The United States Small Business Administration (the “SBA”) requires lenders to obtain completed “economic needs” questionnaires (the “Survey”) of the Paycheck Protection Program for profit and non-profit borrowers (“PPP borrowers“) who borrowed $2 million or more under the Paycheck Protection Program (“PPP”) ready. Although the content of the questionnaire remains subject to the review and final approval of the Office of Management and Budget, PPP borrowers should be prepared to complete the questionnaire as part of PPP rebate application submissions.
Certification of economic needs, in general
As summarized in our previous alerts regarding PPP loan eligibility and cancellationall PPP borrowers were required, at the time of application, to demonstrate economic need for PPP funds, specifically certifying in good faith that “[c]the current economic uncertainty makes [the] loan application necessary to support the applicant’s ongoing operations”. In determining whether a PPP borrower meets the need threshold, subsequent SBA guidance instructed borrowers to consider the state of their then-ongoing business activity and their ability to access other sources of sufficient liquidity. to support ongoing operations in a manner that is not materially detrimental to the business. .
Additional guidance from the SBA issued on May 13, 2020 provided a safe harbor for PPP borrowers who, along with its affiliates, received PPP funds of less than $2 million. These PPP borrowers are deemed to have made the certification of economic need in good faith, on the grounds that this category of borrowers was less likely to have had access to other sources of liquidity at the time the loan was applied for and obtained. The SBA further clarified that PPP borrowers who have secured loans greater than $2 million may still have an adequate basis to complete the required certification, but will be subject to SBA review to comply with the terms. program eligibility set forth in the previous SBA Interim Final Rules and Borrower Application Form.
Questionnaire on the need for a loan
The SBA has already begun distributing the questionnaire to PPP lenders serving PPP borrowers with loans of $2 million or more. Not only does the Questionnaire place substantial documentation and certification requirements on PPP Borrowers, it also requires PPP Borrowers to respond within just 10 working days of receipt of the Questionnaire. Specifically, the questionnaire focuses not only on compliance at the time of application (and the veracity of related “economic need” certifications), but also on the status of the PPP borrower’s business and operations after receipt of funds.
The Questionnaire focuses primarily on the assessment of two operational conditions: business activity and liquidity.
- Business activity assessment. With respect to business activity, PPP borrowers are required to provide details of gross revenue for the second quarter of 2019 (or, for businesses not in operation in 2019, the first quarter of 2020) and 2020. In addition, PPP borrowers are required to provide information related to necessary cash expenditures in connection with mandatory closures and/or significant operational changes resulting from government mandates and emergency declarations issued throughout the pandemic. Note that the questionnaire for nonprofit organizations requires substantially similar information, with an emphasis on gross revenue from donations, grants, contributions, and other amounts.
- Liquidity assessment. The liquidity assessment contains a series of questions relating to the cash flows, capital expenditures and distributions of the relevant PPP borrower, both at the time of application and after. PPP Borrowers are required to disclose, among other things:
- Cash and cash equivalents on the last day of the calendar quarter immediately preceding the submission by the PPP Borrower of its request;
- Payment of dividends or distributions to owners of the PPP Borrower;
- Prepayment of debt during the Covered Period;
- Employee compensation greater than $250,000 on an annualized basis;
- Ownership of 20% or more of the PPP Borrower by any publicly traded company (together with the name and market capitalization of such publicly traded company) or any private equity firm, venture capital firm or hedge fund;
- Information relating to the subsidiaries, parent companies and affiliates of the PPP Borrower; and
- Receiving funds from any CARES Act program or other COVID-19 assistance.
Again, the nonprofit questionnaire follows a similar form, with additional questions relating to cash, savings and temporary cash investments, types and values of endowment funds (including endowments reserved for donors, quasi-endowments or similar funds) and issues specific to health care. service providers.
Conclusions and Considerations
The questionnaire raises significant concerns for PPP borrowers, as it requires PPP borrowers to consider current operational and liquidity factors that appear to go well beyond previous SBA guidance on economic needs testing. determined at the time of application (and through previous security periods). It is unclear whether this will be used as a screening mechanism to determine which loans require further review or whether there is actually an intent to determine eligibility based on subsequent events. Unless and until there are further guidelines, PPP borrowers with loans at or above the $2 million threshold should be prepared not only to certify the information detailed above, but to gather , review, and ultimately produce substantial documentation regarding their responses at that time. to submit their application for PPP loan forgiveness. While many PPP borrowers hope for additional guidance before submitting their PPP forgiveness application, the SBA has not yet indicated if and when such additional guidance will be issued.
We are monitoring the situation closely and will provide updated alerts as additional information becomes available. Our lawyers are available to guide you and answer any questions regarding the questionnaire and PPP considerations.
 For more information, please see our previous alerts issued on April 24, 2020 (regarding the SBA Frequently Asked Questions), May 13, 2020 (regarding SBA guidelines for bona fide certification), May 14, 2020 (regarding the extension of the safe harbor deadline) and May 18, 2020 (regarding debt forgiveness).