SBA loan necessity certification

The Small Business Administration (SBA) recently announced that it will use two forms of questionnaires in its review of certain loans granted under the Paycheck Protection Program (PPP) under the Aid, Relief Act and economic security against coronaviruses (CARES Act), as amended by the Payroll Protection Program Flexibility Act of 2020 (Flexibility Act). The SBA says it uses these forms to collect information to assess certification by the borrower that economic uncertainty at the time made the borrower’s loan application necessary to support its ongoing operations ( Loan Necessity Certification). See our previous alert on this loan necessity certification here.
This latest announcement will force larger PPP borrowers to reconsider the issue of loan necessity certification. There are two forms of questionnaires, one used for the review of loans of for-profit borrowers and the other for the review of loans of non-profit borrowers. These two forms appear to be limited to PPP loans of $ 2 million or more, or for a borrower who, along with its subsidiaries, received $ 2 million or more of the proceeds from the PPP loan. This alert focuses on the questionnaire for for-profit borrowers, but both forms are available below:
Obligation to respond
Aside from analyzing the suitability of these questionnaires under the PPP, which borrowers could save for another day, each questionnaire provides that a borrower’s failure to complete the form and provide supporting documentation may result in the determination by the SBA that the borrower was not on the loan or that the borrower is not eligible for forgiveness of the loan. In addition, the SBA reserves the right to seek repayment of the loan or to exercise other available remedies if the borrower does not respond. According to the questionnaire, the borrower must respond within 10 business days of receiving the document from the lender (or directly from the SBA).
Certificate of loan necessity
As a reminder, the PPP loan documents required the applicant to complete the loan necessity certification as part of the loan process. Later, guidance was issued by the SBA on this certification, suggesting that borrowers performing this certification should consider their current business activity (business activity assessment) and their ability to access other sources of credit. sufficient liquidity to support their ongoing operations in a way that is not significantly detrimental to the business (liquidity assessment). Most of the elements of the questionnaire aim to collect information regarding the assessment of business activity and the assessment of liquidity.
A. Assessment of business activity
The first section of the questionnaire asks for information that explores the borrower’s business activities in and around the second quarter and during the loan cancellation period, including the following:
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Gross turnover of the borrower for the second quarter of 2020 and comparison with the same information for the second quarter of 2019; if it is a business in the start-up phase (for example that does not exist in the second quarter of 2019), the comparison is back to the first quarter of 2020
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Any closure or material change in business due to federal, state or local ordinances, and any voluntary cessation or reduction, or other material change, in business operations, since March 13, 2020
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Identification of new capital improvements, if any, undertaken by the borrower between March 13, 2020 and the end of the loan forgiveness period
B. Liquidity assessment
The other large section of the questionnaire focuses on obtaining information from the borrower that could speak to the borrower’s access to other sources of liquidity, including the following:
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The amount of cash and cash equivalents on the last day of the calendar quarter immediately preceding the loan application
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Any dividend or distribution of capital paid to owners, or prepayment of debt, between March 13, 2020 and the end of the borrower’s loan forgiveness period
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Compensation of employee or owner in excess of $ 250,000 on an annualized basis during the loan forgiveness period
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Public procurement for the borrower’s securities, or ownership of the borrower by a public enterprise, on the date of the loan application
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For non-public companies, or companies without public shareholders, the borrower’s equity on the last day of the calendar quarter immediately preceding the date of the loan application
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20% or more borrower’s stake by a private equity or venture capital firm, or hedge fund, on the date of the loan application
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Affiliation of the borrower to a foreign company
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Receiving funds from any other CARES Act program
Takeaways and open issues
Although the SBA may consider several aspects of a borrower’s loan forgiveness request, including calculating the loan amount, appropriate spending of the PPP loan proceeds, and eligibility based on the size of the borrower. , loan necessity certification appears to be an area the SBA will target more systematically in the review process.
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In the Business Activity Assessment and Liquidity Assessment sections of the questionnaire, the borrower has the opportunity to provide additional comments on any of the questions in that particular section. However, the response is limited to 1000 characters.
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Receipt of the questionnaire does not mean that a borrower’s certification of loan necessity is necessarily contested, and the forms are configured so that it is possible for any loan equal to or greater than $ 2 million to generate a distribution. automatic questionnaire applicable to the borrower.
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The question of whether the guidance on the assessment of business activity and the assessment of liquidity controls or eliminates the question of the need for the loan remains unanswered. This is especially true for early PPP loan borrowers who had applied for and received loans even before the guidance was released. At a minimum, these are criteria that the SBA deems appropriate to assess in determining needs. However, they are only advice and are not expressly set out in the CARES Act, the Flexibility Act or the rules promulgated thereunder.
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In addition, the focus on business activity or second quarter activity during the loan cancellation period raises the question of why and how actual business results should be part of the certification analysis of need for loan. Depending on the definition of certification, uncertainty is that which existed at the time of the loan application, which could have been in the first quarter or very early in the second quarter for some borrowers, and a borrower most likely would not know what the coming weeks hold. Whether the SBA can use actual performance of activities against a borrower to challenge a good faith certification regarding the uncertainty existing at the time of the loan application seems controversial.
© 2007-2021 Hill Ward Henderson, All rights reservedRevue nationale de droit, volume X, number 307