The U.S. Small Business Administration (the “SBA”) is requiring lenders to obtain completed “economic need” questionnaires (the “Questionnaire”) from Paycheck Protection Program for-profit and nonprofit borrowers (“PPP Borrowers”) who borrowed $2 million or more in Paycheck Protection Program (“PPP”) loans. While the content of the Questionnaire remains subject to review and final approval by the Office of Management and Budget, PPP Borrowers should be prepared to complete the Questionnaire as part of the PPP forgiveness application submissions.

Economic Need Certification, Generally

As summarized in our prior Alerts regarding PPP loan eligibility and forgiveness[1], all PPP Borrowers were required, at the time of application, to demonstrate economic need for PPP funds, specifically certifying in good faith that “[c]urrent economic uncertainty makes [the] loan request necessary to support the ongoing operations of the Applicant”. In determining whether a PPP Borrower meets the need threshold, subsequent SBA guidance instructed borrowers to consider the state of its then-current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner not materially detrimental to the business.

Additional SBA guidance issued on May 13, 2020 provided a safe harbor for PPP Borrowers that, together with its affiliates, received PPP funds in an amount less than $2 million. Such PPP Borrowers are deemed to have made the economic need certification in good faith, on the basis that such category of borrowers were 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 obtained loans in excess of $2 million may still have an adequate basis for making the required certification, but will be subject to SBA review for compliance with program eligibility requirements set forth in prior SBA Interim Final Rules and the Borrower Application Form.

Loan Necessity Questionnaire

The SBA has already begun to distribute the Questionnaire to PPP lenders servicing PPP Borrowers with loans of $2 million or more. Not only does the Questionnaire impose substantial document production and certification requirements on PPP Borrowers, but it also requires PPP Borrowers to respond within only 10 business days from receipt of the Questionnaire. Most notably, the Questionnaire focuses not only on compliance at the time of application (and the veracity of related “economic need” certifications), but also the condition of the business and operations of PPP Borrower following 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 relating to gross revenues in 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 relating to cash outlays necessitated in connection with mandatory shutdowns and/or significant operational alterations resulting from government mandates and emergency declarations issued throughout the pandemic. Note that the nonprofit questionnaire requires substantively similar information, with a focus on gross receipts from gifts, grants, contributions and other amounts.
  • Liquidity Assessment. The liquidity assessment contains a series of questions relating to cash flow, capital expenditures and distributions of the applicable PPP Borrower both at the time of application and thereafter. PPP Borrowers are required to disclose, among other things:
    • Cash and cash equivalents as of the last day of the calendar quarter immediately preceding PPP Borrower’s submission of its application;
    • Payment of dividends or distributions to the PPP Borrower’s owners;
    • Prepayment of debt during the Covered Period;
    • Employee compensation in excess of $250,000 on an annualized basis;
    • Ownership of 20% or more of PPP Borrower by any publicly traded company (together with name and market capitalization of any such publicly traded company) or any private equity firm, venture capital firm or hedge fund;
    • Information relating to subsidiaries, parents and affiliates of the PPP Borrower; and
    • Receipt of funds from any CARES Act program or other COVID-19 relief.

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 donor-restricted endowments, quasi-endowments or similar funds), and questions specific to health care service providers.

Conclusions and Considerations

The Questionnaire raises substantial concerns for PPP Borrowers, as it requires PPP Borrowers to consider current operational and liquidity factors which appear to go well beyond the SBA’s previous guidance with respect to the economic need assessment determined at the time of the application (and through the previous safe harbor periods). It is unclear whether this will be used as a screening mechanism to determine which loans require further review or if there is actually an intent to determine eligibility based upon subsequent events. Unless and until there is further guidance, PPP Borrowers with loans at or above the $2 million threshold should be prepared not only to certify to the information detailed above, but to gather, review and ultimately produce substantial documentation with respect to their responses at the time of submission of their PPP loan forgiveness application. While many PPP Borrowers are hoping for additional guidance prior to submitting their PPP forgiveness application, the SBA has not yet indicated if and when any such  further guidance will be issued.

We are closely monitoring the situation and will provide updated alert(s) as additional information becomes available. Our attorneys are available to guide you and answer any questions regarding the Questionnaire and related PPP considerations.

[1] For additional information, please see our prior alerts issued on April 24, 2020 (regarding SBA Frequently Asked Questions), May 13, 2020 (regarding SBA guidance with respect to the good faith certification), May 14, 2020 (regarding extension of the safe harbor deadline) and May 18, 2020 (regarding loan forgiveness).

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.