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PPP Loan Program – SBA Guidelines Regarding “Necessity” – New Safe Harbor for Loans Under $2 million

By April 25, 2020 No Comments

PPP Loan - SBA Guidelines Necessity - Safe Harbor

This article was originally published on April 25, 2020, and was most recently updated on May 14, 2020.

May 13th Updated FAQs: The SBA released a new Question 46 to its frequently-updated list of FAQs. Per Question 46, that there will be a safe harbor regarding the “necessity” certification for any PPP loans under $2 million (aggregating loans across affiliates). As borrowers have been struggling with the lack of clear guidance from the SBA on how to assess “necessity”, this will be welcomed news for borrowers of smaller amounts, but does not provide any additional clarity on how borrowers of larger amounts should make that determination. There is, however, additional clarity from the SBA on its audit process and the implications of incorrect certifications for larger borrowers, which we explore in more detail below. In addition, on the evening of May 13th, the SBA added Question 47, which extends the safe harbor return deadline to May 18th (previously May 14th).

Background: The initial funding for the Paycheck Protection Program (PPP) under the CARES Act was exhausted in under 3 weeks, but new funding was allocated on April 24th to make additional loans available under the program. After the initial scramble to obtain funding, attention has focused on whether funds were improperly received, in particular regarding the question of whether the loans were “necessary” as certified by borrowers in the PPP application. The SBA continues to update the FAQs as new guidance becomes available.

Why does the question of necessity matter? All PPP applicants must certify in their application that
“economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Until FAQs published in late April, there was little guidance on how to assess necessity in this context. Additional guidance has been added to the FAQs in late April and early May regarding this certification, with the latest addition being the safe harbor for loans under $2 million as noted above.

What if I have a PPP loan for greater than $2M – how should I evaluate necessity? The SBA states in Question 46 that borrowers of loans greater than $2 million may still have an adequate basis for making the required necessity certification. Borrowers of loans over $2 million should refer to the previously existing guidance, which unfortunately included no objective metrics but did include the following guidance in Question 31:

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.

The above-referenced Question 31 mentions public companies – what about private companies? The reference to public companies in Question 31 was an example only. In Question 37, the SBA clarifies that private companies should likewise refer to the guidance in Question 31 when considering eligibility, sources of liquidity, and the question of necessity.

Does this mean that if a company has access to credit elsewhere, it is not eligible for a PPP loan? No, unlike traditional SBA loans, the PPP still does not include a specific requirement that a borrower not have access to credit elsewhere. However, these new guidelines do mean that a borrower of a PPP loan in excess of $2 million should carefully consider the availability of alternative sources of funding and how “detrimental” such alternative funding sources would be to the business. At a corporation, this determination should be considered by the board of directors.

Do we have any guidance on what may be considered “detrimental”? No, there is no specific guidance from the SBA on what may be considered “detrimental”. When evaluating alternative sources of funding, we would expect a board to consider, among other factors, the timing and availability, interest rate and maturity, dilutive impact, and contractual obligations that may be tied to such alternative sources of funding.

Are there any safe harbors? Yes, there are two safe harbors: (1) As noted above, borrowers of PPP loans less than $2 million will be deemed to have made the certification as to necessity in good faith, and (2)  if a borrower repays its PPP loan in full by May 18, 2020, it will be deemed to have made the certification of necessity in good faith. It is worth noting that the safe harbors are stated only with respect to the question of the necessity certification, and they are not broad safe harbors regarding all certifications made on a PPP application (such as affiliation, size, or other matters). In our view it is unlikely that the SBA would scrutinize other certifications on loans repaid by the May 18th deadline.[1]

Will there be an audit process? Yes. Question 39 notes, and Question 46 reiterates, that the SBA will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance will be forthcoming from the SBA regarding the audit procedures.  The SBA notes in Question 46 that part of the intent behind creating the <$2 million safe harbor is so that it can focus its limited audit resources; however, it did not state that it will not audit borrowers of loans under $2 million. Borrowers of loans under $2 million should be aware that the SBA may still in some cases perform an audit of their PPP loan, though per Question 46 that audit would not look at the necessity certification. What happens if, in the audit process, the SBA determines that my company’s loan was not necessary? If your loan is for $2 million or more, and the SBA determines in its audit that your necessity certification was not adequately supported, then you will need to repay the loan. It is unclear whether such repayment will be required over the usual course until maturity, or if the SBA will seek immediate repayment. From Question 46:

“If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.”   

Does this mean that if a company is covered by a safe harbor that it will not face any liability regarding its PPP loan? No; these safe harbors go only to the question of necessity as it relates to SBA enforcement. The safe harbors do not extend to other certifications (including for instance the number of employees or amount of payroll); borrowers are still responsible for the accuracy of the information in their application and could face criminal or civil penalties if such other certifications were false. In addition, the safe harbor does not preclude suits under The False Claims Act, which we have explored in more detail here [LINK], though it is possible that the Department of Justice (which has power to take over or request dismissal of such claims) could coordinate with the SBA and the Department of the Treasury to approach such claims consistently with the safe harbor.

What steps should a company take now? Any company seeking more than $2 million in the application process should carefully evaluate the necessity certification in light of the latest SBA guidance, and ensure it can make that certification in good faith before submitting its application (or, if the application has been submitted and not funded, before accepting funds thereunder). If a company has already received a PPP loan in excess of $2 million, it should revisit the necessity certification in light of the latest SBA guidance and give serious consideration to repaying the loan before May 18, 2020 if it is uncertain of its ability to make the necessity certification If a borrower does not opt to repay the loan, it should keep detailed records regarding its determination of necessity, as the latest FAQs make it clear that the SBA will later ask some borrowers to provide supporting documentation. We are still recommending that Borrowers of less than $2 million keep appropriate records documenting necessity.

I’ve heard some companies are suing the SBA – what are they claiming? At least one company group (Zumasys Inc. and its subsidiaries jBase and TCS) is suing the Treasury Department and the SBA, claiming that the new guidance from the SBA regarding other sources of liquidity contradicts the intent of the PPP, which was explicitly set up to include a waiver of the typical requirement that borrowers of SBA loans not have access to credit elsewhere.[2]

We will continue to closely monitor developments regarding these matters. You can view prior alerts and additional guidance regarding the CARES Act and COVID-19-related matters at our resource center.

For more information on these matters, please contact our COVID-19 Task Force at or one of our attorneys at SA&M.

Author: Caroline Cherkassky


[1] The original safe harbor return deadline was May 7, 2020. It was extended to May 14, 2020 and most recently further extended to May 18, 2020.

[2] Zumasys Inc. et al v. U.S. Treasury Department, Small Business Administration 8:20CV00851

(C.D. Cal., filed May 4, 2020)