Self-Certification and the Paycheck Protection Program: What Does “Necessary” Mean?

Updated May 13, 2020.

Big name U.S. companies have been in the news recently for accessing (and returning) funding from the federal Paycheck Protection Program (PPP). These companies, some of them publicly traded, some of them having revenue in the hundreds of millions, and some of them having millions of dollars in cash-on-hand, technically met the qualifications for the loans. What they did not qualify for was the Congressional intent of the program: to aid small businesses in weathering the intense economic downturn caused by COVID-19’s necessary Stay at Home orders.  

These companies have decided to return their loans, and the Small Business Administration (SBA) has chosen not to penalize them as long as those returns are done in a timely manner. The SBA has also provided some guidance on the situation, in a regularly updated FAQ, stating,  

…all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application…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. 

This bit of guidance reemphasizes the self-certifications required by borrowers of the PPP and has left some businesses and non-profits with questions and concerns regarding their eventual ability to receive forgiveness for their PPP loans. To be sure, most businesses do not have access to the kind of liquidity that a national restaurant chain may have. But some small businesses may nonetheless have access to sources of liquidity other than the PPP, even if those sources are dramatically less attractive than the terms of the PPP or may have put at risk their company’s long-term health and survival.  

The PPP’s self-certification process relieved both lenders and the SBA of responsibility for ensuring that the loans were being borrowed by and will be used for the purposes specified in the Act. To aid in quick dispersal of the over $600 billion appropriated to the PPP, Congress required that eligible borrowers self-certify, in good faith, specific requirements:  

• That the uncertainty of the current economic conditions makes necessary the loan request to support the ongoing operations of the borrower;  
• The funds will be used to retain workers, maintain payroll, or make mortgage, lease, and utility payments;  
• The borrower does not have an application pending for a duplicative PPP loan; and,  
• The borrower has not received a duplicative PPP loan.  

This system had the aim and effect of making certain the funds reached as many businesses possible as quickly as possible; without them, application approval and loan disbursement would have been bottlenecked amidst urgent economic conditions.   

Nonetheless, the broader effect of SBA’s specific clarification of the first self-certification provision calls into question whether additional clarification will ultimately define the word “necessary” in this subsection of the Act in a way that will put forgiveness of the loan at risk for borrowers across the country. Additional guidance on the large business question muddies the water even further, 

Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary…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. 

The dilemma for a borrower is whether “necessary” as used in the Act means that there were other sources of liquidity available, or whether it means that a borrower, in their good faith judgment, believed the loan was necessary to support their ongoing operations within the purpose of the PPP (to keep employees receiving paychecks) and within the complex context of Stay at Home orders with no set end date.  

Surely Congress did not intend for the PPP to be limited to only those entities that have used up all other possible sources of liquidity. Surely that first self-certification requirement means that business owners and non-profit leaders should make context-specific determinations about whether their organizations’ survival and their employees’ livelihoods depended on receipt of a PPP loan. The CARES Act was a proclamation to the American people that help was on the way. PPP borrowers across the Capital Region and the country are imploring the SBA to prove Congress will keep its promise to the American people.  

Update May 13, 2020 

Thankfully, the work of Louisiana’s federal Congressional delegation in insisting the SBA address this self-certification issue appears to have been effective. The SBA released additional guidance today regarding self-certification and how it will be reviewed, stating in its FAQ on the PPP:  

…Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. 

To put that in perspective, a $2 million PPP loan would provide eight weeks of payroll for 260 employees whose annual salaries are $50,000 per year. Small businesses are typically those of 500 employees or fewer.  

Almost all loans will be covered under this safe harbor. Of the 3,606,253 PPP loans made before May 9, 99 percent were for $2 million or less.  The SBA explained its reasoning for the definition as, “appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.”  

Loans made to businesses for greater than $2 million will be subject to SBA review for compliance with program requirements, but SBA makes note that these borrowers, “may still have an adequate basis for making the required good faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance.” The safe harbor is great news to the bulk of borrowers, and our federal delegation should be commended. Hopefully, the SBA will elucidate further how it will judge applications for those borrowers which remain.