SBA Provides Much-Needed Safe-Harbor for PPP Loans Under $2 Million

Fennemore Craig Client Alert

SBA Provides Much-Needed Safe-Harbor for PPP Loans Under $2 Million

The CARES Act’s Paycheck Protection Program (PPP) has provided nearly $670 billion in funding ­for businesses affected by the pandemic. However, after the first round of funding ran out, it was revealed that public companies received almost $1.3 billion in forgivable loans. In response, the SBA issued guidance requiring all borrowers to assess their economic need for a PPP loan in light of their “other sources of liquidity.” The guidance foreclosed access to PPP funding by public companies. But it also raised confusion, and even fear, among many small businesses who questioned their eligibility for the program because of the requirement that they certify the loan was “necessary” after reviewing other sources of liquidity.

Now, the SBA has issued guidance explaining that borrowers who received PPP loans of less than $2 million (this $2 million amount includes all loans to affiliates aggregated together) will automatically be deemed to meet the necessity standard for the loan. The SBA notes that the new safe harbor will provide “economic certainty” and “enable SBA to conserve its finite audit resources and focus its reviews on larger loans.”

Although there is no safe harbor for firms with loans exceeding $2 million, the new guidance further notes that if the SBA subsequently determines that a borrower lacked an adequate basis for the necessity certification, the SBA will only seek repayment of the loan and advise the bank that the borrower is not eligible for loan forgiveness. The SBA further states that borrowers who repay their loans after receiving notification from the SBA will not be subject to administrative enforcement.

As always, we will continue to provide updated information as it becomes available. If you have questions about the PPP or the CARES Act, please contact one of our business and finance attorneys listed above.