PPP Safe Harbor

There is new guidance from the SBA regarding the ‘necessity’ certification made by businesses to receive PPP funds which are later forgiven.  When the PPP was first established, the intent was to provide funds to businesses who needed immediate cash to keep people employed.  Businesses were required to certify the funds were needed due to ‘uncertain economic conditions’ as a result of COVID-19 in order to be eligible to receive the PPP forgiveness for all or part of the loan.

After the initial round of PPP funds were disbursed, the program received some negative publicity because seemingly strong businesses with access to capital were taking the funds at the expense of smaller businesses that were left without funding when the initial round of PPP funds were exhausted.  Shortly thereafter, the SBA issued a FAQ about the certification noting:

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. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

The ‘necessity’ is still largely undefined with clear guidelines. Furthermore, the SBA indicated that businesses who took loans in excess of $2 million were going to be audited with regards to their certification of need.   This left many small businesses who took PPP funds of less than $2 million uncertain as to whether they would also be audited and if they met the vague criteria for needing the funds due to the uncertainty.

Enter SBA PPP FAQ #46

If you took PPP funds less than $2 million you can breathe a sigh of relief.  The SBA has stated:

Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

The SBA goes on to say they have made this safe harbor because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.  Policing the millions of loans less than $2 million would also be too much for the SBA to handle.

Here is the bottom line: If your business took a loan of less than $2 million you fall in the safe harbor provision and are deemed to have made the certification concerning the necessity of the loan request in good faith.   If your loan was greater than $2 million, then be prepared to defend the necessity of the loan because it is highly likely you will be audited.