SBA Releases New Guidance on Loan Forgiveness

At Narron Wenzel, P.A. we are committed to providing our small business clients the most up to date information about resources available to them during the COVID-19 shut down. In this post we discuss the latest guidance from the Small Business Administration (“SBA”) regarding loan forgiveness eligibility under the Paycheck Protection Program.

Overview of the CARES Act

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed by Congress and signed by President Trump on Friday, March 27, 2020. The CARES Act allocated $349 billion in federal funds to the Small Business Administration (“SBA”) to provide immediate assistance for qualified expenses. This portion of the bill is called the Paycheck Protection Program (“PPP”). More funds were added to the PPP on April 23, 2020. For more on qualification requirements please see our posted entitled SBA Loans Available to Cover Payroll & Other Qualified Costs.

PPP Certifications

The CARES Act requires that Borrowers applying for a loan under the PPP make a good faith certification that (1) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient; and (2) acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. The PPP did not require a personal guarantee, nor did the PPP require that the Borrower certify that the business did not have access to other capital. On the contrary, the CARES Act removed the requirement that a small business assert that is unable to obtain credit elsewhere.

Updates Regarding Eligibility of Borrowers and Necessity Requirements

The SBA released new guidance regarding borrower eligibility on April 23, 2020, in response to severe backlash after news outlets began reporting that large, publically traded groups like Shake Shack reportedly received millions in funding from the PPP. The guidance released came in the form of a Frequently Asked Questions page which is updated regularly. The question posed was whether businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for the PPP. In response, the SBA offered limited guidance, but made it clear that all borrowers, not just large companies, 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.

The SBA elaborated further by stating that:

[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.

How Do I Know If My Business’s Loan Was “Necessary”?

Thus far the SBA has been somewhat silent with regard to any standard by which a business may determine what is or is not “necessary”. Notably, no standard has been established for “significantly detrimental” nor has the SBA defined what “ongoing business operations” means. However, it is clear that businesses which did not make the certification in good faith regarding their need are subject to legal recourse. Additionally, every business which applied for a PPP loan should ask the following:

  1. Did you believe in good faith that current economic uncertainty required that you take a loan from the SBA in order to support the ongoing operations of your business? The ongoing operations would likely include employment ramifications, financial forecasts and reforecasts through the end of 2020, and the impact the pandemic and work-from-home measures have had on the business.
  •  When making the certification did you consider your current business activity and your ability to access other sources of liquidity which might have been sufficient to support your ongoing operations in a way which would not be significantly detrimental to your business?

What if My Business Received Less than $2 Million Dollars?

The SBA has already stated that those who received loans of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. While the SBA may still proceed with “spot checks” of loans under the $2 million dollar threshold audits of smaller loans are unlikely. However, in order to be eligible for loan forgiveness all businesses who received funds will be required to show documentation of how the funds were used. For more about authorized uses for the funds please review our article entitled SBA Loans Available to Cover Payroll & Other Qualified Costs.

SBA to Audit Any Loans Over $2 Million Dollars

The SBA has also stated that any loan provided to a business in amounts $2 million dollars and over will be subject to an audit before the loan can be forgiven. If the SBA determines that the loan was not “necessary” to the business, then the Borrower will not only have to repay the loan, but may be subject to criminal liability as well. However, the risk of criminal liability is low. On May 13, 2020, the SBA stated that if the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. In other words, the risk of criminal liability is being reserved to those individuals who knew or should have known that the PPP was not for them, or presented false information as a part of their application.

The SBA has not released guidance on when the audit will occur, what agency will perform the audit, or what documents will be required as part of the audit in order to show that the loan meets the “necessary” element of the borrower’s certification.

If your business has received a loan for $2 million dollars or more, then preparing for an audit now will help make the process easier. As part of preparations for a possible SBA Audit under the Paycheck Protection Program, management of any company who received a PPP Loan should prepare a COVID-19 memo addressing conditions facing the business at the time the PPP application was submitted. This memo should be prepared as soon as possible, as it will be much more difficult to try and prepare it at some future date when management is under audit pressure from the Treasury, SBA, or a bank lender.

This memo should be continually updated with the information needed to prepare the loan forgiveness application, documenting how the loan proceeds were used in the business. While every situation differs, we have outlined points that the memo could address below.

(1) A quantitative and qualitative summary of the situation the business faced (at the time of the PPP loan application) should form the basis for the memo. This could include a narrative and financial forecasts showing pro forma financial results for the next 6 – 12 months using various scenarios. The memo should also document what motivated management to seek the loan. Some examples of what should be considered include:

  • Have operations been closed or restricted by local government orders?
  • Has revenue declined or is it projected to decline?
    • If so, provide the amount or percentage it has gone down.
  • Has profitability declined or is it projected to decline?
  • Are customers delaying orders?
  • Are there concerns that major customers or vendors might not survive the COVID-19 crisis?
  • Are accounts receivable (and delinquencies) increasing?
  • Has, or will, cash flow decline because customers cannot pay?
  • Are there supply chain issues?
  • Have contracts been cancelled?
  • Has the company laid off employees, or considered laying them off?
  • Do the projections indicate whether the business will return to pre-COVID-19 levels after the crisis has ended?
  • Due to the demand for PPP loans, was management concerned that if the COVID-19 crisis continued for an extended period, that the business would burn through all of its resources (e.g., lines of credit) and then be unable to secure a PPP loan?
  • If the business has existing debt, would it be able to service it, and cover payroll and other expenses?
  • Could the business’ assets—such as real property and machinery—face a significant reduction in value if the crisis continued for an extended period or if the business was required to cease some or all of its operations during the crisis?
  • What would be the operating costs for things like safety and sanitation in a post-COVID-19 environment?

(2) Consider what access, if any, the business has to liquidity—debt or capital. In this regard, simply having a line of credit does not address whether it will be available at a later date if the COVID-19 crisis persists for an extended period of time. Theoretically, many companies may be able to raise capital from others, but it takes time to make a case for investment by third parties. Even friends and family expect substantial returns on their investment in exchange for making what could be a risky illiquid investment.

(3) Be sure that the memo gives a general overview of the business’ use of funds and general strategy related to the PPP loan. Note, in accordance with the SBA rules, at least 75% or more of the funds from the PPP loan should be used for payroll costs.

(4) As part of the loan forgiveness process—which will be considered in any audit by the regulators—you need to prepare detailed records of how the proceeds where spent. Not only will this be required by the lender when you request that some or all of the loan be forgiven, but it will also help you in the audit process.

If your business is considering returning funds or has questions regarding how best to prepare to apply for loan forgiveness, please contact Whitney L. Hosey at