SBA Issues New Guidance on Small Business Loans
By Israel Tannenbaum
May 12, 2020
Recently, the Small Business Administration (“SBA”) issued new guidance regarding eligibility for the Paycheck Protection Program (“PPP”) which should afford increased opportunities for not-for-profits to obtain funding under the PPP.
Specifically, the SBA has shed light on what they will consider a valid “good faith certification” regarding the necessity of PPP loans and lack of other funding options.
The change comes on the heels of a second round of funding for the PPP, after the initial $350 billion was depleted. The program has received $310 billion in fresh funds, and this clarification should enable more of those funds to be allocated to not-for-profit organizations, which do not have the funding options of capital markets, or other sources, to rely on.
It is critical for not-for-profit organizations to thoroughly analyze their finances to determine whether they qualify to receive these federal funds. On March 19, 2020, the Department of Justice ordered every U.S. Attorney’s Office to appoint a Coronavirus Fraud Coordinator and we expect there to be extreme scrutiny around these loans and their subsequent forgiveness.
Companies applying for coronavirus relief funds must certify that the loans are necessary and that they cannot tap other sources of funding, the SBA said. By definition, public companies have access to capital markets. For example, Shake Shack returned the $10 million it got through the PPP after it sold $150 million in new shares. As this will preclude many companies from receiving loans under this program, it should free up significant funds that can be allocated to not-for-profits, which do not have the ability to raise funds through stock sales.
“Borrowers still must certify in good faith that their PPP loan request is necessary,” the SBA said. “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.”
In a key detail, the SBA indicated that companies who already received funds from the PPP will be considered to have acted in good faith by paying back the relief loans before May 14, 2020. The original May 7 deadline was moved under additional guidance.
The PPP specifies that applicants must certify the application and indicates applicants may be penalized for “knowingly making a false statement to obtain a guaranteed loan from SBA,” and knowingly using the funds for unauthorized purposes. False statements or other fraudulent conduct may subject a violator to significant federal criminal liability.
In light of this, and because Boards have a fiduciary responsibility, organizations should make sure to thoroughly document the basis for their qualification to receive PPP funds, and should ensure that this is approved through a written Board resolution.
Please contact your Mazars USA LLP professional for additional information