SBA Announces New Safe Harbor for PPP Loan Borrowers

May 14, 2020

By: Rod Kubat

On May 13, 2020, one day before the safe harbor for returning PPP Loan proceeds under the Small Business Administration’s Interim Final Rule FAQ #42 would expire, the SBA announced a new safe harbor for borrowers whose PPP Loan amount was less than $2,000,000.  SBA’s FAQ #46, issued on May 13, 2020, provides that in connection with the SBA’s review of PPP Loans:


“[a]ny borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” 


The SBA determined that borrowers with loans below $2,000,000 are less likely than larger borrowers to have access to other sources of liquidity to support their operations during the COVID-19 pandemic, and administratively, the SBA could focus its limited resources on larger borrowers where the rewards reaped would be greater.  The safe harbor for borrowers with PPP Loans of $2,000,000 or more to return their loan proceeds currently expires on May 14, 2020.


This new safe harbor arises from the SBA’s position regarding borrowers’’ certification made in their PPP Loan Applications that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  In its Interim Final Rule FAQs # 31, published on April 23, 2020, and FAQ #37, published on April 28, 2020, the SBA interpreted the certification to require each borrower’s “good faith” certification to take into account the borrower’s current business activity and the borrower’s ability to access “other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”  This interpretation was stated to apply not only to large public companies with access to the capital markets, but also to private companies with adequate sources of liquidity to support ongoing business operations.  In FAQ #31, the SBA also stated that in connection with a request for loan forgiveness, it would audit all PPP Loans over $2,000,000 to evaluate whether or not this certification was true. 


The SBA did not explain what it meant by “other sources of liquidity sufficient to support ongoing operations,” except in the context of public companies with large market capitalization having access to the capital markets for funds to support its ongoing business operations.  Furthermore, the CARES Act specifically excluded application of the “credit elsewhere test” associated with SBA Section 7(a) loans.  Essentially, the “credit elsewhere test” requires a borrower to certify that it cannot obtain credit on reasonable terms from another lender or financial source.  As a result, the SBA’s interpretation interjected uncertainty for many borrowers about whether or not the SBA would challenge the borrowers’ eligibility to receive the PPP Loan and raised the specter of potential criminal charges and large fines under the Federal False Claims Act. 


The SBA’s FAQ #46 provides certainty to those borrowers with PPP Loans of less than $2,000,000.  However, it leaves unanswered the question about how the SBA will evaluate or apply the” other sources of liquidity” standard to borrowers with PPP Loans for more than $2,000,000, although the SBA recognizes that those borrowers may still have a good faith basis for making the certification.  Consequently, these borrowers must be prepared to establish their good faith basis at the time of submitting the PPP Loan Application should the SBA challenge it. (A discussion about preparing for an SBA audit can be found here.


In FAQ #46, the SBA provided additional guidance on how it will address borrowers’ lack of an adequate basis for the certification.  If it determines a borrower lacked an adequate basis to make the certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP Loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.  So long as the borrower repays the loan after receiving notification from SBA that it lacked an adequate basis for the certification, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to that certification concerning necessity of the loan request.


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