SBA Guidance Creates Doubt About PPP Loan Eligibility

Recent guidance from the U.S. Small Business Administration (“SBA”) is causing some businesses to reconsider whether they are eligible for Paycheck Protection Program (“PPP”) loans and to contemplate returning loans they have already received.

The PPP, part of the $2.2 trillion federal stimulus bill enacted in response to COVID-19, was intended to provide low-interest, forgivable loans of up to $10 million to businesses that maintain their payrolls during the pandemic.  Businesses that use PPP loan funds for employee payroll and certain other permitted expenses during an eight-week period beginning on the loan disbursement date generally are eligible to have the loans forgiven, with the forgiveness amount excluded from borrowers’ gross incomes.

PPP loans generally are available to businesses with 500 or fewer employees and to larger businesses that either meet applicable SBA size standards or operate in certain industries.  Under the PPP loan statute, there is no requirement that businesses experience or forecast a loss in revenue, nor is there any requirement that businesses be unable to obtain capital or loans elsewhere.  Businesses are required to certify, however, that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the [business].”

Soon after the first round of PPP loans totaling $349 billion was completed, reports emerged of large, well-capitalized companies, private-equity owned businesses, and publicly traded corporations receiving PPP loans .  Among the businesses that received and subsequently repaid PPP loans are Shake Shack, Nathan’s Famous, Ruth’s Chris, Potbelly’s, and the Los Angeles Lakers.

Following these reports, the SBA published new guidance that raises questions about all businesses’ eligibility for PPP loans.  On April 23, 2020, the SBA stated, in response to a frequently asked question, that while public companies are not necessarily ineligible for loans (emphasis added):

[A]ll borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  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.  For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

Subsequently, on April 28, 2020, the SBA indicated the same analysis would apply to businesses owned by private companies with adequate sources of liquidity. 

In addition, the SBA published an Interim Final Rule on April 24, 2020, indicating that portfolio companies of private equity funds, like public companies, are not per se ineligible for PPP loans but should “carefully review the required certification on the Paycheck Protection Program Borrower Application Form … stating that ‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’”

The SBA published further guidance on April 29, 2020, reminding borrowers of the importance of the certification and confirming an announcement by Treasury Secretary Steven Mnuchin that the SBA would examine all loans in excess of $2 million before approving a borrower’s request for forgiveness:

In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan.  To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming.

Until such guidance is issued, borrowers face a quandary:  On the one hand, COVID-19 has created an unprecedented economic disruption, and even profitable businesses may have good reason to believe that the current economic uncertainty makes PPP loans necessary to support their operations – the exact certification they are required to provide on the SBA loan application.  Indeed, many businesses that were profitable as recently as a few months ago are now experiencing steep declines in revenues, supply chain interruptions, project or order cancelations, reduced demand for their goods and services, and even a complete suspension of their business as a result of state-imposed shelter-in-place orders.  On the other hand, businesses that have cash reserves, access to credit, or the ability to raise money through public or private offerings of their securities may fear that accepting PPP loans will expose them to civil or even criminal penalties, not to mention public scorn if the SBA later determines they were ineligible.

Unfortunately, until the SBA issues further guidance, each borrower must weigh the facts and circumstances applicable to its particular situation and make a judgment about whether it can make the required certification in good faith or, alternatively, whether it has access to sufficient cash and credit to continue operating without a significant detrimental effect on the business.  In addition, for borrowers who are applying for or have already received a loan in excess of $2 million, a further consideration is the prospect of having their forgiveness request audited by the SBA.  For some businesses, this may be an easy decision.  But for others, it may be a close call, and future SBA guidance will be extremely helpful as businesses contemplate whether to apply for loans, to deploy loans funds they have already received, or to return their loans to avoid penalties.