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The Importance of Documenting the PPP Certification of Need Under SBA Guidance

The announcement of the $2 million Payroll Protection Program (PPP) loan being subject to full review and the FAQs recently issued by the Department of Treasury (which focus on the certification of need) impact all borrowers of PPP loans. It is important to know that the lender can rely on the company’s certification of need and the accuracy of the information submitted by the company on their PPP loan application. Accordingly, it is up to the company to have the proper backup and documentation supporting the loan. The latest guidance, along with the intense public scrutiny surrounding the sports teams and public companies that received loans, have borrowers concerned if they are actually eligible for the PPP loan for which they have applied for and/or have already received the funds for.

The PPP loan application states: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Treasury FAQ #31 indicates that “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.” The FAQ indicates that it is unlikely that a public company with substantial market value and access to capital markets can make the aforementioned certification in good faith. However, FAQ #37 notes that the certification applies to private as well as public companies.

It is clear that a key element in determining if a borrower can make the certification in good faith is whether they have adequate access to sources of liquidity to support ongoing operations, without which the business would be harmed. Unfortunately, it is unclear from anyone on how access to sources of liquidity will be completely defined and interpreted.

Ultimately, companies may determine that they are not eligible for the loan based on the required certification. Companies that cannot make the certification in good faith have until May 7th to return any PPP loan funds they may have received without any penalties.

Although the decisions that were made regarding the need for the funds will be different depending on the borrowers, it is important that all borrowers document their factors in certifying the PPP loans. Below are some thoughts we have on best practices and ideas from what other companies are doing for this documentation:

  • Keep dairies, logs or other written memos to document qualitative factors and considerations regarding their decisions.
  • Factors and considerations regarding these decisions could include questions/concerns that impacted the borrowers decision making such as:
    • What was happening in their industry; how their clients could be impacted
    • If there could be supply chain disruptions
    • Specific local and state situations
    • International trade considerations
    • Labor interruption concerns
    • Conversations with lenders and trade groups
    • What could happen if they didn’t take the loan
    • How they were looking at this funding to avoid lay-offs, pay reductions, furloughs
    • Thoughts about what it would take to open up again if operations were to shut down, etc.

It would also be helpful to document what the borrowers thought process was in regards to how bad it can get for their company (worst case scenario to best case scenario) knowing that none of us can predict the future. Additionally, it is also important to add to the borrower’s documentation as circumstances change and they continue to experience the economic impact of the pandemic.

In addition to the qualitative factors listed above, it will also be important to have quantitative documentation that models out different scenarios from both a short-term and long-term basis by forecasting based on factors that include questions such as but not limited to:

  • What is our current cash position?
  • What is our access to lines of credit?
  • How will this impact our collections?
  • Who are our clients and how will they be impacted?
  • What contracts or backlog do we have and how will that be impacted?
  • Consideration of working capital impacts and bonding/surety considerations
  • How does taking out new debt impact my business?
  • How do these scenarios impact bank covenants?
  • Can we raise outside capital?
  • What if I have to close down fully or partially due to the Covid-19 shutdowns?
  • What will happen to productivity if we work remote?
  • What is the impact of shortages in the supply chain?

If a borrower does their analysis and determines it was not necessary to have applied for and received a PPP loan, the loan proceeds can be repaid to the SBA (through the borrowers lending bank) and additional inquiry by the SBA can be avoided. As mentioned above, repayment of the PPP loan in this case must be done by May 7, 2020. A borrower may want to consult with his or her legal counsel in this situation, as well as the bank they obtained the PPP loan from. Certainly the decision needs to be made in accordance with your corporate governance policies.

Something to be aware of is that even if a business determines that they made the certification in good faith and have the documentation to support their loan application/receipt of PPP funds, we have also heard that the identity of the borrower may be made public at some point. This is another element to be aware of. This matter can become a significant PR concern for the business even if the loan was needed and appropriate. Most borrowers are not used to public scrutiny so we recommend that a borrower consider developing a communications plan for the media that can be rolled out if needed.

Furthermore, on April 24th the Treasury came out with additional directions on how to calculate PPP Maximum Loan Amounts – By Business Type. This information is quite helpful if you are still applying for a PPP loan or if you would like to go back and review how you did your application. It is worth a read and addresses all types of organizations including self-employed loan amounts. Here is the link for more information.

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


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