Client Alert: SBA Clarifies the Standard for Needing a PPP Loan

Date: April 23, 2020
As part of the Paycheck Protection Program (the “PPP”), the CARES Act suspended the ordinary requirement for SBA loans that borrows demonstrate an inability to obtain credit elsewhere. Instead, borrowers are required to certify, which lenders are entitled to rely upon, that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

In FAQ #31, published on April 23, 2020, Treasury emphasized that this “necessity certification” must be made in good faith, taking into account the applicant’s current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner not significantly detrimental to the business.

By way of example, according to Treasury, it is unlikely that a publicly traded company with substantial market value and access to capital markets would be able to make the necessity certification in good faith. Further, Treasury indicated that the SBA can request that a borrower demonstrate its good faith basis for making the necessity certification.

Finally, Treasury provided an opportunity for borrowers that applied for a PPP loan prior to April 23, 2020, to return the PPP loan proceeds in full by May 7, 2020, and be deemed by the SBA to have made the necessity certification in good faith.

Beyond certain publicly traded companies, it is difficult to forecast what borrowers the SBA might require to demonstrate their good faith basis for making the necessity certification. Borrowers should remember that a central purpose of the Paycheck Protection Program is to facilitate a willingness by companies to maintain their employee headcount through June 30, rather than laying off employees as a hedge against the current and prospective economic conditions. We believe that those companies that mostly maintained their employee headcount, and had suffered some downturn in business during the pandemic by the date of the loan agreement, will be best positioned to provide a satisfactory demonstration of its good faith in making the necessity certification.