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SBA ISSUES FAQ QUESTION #53 ADDRESSING THE LOAN NECESSITY QUESTIONNAIRE (FROM 3509 OR 3510)

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Last month, the SBA quietly released Form 3509, Paycheck Protection Program Loan Necessity Questionnaire (For-Profit Borrowers), (view PDF) and Form 3510, Paycheck Protection Program Loan Necessity Questionnaire (Non-Profit Borrowers) to the program lenders.

Lenders are requesting these forms be completed by borrowers who received a loan in excess of $2 million and forwarding the responses on to the SBA. The purpose of these forms is to provide the SBA with additional information about the borrower to assist in the determination of the good faith certification of necessity which was made at the time of application for a PPP loan. The forms request a substantial amount of information about the borrower’s finances and liquidity in 2020, both before and after the receipt of a PPP loan. Borrowers have 10 days from the time the form is received to compete and return to their lender. Borrowers who received a PPP loan of less than $2 million are assumed to have met the required certification of the loan request in good faith, per our May 13th blast, and need not complete a Form 3509 or 3510 at this time, unless specifically requested by your lender.

On December 9, the SBA published FAQ #53 which addresses the question of why borrows are receiving the questionnaire now, without any previous indication that such information would be required. Below is a summary of the FAQ:

1. The information will help the SBA assess the borrower’s certification that was made at the time of application for the loan that “Current economic uncertainty makes the loan request necessary to support the ongoing operations of the Applicant.”

2. The SBA will assess the borrower’s certification based on the totality of the borrower’s circumstances (FAQ #46), which will take into account the borrowers circumstances both before and after the certification was made.

3. After reviewing the completed form, the SBA may request additional information. At this time, a borrower will have an opportunity to provide a narrative response to the SBA explaining their circumstances.

While the form may come as a surprise, it is consistent with the history of the PPP program which was rolled out quickly to provide immediate assistance to businesses in need. There have been several significant program changes since its inception and the majority of the forgiveness guidance came after borrowers had received their loan.

Borrowers who must complete the Form 3509 or 3510 should take steps to ensure they are providing an accurate representation of their thought process when providing the certification as part of the application. Per FAQ #31, “All borrowers must assess their economic need for a PPP loan under the standard established under the CARES act and the PPP regulations at the time of the loan application.” We have consistently recommended that borrowers clearly document their considerations in their determination of a need for the PPP loan. Outlined below are several key questions to consider in your documentation:

• Uncertainty – At the time of the loan application, what uncertainties was the business facing?

• Impact analysis – Business conditions facing the company at the time of the loan application including how the uncertainty of the pandemic influenced decisions of the company, its customers, and its suppliers.

• Financial analysis – What were the different alternatives to a PPP loan that were considered? How would each alternative have impacted the company, including employment levels?

• Access to capital – As a private company, what were the options for additional financing, including the costs associated with those financing options? Would these other sources of financing have an impact on the borrower’s existing financing arrangements? How would a new financing arrangement affect the company, including their financial ratios and employment level?

• Use of existing lines of credit – what effect would this have on the business going forward? Would the borrower have been able to maintain required financial covenants?

• Would the company have maintained the same level of employment had they not received a PPP loan?

• Existing cash on hand – How would using existing cash on hand to support operations and the economic uncertainties have impacted the business? Could there have been a detrimental impact, including reduced flexibility or inadequate working capital had the company not received the PPP loan.

Borrowers who are required to complete a Form 3509 or 3510 should include the answers to the above questions in the narrative questions on the form. Borrowers who are not currently required to complete a Form 3509 or 3510 should consider writing a narrative analysis of their considerations to ensure they are adequately prepared to defend their certification, should the SBA choose to review their loan.

On a separate note, there are currently several pending pieces of legislation being negotiated in Congress which may provide additional business relief. Another round of PPP funding which is expected to be targeted at businesses which have experienced significant declines in revenue will likely be included if any legislation is passed. In addition, the legislation may provide for the deductibility of expenses paid with PPP funds. BP will continue to provide additional information if and when any new legislation providing small business relief is passed.

We will continue to provide updates as additional information is released. We are available to assist with loan forgiveness application process – for additional information and to have one of our team members contact you, please fill out the intake form linked here.

Berntson Porter is here to help businesses navigate these challenging times. Visit our Resource Center for up-to-date information about COVID-19 legislation that impacts you and your business.