In applying for a Payroll Protection Plan Loan (“PPP loan”), eligible applicants must be able to make a good-faith certification that the uncertainty of current economic conditions makes the PPP loan request necessary to support the ongoing operations of the applicant.
The law suspends the ordinary requirement that an applicant be unable to obtain credit elsewhere, which is normally defined to mean the ability to obtain credit from non federal sources on reasonable terms and conditions, taking into consideration the prevailing rates and terms in the community where the borrower does business, for similar purposes and periods of time.
An applicant for a PPP loan does not need to certify it is unable to obtain credit elsewhere. Instead, PPP loan applicants must consider alternate sources of liquidity to assess whether the current economic uncertainty makes its PPP loan request necessary to support its ongoing operations.
On April 23, 2020, the SBA issued updated FAQs addressing the necessity certification in the PPP loan application. It did not give any specific standard for defining the applicant’s need for the PPP loan. The FAQs did make clear that (1) applicants must make a reasonable, good-faith determination of need and (2) applicants must assess their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner not significantly detrimental to the business. Under the FAQs, applicants that get a PPP loan should maintain records supporting their determination of need and be ready to demonstrate to a federal regulator the basis for having made their certification
Borrowers that receive PPP loans in an original, aggregate principal amount of less than $2 million now have the benefit of a safe harbor making the necessity certification. Under the new safe harbor, they will be deemed to have made the necessity certification in good faith.
SBA determined this safe harbor is appropriate 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. The safe harbor is intended to promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. This approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.