SBA Releases Credit Adequacy Questionnaires for $ 2 Million PPP Loans | Hahn Löser & Parks LLP

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The US Small Business Administration (“SBA“Has published two credit requirement questionnaires – one for for-profit corporations, the other for nonprofits – for recipients of the Paycheck Protection Program (“PPP“) Loans of $ 2 million or more.

The questionnaires are intended to help the SBA to assess the trust certificate of a borrower that his loan application was necessary to support ongoing business operations. A borrower who receives a questionnaire from their lender must return the questionnaire within 10 working days. If a borrower does not fill out the questionnaire or the SBA determines that the borrower has not certified in good faith that his loan application was necessary to support his ongoing business activities, the borrower’s application for a PPP loan may be rejected.

The PPP, one of the pillars of the Coronavirus Aid, Aid and Economic Security Act (“CARES law“) Enabled most organizations with 500 or fewer employees (and some with more than 500 employees) to apply for low-interest, forgeable loans of up to $ 10 million. If a borrower has used at least 60 percent of their PPP loan proceeds on payroll and the remainder on other eligible expenses such as rent, mortgage interest, and utilities, then the entire loan is waivable (and the waiver amount is excluded from the gross amount of the borrower). Income), whereby the loans are essentially treated as grants.

As part of the application process, borrowers had to certify that “[c]The current economic uncertainty makes this loan application necessary to support the applicant’s ongoing operations. ”The SBA previously announced the following:

Borrowers must make this certification in good faith, taking into account their current business operations and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that does not materially affect the business. For example, a public company with significant market value and access to capital markets is unlikely to be able to provide the required certification in good faith …

The SBA had also previously announced that it would consider all PPP loans of $ 2 million or more, generally at the time the borrower filed for waiver. The language of the certification and the announcements of the SBA left many PPP borrowers – especially borrowers who are $ 2 million.

The Loan Requirement Questionnaires help clarify these questions by making it clear what information the SBA will review. For example, the questionnaire for profit-oriented companies asks:

  • How the borrower’s gross receipts in the second quarter of 2020 compared to the borrower’s gross receipts in the second quarter of 2019 (or in some cases, the first quarter of 2020);
  • Whether the borrower has been ordered by a state or local agency to cease operations or make significant changes due to COVID-19;
  • Whether the borrower has voluntarily ceased, reduced or otherwise changed their business activities due to COVID-19 since March 13, 2020;
  • How much cash and cash equivalents the borrower had on the last day of the calendar quarter immediately prior to his PPP loan application;
  • Whether the borrower is between 13Period covered“(Typically an 8 or 24 week period starting from the loan disbursement date);
  • Whether the borrower paid employees or owner employees more than $ 250,000 on an annual basis during the covered period;
  • Whether the borrower was a publicly traded company at the time of their PPP loan application or whether at least 20 percent of the stock or equity of the borrower was owned by a publicly traded company, private equity firm, venture capital firm, or hedge fund.

The nonprofit questionnaire is similar except that it is tailored for nonprofits. In addition to asking how gross revenue for Q2 2020 compares to gross revenue for Q2 2019, the nonprofit survey asks borrowers to compare gross receipts from gifts, grants, and contributions in Q2 2020 to Q2 2019 to compare. Rather than asking if a nonprofit borrower is publicly traded or owned by a listed parent company or mutual fund, the nonprofit questionnaire asks whether the borrower had a foundation or other investment.

The questionnaires show that the SBA will closely examine the borrowers’ businesses during the period covered and may refuse to cancel the loan if a borrower was either not adversely affected by COVID-19 or had other sources of liquidity that he could have used, to compensate for any decrease in its gross income, income, or income caused by COVID-19.

If so, many borrowers can rightly complain that at the time of the loan application they had no way of knowing how COVID-19 would affect their business. In fact, many companies who feared the worst in March or April have found that business was better than originally expected. In addition, the CARES Act itself does not require borrowers to demonstrate that they were or would be negatively affected by COVID-19 or that the borrower would not be legally competent without the PPP loan. Instead, the PPP statute only required borrowers to certify that “economic uncertainty” made the loan application necessary to “support” the borrower’s day-to-day business.

Although it is not yet certain how the SBA will use these questionnaires or under what circumstances the SBA will refuse to forgive, if the SBA begins to refuse forgiveness requests because a borrower is not actually seeing a decrease in gross receipts, borrowers can or has received revenue have good reason to contest the SBA’s denials.

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