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New Considerations for Small Business PPP Borrowers

Update April 29, 2020: The Treasury and SBA confirmed in their April 29th FAQ Update that all loans in excess of $2 million, “in addition to other loans as appropriate,” will be subject to review by the agencies. Additional information regarding these audits is forthcoming.


After Congress reached a deal to infuse an additional $310 million into the Paycheck Protection Program (“PPP”) and re-open applications for small businesses, the Small Business Administration (“SBA”) and Treasury Department updated the PPP Frequently Asked Questions (“FAQs”) to include clarification and guidance on the good faith certifications made by applicants, and also created a safe harbor deadline for companies to return loan funds without recourse.

The clarifications come on the heels of recent headlines shaming large public companies for utilizing the small business program. The clarifications retroactively apply to prior PPP loan recipients as well as future PPP loan recipients. Small business applicants should carefully review all required certifications and determine whether the loan is necessary in light of the guidance from the SBA and Treasury.

Clarified SBA Guidance

The new guidance explains that all borrowers should carefully review the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

It goes on to explain that applicants need to examine their current business activity and access to other liquidity sources when determining whether they can make application for a PPP loan in good faith.

The guidance specifically describes a “public company with substantial market value and access to capital markets” as being unlikely able to provide such a good faith certification; however, it is believed that the newly issued guidance applies to all applicants, not just the larger businesses described in the example.

Additionally, applicants who applied for a PPP loan prior to April 23 and believe they are no longer eligible for the program following the additional guidance have until May 7 to repay the loan in full without recourse.

The guidance at issue is found in the FAQ under Question 31, which states:

31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should carefully review the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” 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.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7 will be deemed by SBA to have made the required certification in good faith.

Loan applicants and recipients of funding should maintain documentation in support of their decision to accept PPP funds in the event they are required to later provide justification.

Treasury Secretary Steve Mnuchin reported on April 28 that the SBA will conduct full audits on PPP loans that exceed $2 million. While it is too early to determine how enforcement of the guidance will look in practice or how these audits will take place, applicants should err on the side of caution and expect some level of scrutiny of their decision to accept a PPP loan, particularly if their loan amounts are above the $2 million threshold.

Please contact contact your KDDK attorney or any member of the KDDK business law team if you have any questions about the Paycheck Protection Program, its guidance, or what documentation should be used in support of participating in the program.

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