On Tuesday, the U.S. Small Business Administration [SBA] issued new guidance relating to the certification requirements of loans issued under the Paycheck Protection Program [PPP]. Forgivable loans issued under the PPP are intended to help small businesses weather the challenging economic landscape caused by the COVID-19 pandemic, but recent confusion regarding loan certification requirements have caused many borrowers to worry that they made these certifications in error.
The PPP loan application requires that the applicant make a good faith certification that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the applicant.” Most small business owners have interpreted this language at its face value, made the certification, and were issued loans. Unfortunately, not long after the PPP was rolled out, several large public companies were found to have accepted PPP funding unnecessarily. These companies, including Ruth’s Chris Steakhouse and Shake Shack, were widely criticized for accepting PPP aid money and ultimately returned the funds because of severe public backlash.
In response, the SBA issued additional guidance that focused on the certification component of the loan application. This guidance suggested that businesses such as Ruth’s Chris and Shake Shack – as the SBA put it, “businesses owned by large companies with adequate sources of liquidity” – would likely be unable to make the required certification in good faith, and therefore could not only lose loan forgiveness eligibility, but also be subject to liability. The SBA also created a safe harbor provision that would permit borrowers who no longer felt they could make the certification in good faith an opportunity to return the money with no penalty.
As a result, many borrowers found themselves rethinking the certification language and fearing that they may have made the certification in error. The concern is understandable because certification language is unclear – what exactly constitutes “uncertainty”? What specific conditions “make necessary” the loan request? The confusion sparked widespread apprehension among borrowers and caused many potential new applicants to reconsider taking the funds at all.
Fortunately, Tuesday’s new guidance document provides much-needed clarity for most borrowers. The SBA announced that all borrowers with loans totaling $2 million or less will be deemed to have made the required certification in good faith, so these borrowers will not need to second guess their original decision to certify. That said, borrowers should remember that good faith is still required – this new guidance does not suggest that fraudulent certifications will be tolerated. That said, for the majority of borrowers this news will come as a relief. In addition, it will allow the SBA to focus its auditing efforts on larger companies and promote economic certainty for small businesses still considering a PPP loan.