The Small Business Administration (SBA) Frequently Asked Question (FAQ) guidance published on May 6, 2020 provided clarity on eligibility requirements for businesses hoping to receive loans under the Paycheck Protection Program (PPP). In light of this update on borrower eligibility, the FAQ allows a business to return loans without any repercussions if a business believes they are ineligible. In response to feedback from borrowers, this return window – which was previously set to end on May 7, 2020, just one day after the FAQ publication – has been extended to May 14, 2020.
Whether a borrower must return their loan remains uncertain. The FAQ states that although the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) suspended the ordinary requirement that borrowers must be unable to obtain credit elsewhere, as provided in section 3(h) of the Small Business Act, borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, borrowers must certify that “current economic uncertainty makes the loan request necessary to support the applicant’s ongoing operations.” The FAQ goes on to state that borrowers may return their loans if the borrower believes that the funds received from the SBA were not actually necessary to support the business’s ongoing operations. As alluded to above, businesses that applied for a PPP loan prior to the issuance of the May 6, 2020 guidance may now repay the loan in full by May 14, 2020 without facing any consequences, regardless of whether the loan was unnecessary. Formalization of this extension through a revision of the SBA’s interim final rule establishing the safe harbor is expected.
In order to make the most of this extension, borrowers should gather documentation establishing the need for funding at the time of the loan application. This data should include information relating to market conditions, such as declines in revenue, continued payroll costs, or increases in the costs of necessary supplies and an inability to cover such expenses or losses in revenue absent a loan. It is anticipated that more guidance will be published prior to May 14, 2020, so be sure to refer to the McLane Middleton Coronavirus Resource Center at https://www.mclane.com/Coronavirus-Resource-Center for updates as more information becomes available.