Can Your Business Certify That a PPP Loan is Necessary?
The Small Business Administration (SBA) recently provided some much-requested guidance on the Necessity Certification businesses must complete as a part of their Paycheck Protection Program (PPP) loan application. For the fifth installment of our PPP conversation (Part 1, Part 2, Part 3, and Part 4), we’ll briefly discuss the Necessity Certification and what the SBA’s guidance tells us about loan eligibility.
What is the Necessity Certification?
Generally, applicants for non-PPP SBA 7(a) loans have to attest that they meet various requirements to be eligible for the program. As a common example, non-PPP SBA 7(a) loans generally require a personal guarantee or collateral and for the applicant to attest that it is unable to obtain some or all of the requested loan elsewhere without undue hardship. The CARES Act waived these requirements for PPP loans.
Instead, the CARES Act requires that PPP applicants make certain good faith certifications, including that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” The wording left many confused about how they could know whether they could certify to that in good faith.
Large entities including the Los Angeles Lakers, Shake Shack, and Ruth’s Chris Steakhouse took advantage of that vague language to the tune of tens of millions in PPP funds. In response, the SBA updated its PPP FAQs on April 23, 2020—two days after Congress replenished the PPP fund—to address the Necessity Certification issue for the first time. Since then, the SBA has updated the Necessity Certification guidance six more times, most recently on May 13, 2020.
What guidance has the SBA given for the Necessity Certification?
For the most part, the FAQs have relied on categorical line-drawing to try to show which businesses are able to accurately make a good faith Necessity Certification.
In its April 23 FAQ update, the SBA notes that business must take into account their current “business activity” and whether they have liquidity “sufficient to support their ongoing operations” that would “not be significantly detrimental” to the business. (SBA FAQ No. 31).
To that end, the SBA said that “public companies with substantial market value and access to capital markets” likely wouldn’t be able to make the Necessity Certification in good faith. Borrowers who were concerned about this issue were granted safe harbor if they repaid PPP loans before May 7 (later extended to May 14). (See SBA FAQ No. 43).
The SBA’s most recent Necessity Certification update took the April 23 guidance a step further and stated plainly that businesses that take PPP loans of less than $2 million will be deemed to have made the Necessity Certification in good faith. (SBA FAQ No. 46). Borrowers who took out more than $2 million––approximately 1% of borrowers––may still have an adequate basis to make a good faith Necessity Certification and will be subject to an SBA review.
So, which businesses should be concerned about the Necessity Certification?
Very few. While the safe harbor deadline to repay loan funds has passed, Wednesday’s guidance all but waives the Necessity Certification for nearly 99% of borrowers. Only those businesses with PPP loans of over $2 million will face further scrutiny on the Necessity Certification issue from the SBA. If the SBA finds that a borrower didn’t meet the required need, the business will have the opportunity to repay the loan to avoid enforcement or referrals.
Though Necessity Certification won’t be an issue for the vast number of borrowers, businesses should still keep careful track of PPP funds and make sure they are only being used to pay for PPP-permitted expenses.
If you have PPP-related questions or need help maximizing your PPP loan forgiveness, call GKWW at (312) 362-0000 and ask for Stephen Pauwels—he does this every day.
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