May 7, 2020
Borrowers applying for PPP loans must certify in good faith that their PPP loan is necessary. Specifically, they must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA has recently released guidance clarifying the required certification. The guidance states that when making this good faith certification all borrowers must take 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 a public company with substantial market value and access to capital markets would be able to make the required certification in good faith. Similarly, a company or nonprofit with a substantial unrestricted reserve should carefully evaluate whether they can make the certification. The question will be whether drawing on the reserve (or potential ability to access other sources of liquidity) would be significantly detrimental to their business – and if so, how they will support that decision if the SBA inquires.
The SBA will review loans in the excess of $2 million, and other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Borrowers should be prepared to demonstrate to SBA the basis for their certification.
On May 6, the SBA released further guidance and extended the safe harbor deadline from May 7 to May 14, 2020. Any borrower that applied for a PPP loan prior to the issuance of this regulation that determines that the certification was in error in light of the new guidance, will be deemed by the SBA to have made the required certification in good faith if it repays the loan in full by the May 14 deadline.
As always, the business lawyers at RCO Law stand ready to counsel you on COVID 19-related business issues.
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