Do we “NEED” the PPP loan? Demonstrating and documenting need

Under general SBA lending guidelines, a borrower of SBA funding must show that they were unable to obtain credit elsewhere. However, the CARES Act suspended this requirement. Although the requirement is suspended for PPP applications, the borrower must certify that the current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant. This is commonly referred to as meeting the “need” criteria.

Just the facts
On April 23, 2020, the SBA, in consultation with the Treasury, in FAQ 31, updated their interpretation of the CARES Act and PPP Interim Final Rules to clarify 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”.

While the FAQs provide a deeper understanding of SBA’s interpretation of the law, the concept of “economic uncertainty” and further guidance on determining “need” have not been released.

FAQ 31 appears to focus on large and/or public companies, however the determination of whether or not the borrower had access to other sources of liquidity is not company size specific. Looming uncertainty has given some borrowers pause as the SBA indicated civil or even criminal enforcement down the road is possible.

The SBA previously stated that borrowers who applied for a PPP loan prior to April 23, 2020 can repay the loan in full by May 7, 2020 without penalty. On May 5, the SBA added FAQ 43 which extended the repayment period to May 14, 2020. It is likely that material guidance will be provided over the next few days that provide more details on how companies should measure the “need” provision.

Timing aside, the burning question for some PPP borrowers has become do we “need” the PPP loan?

Documenting the “need”
Documenting the facts and circumstances surrounding your company’s position, thought process and considerations regarding this matter should be considered mandatory. We recommend that companies get started now to meet the May 14th deadline. Items that could be used to document “need” include but are not limited to:

• Current financial situation
• Uncertainties faced resulting from COVID-19
• Macro and micro economic data including industry demand data
• Financial forecasts and projections including scenario modeling of ability to cover payroll costs with and without this funding
• Customer/client analysis
• Vendor/pricing analysis

What’s Next?
Aprio has established a dedicated SBA loan forgiveness team to consult on the documentation of need and the requirements to maximize PPP loan forgiveness.

Disclaimer for services provided relative to SBA programs and the CARES Act
Aprio’s goal is to provide the most up to date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.

The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.

Due to the evolving nature of the situation and the lack of final published rules, Aprio cannot guarantee that additional changes or updates won’t be needed or forthcoming and the original advice given by Aprio may be affected by the evolving nature of the situation.

You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.

In situations where resources are provided by third parties, those services should be covered under a separate agreement directly with that service provider. Aprio is not responsible for the actions of any other third party.

Aprio encourages you to contact your legal counsel to address the legal implications of the impact of the CARES Act and specifically your participation in any of the SBA programs.