PPP Update for Business Owners

Jun 5, 2020Covid-19, News

On April 23 Congress added significant additional funding to support the PPP and other disaster-related loan programs, the original funding having been quickly exhausted.  A portion of the new funding is earmarked specifically to provide assistance to small and minority-owned business and financial institutions.

The new stimulus package provides an additional $351 billion in the PPP program to assist business impacted negatively by COVID-19.  The Economic Injury Disaster Loan Program (EIDLP) was also increased by $60 billion for loans and advances.  Importantly, “set-aside” funds totaling $60 billion have been established for smaller businesses, minority businesses and others. Of the $60 billion additional EIDLP funding, (i) $30 billion is available to insured depository institutions and credit unions with assets between $10 billion and $50 billion, and (ii) $30 billion is available to “community financial institutions,” which also include minority depository institutions, certified development companies, SBA Microloan intermediaries,  credit unions with assets of less than $10 billion, as well as others.

The certification of the need for a PPP loan (required in the application)  came under great scrutiny, given the perceived potential abuse of the PPP by some larger businesses.  The application requires a borrower to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”

In response to the negative publicity surrounding some of the existing loan recipients, the Treasury and the SBA on April 23 issued the following guidance, in FAQ 31 of the updated Treasury/SBA FAQs:

“All borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application.  Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary.”

Specifically, before submitting a PPP application, all 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.”

FAQ31 has generated significant confusion over how the “necessity” standard would be evaluated.  Many applicants who had applied for a PPP loan before April 23 were now unsure whether their “liquidity” at the time they initially applied would be second-guessed in the future, with significant potential civil and criminal liability at stake.  Given the outcry and confusion of the business community, the Treasury/SBA on May 5 issued FAQ 43, which extended the “safe harbor” date for borrowers to return PPP loan proceeds from May 7 to May 14.

On May 13, one day before the May 14 “safe harbor” expiration date,  Treasury/SBA issued FAQs 46 and 47, which may alleviate some borrowers’ concerns.  FAQ46 specifically states that any business that, together with its affiliates, received an original principal amount of less than $2 million from the PPP loan program will be deemed to have made the required certification concerning the necessity of the loan request in good faith.  So long as the application was made in good faith, the applicant’s analyses, judgments and decisions over liquidity and the like do not appear to be subject to challenge.  For those borrowers who remain concerned, and for recipients of PPP funding in amounts greater than $2,000,000, FAQ47 further extended the  “safe harbor” return date to May 18, 2020.

The Treasury/SBA FAQs, updated as of May 27, 2020, can be found here: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf. Additional information, qualification requirements and guidance can be found on the websites of the Small Business Administration (www.sba.gov) and the Treasury Department (www.treasury.gov). There remain many ambiguities and nuances in both the statute and the positions set forth in the Treasury/SBA FAQ’s.

The Payroll Protection Act was further amended on June 5, 2020 by the Payroll Protection Program Flexibility Act (“PPPFE”), which in many respects relaxed some of the more stringent requirements of the PPP and the Treasury/SBA “guidance”.  Among the most significant changes are:

  • The requirement that at least 75% of the loan proceeds be utilized for payroll in order to maximize loan forgiveness has been reduced to 60%
  • PPP loan proceeds may be expended over 24 weeks, up from 8
  • Loan repayment can extend over 5 years, up from 2
  • Applications for loan forgiveness will be accepted through December 31, 2020; the previous deadline was June 30, 2020
  • There are “safe harbors” from reductions in loan forgiveness based on reductions in full-time equivalents employees (i) for borrowers unable to return to pre-February 16, 2020 due to compliance with CDC/HHS/OSHA requirements or guidance, and (ii) to provide protection for borrowers unable to rehire individuals who were employees on February 15, 2020 and unable to hire similarly qualified employees for unfilled positions by December 31, 2020.

Several of these changes require action or elections made by the Borrower in order to affect the particular loan. The programs (and relevant guidance) continue to evolve; please contact us if you have any questions or wish assistance in the process.