Small Business Administration (SBA) Provides Guidance on Good Faith Certifications Needed to Obtain a PPP Loan: What Nonprofit Employers Need to Know

CATEGORY: Special Bulletins
CLIENT TYPE: Nonprofit
PUBLICATION: LCW Special Bulletin
DATE: Apr 24, 2020

Under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), banks and lenders may provide up to $349 billion in forgivable loans to small businesses under the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”).  Lenders exhausted the entire $349 billion set aside for PPP loans less than two weeks after the PPP loan program began.  On April 24, 2020, the federal government approved an additional $310 billion for the PPP loan program.

To obtain a PPP loan, businesses must make specific good faith certifications, including “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.”  During the initial PPP loan period, news has come out that some lenders may have provided PPP loans to businesses that had access to other sources of funding that could have helped them through this time, and these companies are being accused of not properly certifying their need for the loans. Accordingly, on April 23, 2020, the SBA issued additional guidance to address questions about the need certification requirement.

In the form of an updated FAQ (see question 31), the SBA explained that borrowers must certify in good faith that their PPP loan request is necessary. In doing so, borrowers must take into account: (1) their current business activity and (2) their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to their business.  SBA gave an example that a public company with substantial market value and access to capital markets will not likely be able to make a good faith certification that it needs the loan to support its ongoing operations.  SBA reminds PPP loan applicants that if they obtain a PPP loan, they should be prepared to demonstrate that they need the PPP loan through a good faith certification.

In its updated FAQ, the SBA also provided a “get out of jail free” option to borrowers that applied for a PPP loan on or before April 23, 2020, and are now questioning in light of this new information from the SBA whether they can make a good faith certification that they need this loan to support ongoing operations.  If a PPP loan borrower repays the loan in full by May 7, 2020, the SBA will automatically deem that the borrower made the required good faith certifications regarding their need for the PPP loan.

Nonprofit organizations that applied for or received a PPP loan, but are unsure if they need a PPP loan based on the current economic conditions, should conduct a due diligence examination of their situation.  Nonprofit organizations should analyze whether they have other sources of funds available to use without causing significant harm to their organization.  For example, if a nonprofit organization has access to large liquid unrestricted investment accounts that could be used to keep operations ongoing, that nonprofit organization may not be able to make an appropriate good faith certification that, despite those funds, it still needs a PPP loan.  If a nonprofit organization feels it cannot in good faith make the required certification, it should repay any PPP loan amounts received in full by May 7, 2020.  Nonprofit organizations that do not repay their PPP loans by May 7, 2020, should be prepared to show, through documentation, that their certifications regarding their need for the PPP loan were made in good faith.