New Guidance from the SBA Concerning Borrower Eligibility Under the CARES Act’s Paycheck Protection Program Highlights Economic Need as a Prerequisite and Offers a “Limited Safe Harbor” to Return Loan Funds for Those Who Do Not Meet this Vague Requirement

By way of Interim Final Rule dated April 24, 2020, the Small Business Administration (“SBA”) issued further agency guidance in connection with borrower eligibility for loans under the CARES Act’s Paycheck Protection Program (“PPP”) (“New Guidance”). In keeping with previous Interim Final Rules, the New Guidance is structured as a series of questions and answers, among which is the following:

Do the SBA affiliation rules prohibit a portfolio company of a private equity fund from being eligible for a PPP loan?

Responding in the affirmative, the SBA then made the curious decision to add the following language: “. . . in addition to applying any applicable affiliation rules, all borrowers should carefully review the required certification on the [new PPP] Application Form (SBA Form 2483) stating that ‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’” What’s more, and underscoring the importance attributed to this qualification by the SBA, the New Guidance goes on to provide a “[l]imited [s]afe harbor with [r]espect to [c]ertification [c]oncerning [n]eed for PPP Loan[.]” The “limited safe harbor” provides that “[a]ny borrower that applied for a PPP loan prior to the issuance of this regulation and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.”

A newly released (April 26, 2020) SBA FAQ page further elaborated on this point, indicating that borrowers attempting to determine whether they met the “necessary to support ongoing operations” threshold should “tak[e] 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 detrimental to the business.” By way of example, the SBA stated that 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 company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”

While the SBA’s increased focus on this nebulous “economic uncertainty” test may be troubling to some borrowers, it bears noting that, under current guidance and preexisting SBA regulation, a practice’s “good faith” certification as to economic need will be (or at least should be) evaluated as of the date the PPP application was filed – hindsight evaluations should not be permissible. The above-referenced FAQ indicates as much, advising that “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.” Significantly, this position is also consistent with the SBA’s size eligibility regulation (applicable to the PPP), which provides that size determinations are to be made “as of the date the application for financial assistance is accepted for processing . . .” 13 C.F.R. 121.302.

For these reasons, it is strongly recommended that providers who have already applied and have received (or will receive) PPP funds, take some time to evaluate whether their practice faced “economic uncertainty” when they applied for the PPP loan – and that they do so quickly, since the limited safe harbor closes after May 7, 2020. In this way, if the practice retains the loan funds, it will be prepared to provide the SBA with a cogent rationale for why it met the economic need test when applying, thereby avoiding the potential for government imposed penalties, which could be steep. While the New Guidance’s directive to consider the practice’s “business activity” and “ability to access other sources of liquidity sufficient to support” ongoing operations is not particularly detailed or clear, certain baseline considerations/analyses seem of obvious import to this assessment:

  • As of the date that you applied for the PPP loan, had your practice furloughed or laid off employees due to the crisis?
  • As of the date you applied for the PPP loan, was your practice, as a result of lost business stemming from the crisis, unable to make certain payments necessary to ensure uninterrupted ongoing business operations, e.g., monthly rent payments for practice, monthly rent payments for medical equipment used by the practice, etc.
  • As of the date that you applied for the PPP loan, what was your practice’s cash flow as compared to your practice’s cash flow in February or early March (note that the COVID-19 crisis was formally recognized as a national emergency by the federal government on March 13, 2020)?
    • Consider tallying number of (among other things) patients seen or procedures performed and comparing the numbers for each time period
    • If you are a pharmacy or DME supplier, consider tallying number of (among other things) scripts/orders received and comparing the numbers for each time period
  • As of the date you applied for the PPP, was the practice going to be imminently receiving (per preexisting contract) a significant loan or grant? If so, this may cut against a finding of economic uncertainty
  • As of the date you applied for the PPP, given the nature of your practice, did you have substantial justification to predict that, as a result of the crisis, you would see a substantial drop in cash flow, e.g., you are an owner in an ambulatory surgery center, and, due to the ban on/reduction of elective surgeries on a prospective basis, it was highly likely the practice would suffer significant financial injury

How Frier Levitt Can Help

Should your practice have concerns as to whether it meets the “economic uncertainty” test, contact Frier Levitt to further discuss.

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