New SBA Guidance to PPP Loan Applicants
- Charles Ciaccio
- April 30, 2020
Last week, additional SBA guidance was issued providing additional clarity to the certification all PPP loan applicants must make that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The new guidance language indicates in part that “Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business” (emphasis added).
Although we think that the primary purpose of this new guidance was to tamp down on publicly traded companies like Shake Shack taking PPP loan funds, the reference in the FAQ question to “businesses owned by large companies with adequate sources of liquidity” and the reference in the new Interim Final Rule to portfolio companies of private equity funds suggests there will be increased scrutiny for PE- and VC-backed companies that have taken PPP loans. Although this scrutiny likely won’t manifest until after the pandemic has subsided, there are steps that companies need to take now.
We are advising management and/or boards of all clients who have received PPP loans to analyze whether your company would have been able, in good faith, to make the certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” at the time of its PPP loan application if this new guidance had been available at that time, specifically taking into consideration whether there are alternate sources of liquidity available to the company to support ongoing operations in a manner that is not significantly detrimental to the business.
We think that the management and/or board should consider the following when conducting this analysis:
- Take into account additional potential sources of liquidity such as cash on hand, existing lines of credit with availability, new lines of credit, additional equity investments and any other source of additional liquidity
- Factors to consider include when considering an additional source of liquidity include, but are not limited to:
- Size of the additional source of liquidity relative to need
- Amount of time needed to access the additional source of liquidity, measured against the timing of the company’s need to use the liquidity
- Uncertainty in accessing the additional source of liquidity
- Terms on which the additional source of liquidity can be obtained
- For additional debt, consider, e.g., repayment terms and interest rates
- For additional equity, consider, e.g., dilutive effects to existing owners and effects of liquidation preferences
We advise that you update your internal memorandum to indicate that you have now taken these factors (and any other factors you deem relevant) into consideration. If you do not have an internal memorandum documenting your thought process regarding the company’s certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” we highly recommend you create one now.
If, after doing this additional analysis, you determine that the company cannot in good faith make the certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” (or could not in good faith have made that certification if the new guidance from the SBA had been available at that time), then the company should repay any funds it has already received under the PPP loan by May 7, 2020, in order to qualify for the safe harbor under the guidance.
If you have a PPP loan application in process or are about to start one, it is vital that you take the new guidance into consideration when determining whether to apply for the loan.
Please note that our comments on this update are generic in nature and should not be considered specific guidance or counsel. If you want to discuss your specific situation, please don’t hesitate to reach out to us.