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  • Writer's pictureMatthew Slaton

Should I Pay Back My PPP Loan?

Since the CARES Act was enacted on March 27, 2020, the U.S. Department of the Treasury (Treasury) and the Small Business Administration (SBA) have continued to issue guidance with respect to the Paycheck Protection Program (PPP). This guidance came on the heels of negative press regarding public companies being among beneficiaries of the PPP loan program. This caused some of the loan recipients to return PPP funds that were intended to pay employees for the 8-week period following the funding date of the PPP loan.

All PPP loan applicants are required to make a “necessity certification.” In doing so, PPP loan applicants must certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

After “Round 1” of PPP loan funding was exhausted in just 14 days, Congress approved “Round 2” on April 23rd. Coinciding with this approval, the SBA and Treasury added FAQ 31 and FAQ 37 to its FAQ document. The answers to these two questions purport to provide guidance, retroactively, on the “necessity certification.” FAQ 31 and FAQ 37, in effect, modify the necessity certification by making additional factors part of that certification. Thus, in making the necessity certification, borrowers must now take into account their “current business activity” and their ability to “access other sources of liquidity.”

For a prospective borrower, this guidance creates significant uncertainty as to whether a borrower can make this certification when it may have access to other sources of liquidity (e.g., cash reserves, other investments or assets, access to undrawn lines of credit or other debt). This guidance also presents questions about how a borrower having an owner or owners with significant capital should factor such facts into a borrower’s evaluation of other sources of liquidity, and therefore necessity for a PPP loan.

Many small businesses previously made this “necessity certification” when submitting their applications for PPP loans long before the SBA and Treasury made this recent “guidance” available. Nevertheless, PPP loan applicants must take this guidance into account in deciding whether to: (1) accept PPP loan funds previously applied for, or (2) return PPP loan funds that they have already received following SBA approval of their initial application.

The recent “guidance” has resulted in applicants – big and small – asking an important question: Should I pay back my PPP loan? For example, see the recent Bloomberg article “Small Firms Join Rush to Return Loans After Rules Revisions” There has also been significant press reporting over the government’s position that all persons receiving PPP loans over $2 million will be audited and that businesses that cannot support their application will be subject to criminal and civil penalties. See the recent article by FOX Business entitled “Coronavirus PPP loan recipients in 'panic' over unintentional fraud as safe harbor deadline looms.”

The SBA’s and Treasury’s “safe harbor” guidance issued last week only clarifies that borrowers receiving PPP loans of less than $2 million will be deemed to have made the required “necessity certification” in good faith. Conversely, the SBA confirmed its previously-announced intention to audit all PPP loans in excess of $2 million (as well as other PPP loans as deemed appropriate by the SBA) for compliance with program requirements, including the necessity certification.

The new safe harbor guidance also extended the deadline for borrowers who have received PPP loans of $2 million or more. These borrowers will be deemed to have made the “necessity certification” in good faith if they repay their PPP loan in full by the extended deadline of May 18th.

Loan applicants should carefully assess their specific needs and resources in light of the state of the evolving guidance, and contemporaneously document their decision-making process along with supporting financial information.

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