The U.S. Small Business Administration (“SBA”) has released two Loan Necessity Questionnaires – one for for-profit businesses, the other for nonprofits – for recipients of Paycheck Protection Program (“PPP”) loans of $2 million or more.
The questionnaires are designed to help the SBA evaluate a borrower’s good-faith certification that its loan request was necessary to support ongoing operations. A borrower that receives a questionnaire from its lender must return the questionnaire within 10 business days. If a borrower fails to complete the questionnaire, or if the SBA determines the borrower did not have a good faith basis to certify that its loan request was necessary to support its ongoing operations, the borrower’s PPP loan forgiveness application may be denied.
The PPP, one of the pillars of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), allowed most businesses with 500 of fewer employees (and some with more than 500 employees) to apply for low-interest, forgivable loans of up to $10 million. If a borrower used at least 60 percent of its PPP loan proceeds for payroll and the balance for other allowable expenses such as rent, mortgage interest, and utilities, the entire loan is eligible for forgiveness (and the forgiveness amount is excluded from the borrower’s gross income), making the loans essentially equivalent to grants.
As part of the application process, borrowers were required to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA previously announced that:
Borrowers must make this certification 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…
The SBA also previously announced that it would examine all PPP loans of $2 million or more, generally at the time the borrower applied for forgiveness. The language of the certification, and the SBA’s announcements, left many PPP borrowers – particularly borrowers who received $2 million or more – uncertain as to how the SBA would evaluate their loan forgiveness requests.
The Loan Necessity Questionnaires shed some light on those questions by clarifying what information the SBA will examine. For example, the questionnaire for for-profit businesses asks, among other things:
- How the borrower’s gross revenue during Q2 2020 compared to the borrower’s gross revenue during Q2 2019 (or in some instances Q1 of 2020);
- Whether the borrower was ordered to shut down or significantly alter its operations by a state or local authority as a result of COVID-19;
- Whether the borrower voluntarily ceased, reduced, or otherwise altered its operations at any time since March 13, 2020, due to COVID-19;
- How much cash and cash equivalents the borrower had on hand on the last day of the calendar quarter immediately preceding its PPP loan application;
- Whether the borrower paid any dividends or capital distributions, or prepaid any other debts, between March 13, 2020 and the end of the borrower’s “Covered Period” (generally, an 8- or 24-week period beginning on the loan disbursement date);
- Whether the borrower paid any employees or owner-employees more than $250,000 on an annualized basis during the Covered Period;
- Whether the borrower was a publicly traded company on the date of its PPP loan application, or whether 20 percent or more of the borrower’s stock or equity was owned by a publicly traded company or a private equity firm, venture capital firm, or hedge fund.
The questionnaire for nonprofits is similar, except that it is tailored to nonprofits. In addition to asking how Q2 2020 gross revenues compared to Q2 2019 gross revenues, for example, the nonprofit questionnaire asks borrowers to compare gross receipts from gifts, grants, and contributions in Q2 2020 versus Q2 2019. Further, instead of asking whether a nonprofit borrower is publicly traded or owned by a publicly traded parent or an investment fund, the nonprofit questionnaire asks whether the borrower had an endowment or other investments.
The questionnaires suggest the SBA will scrutinize borrowers’ operations during the Covered Period and may deny loan forgiveness where a borrower either was not negatively impacted by COVID-19 or had other sources of liquidity that it could have used to address any declines in its gross receipts, revenues, or income caused by COVID-19.
If that is the case, many borrowers may rightly complain that they had no way to know how COVID-19 would affect their businesses at the time of the loan application. Indeed, many firms that feared the worst in March or April have found that business has been better than initially expected. Moreover, the CARES Act itself does not require borrowers to establish that they were or would be negatively affected by COVID-19, or that the borrower would be unable to operate in the absence of the PPP loan. Instead, the PPP statute merely required borrowers to certify that “economic uncertainty” made the loan request necessary to “support” the borrower’s ongoing operations.
While it is not yet certain how the SBA will use these questionnaires, or under what circumstances the SBA will deny forgiveness, if the SBA begins denying forgiveness requests because a borrower did not actually suffer declines in gross receipts, revenues, or income, borrowers may have good reason to challenge the SBA’s denials.