Alert: SBA Says Paycheck Protection Program Loans Are Not For Larger ‘Small’ Businesses With Liquidity Access

Today the US Small Business Administration (SBA) sent an important message: loans under the Paycheck Protection Program (PPP) are not for larger “small” businesses that have adequate sources of liquidity and access to capital markets. Those types of companies will not quality for PPP loans. The SBA, which provides PPP funding made available by the CARES Act, explained this in updated FAQs.

The SBA probably issued this guidance in response to an uproar during the past week about some publicly traded companies that received significant PPP funding, including Shake Shack. (See reporting from NBC News, CBS News, and the Associated Press.)

The first round of PPP loans quickly ran out, leaving many aggrieved small-business owners without any crisis aid. Paycheck Protection Program is expected to get an additional $310 billion in funding this week. The SBA’s clarification will help businesses know better whether they qualify for the loan, reduce some of the legal risks in its hardship certification, and perhaps slow the rush for PPP loans to prevent them from again being quickly depleted.

The Hardship Certification In The PPP Loan Application

Soon after the PPP loan application came out, I drew attention to the vagueness of the wording in its hardship certification, which was therefore hard to interpret precisely (see Free Money For Small Business? Beware Legal Risks Of Paycheck Protection Loan Program Until More Guidance Issued). The hardship certification states: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”

As nearly all business are experiencing “economic uncertainty” in the unprecedented circumstances of the COVID-19 pandemic, the wording of the hardship certification left a substantial gray area. In its FAQ 31, the SBA has clarified what the full wording of this certification means, at least for larger companies. Below I quote the FAQ in full (some passages bolded for emphasis).

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, 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.

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.

What This Means

It is not clear by the wording in parts of the answer whether it applies only to the type of “small business” in the question (remember that PPP loans are available for companies with up to 500 employees), or whether it applies to all small businesses (e.g. your neighborhood owner-operated restaurants and retail stores).

Below are some thoughts on it:

• Borrowers under this forgivable loan program need to assess their economic need under the hardship standard and carefully review it before applying.
• Borrowers must certify in “good faith” that their loan application is needed. You do not need to show that you cannot obtain credit elsewhere.
• Borrowers need to evaluate the ability to access other fund sources to support their business in a way that does not significantly hurt their business (presumably this means not a high-interest-rate loan but needs SBA clarification). While it is not clear whether this part of the SBA answer applies only to large companies with sources of liquidity or more broadly to all small businesses and nonprofits, it is a good best practice for all companies applying for and receiving the loan to follow.
• Larger public companies with meaningful market value (clarification needed on how big or what stock market trades on) and ability to access capital markets (i.e. public companies) will struggle to make the hardship certification in good faith.
• Public companies getting these loans must be able to show the SBA the support for this certification, when requested to do so.
• Lenders do not need to pry into the truthfulness of a borrower’s hardship certification. They can reply on your honest, good-faith certification.
• Borrowers that applied for the PPP loan prior to the SBA’s updated FAQs on April 23 and pay it back in full by May 7, 2020, will be considered by the SBA to have made the certification in good faith.

I plan to update this blog with links to useful law firm client alerts on this development, so check back later.

See also my other Forbes.com blogs about the Paycheck Protection Program:

You Got Your Paycheck Protection Program Loan. Now What? Advice From Small-Business Lawyers

How To Avoid Going To Prison For Your Payroll Protection Program Loan: Advice From Former Federal Prosecutors