On October 26, 2020, the Small Business Administration (SBA) published a notice seeking approval from the Office of Management and Budget (OMB) to release two new forms to supplement the loan forgiveness applications of larger PPP borrowers. The forms, not yet publicly available but have been circulated, will facilitate the collection of information that will be used by SBA loan reviewers to assess borrowers’ good faith certification made on their Paycheck Program Protection (“PPP”) loan application that current economic uncertainty made the loan request necessary to support their ongoing operations. The forms should be reviewed by all borrowers who received PPP loans of at least $2 million, as the information requested suggests that the government may once again be altering the rules regarding PPP loan eligibility.
The two new forms are Form 3509, Loan Necessity Questionnaire (For-Profit Borrowers) and Form 3510, Loan Necessity Questionnaire (Non-Profit Borrowers). The instructions for these forms state that they are required to be completed for Borrowers with PPP loans of $2 million or more, and must be completed within 10 days of receipt from the Lender. Due to this short deadline to respond, we recommend that Borrowers begin reviewing the applicable form and start gathering the information and documentation requested, so they are prepared when they receive the request from their Lender.
The SBA previously issued notification via FAQs (FAQ #39) of its intent to audit all PPP Loans in excess of $2 million to ensure PPP loans were only received by eligible borrowers in need. The release of Form 3509 and Form 3510 goes a step further to protect the integrity of the PPP and protect taxpayer resources.
Each form contains a Business Activity Assessment and a Liquidity Assessment which contains questions addressing each topic, some of which require supporting documentation.
Business Activity Assessment
This section contains questions about how the borrower’s business was impacted by COVID-19, including the following:
- Asking the borrower about its gross revenues in the second quarter of 2020 as compared to 2019. The borrower must also provide evidence satisfactory to the SBA, such as P&Ls for the two years.
- Whether the Borrower was required to shut down by a state or local authority.
- If the Borrower altered its business because of COVID-19 and if so, how operations were altered.
- Whether the Borrower began any new capital improvements not due to COVID-19.
This section contains questions and requests supporting documentation concerning the Borrower’s liquidity position, including the following:
- Cash position of the Borrower at the end of the quarter before the PPP application date.
- Information about distributions and debt payments made during the Covered Period.
- Number of employees and owners whose compensation exceeded $250,000 on an annual basis.
- Whether the Borrower is publicly traded, owned 20 percent or more by a publicly traded company or owned 20 percent or more by a private equity firm, venture capital firm or hedge fund.
- Whether the borrower received funds from other CARES Act programs.
Note that the above questions are slightly altered for non-profits. For example, the definition of gross revenue would include grants, gifts and contributions. Also, non-profit borrowers are required to submit second quarter expenses for 2019 and 2020 and are asked if they hold assets in endowment funds or otherwise have restrictions on using net income, cash, savings or investments for payroll and nonpayroll costs otherwise eligible for PPP loan forgiveness.
The questions asking Borrowers to compare quarterly revenue between 2019 and 2020 and whether they were ordered to shut down or required to make significant changes to their operations due to COVID-19 imply that such inquiries are relevant to the certification about uncertainty regarding the future that Borrowers faced as of the loan application date. However, the CARES Act that created the PPP does not include a requirement that businesses be impacted by COVID-19, only that “economic uncertainty” made the loan necessary. Similarly, the PPP loan application only required a Borrower to certify that the loan was necessary because of the economic uncertainty caused by the COVID-19 pandemic and made no reference to measuring revenue declines or a Borrower’s other forms of liquidity.
Borrowers with PPP loans exceeding $2 million should carefully review the determination made that the loan was necessary to sustain their ongoing operations, considering these new questionnaires and previous SBA guidance, and ensure their determination is well supported and documented. Notably, each section of the draft forms also includes an optional question permitting the Borrower to provide additional information to present the context of their PPP loan application in the best possible light. This optional information space could be used to indicate that the Borrower has already conducted a review by a third-party advisory and accounting firm validating that the Borrower’s good faith certification was fully evaluated and affirmed.
What to Do Next?
With guidance changing frequently, it’s more important than ever to document and track all information, expenses and forms related to your PPP loan. With the anticipated short deadline for both of the forms mentioned throughout this article, we recommend Borrowers with loans of $2 million or more begin working on documentation as soon as possible.
We view the new loan necessity questionnaires as the initial determination as to whether a full audit will be conducted by the SBA. Bennett Thrasher can assist you with SBA Form 3509 or 3510 to evaluate and help document answers to the following questions:
- Did the Borrower make its representation set forth in the application in good faith?
- Did the Borrower meet the qualifications established by Congress and in accordance with the Interim Final Rules and FAQs issued by the SBA?
- Did economic uncertainty exist at the time the loan request was made to make the loan necessary to support the ongoing operations of the Borrower?
Since the forms allow the Borrower to insert additional comments on any of the questions contained therein, we believe it may be advisable to obtain independent validation of answers to the preceding questions before they are asked. Since it would be nearly impossible to conduct a review of the decision-making process within the ten-day period, we recommend that Borrowers take proactive steps to obtain a Necessity Analysis far in advance of a potential governmental audit.
Bennett Thrasher will continue to monitor developments with the PPP loan process and new requirements and will communicate any significant changes that will impact our clients. For further questions or guidance regarding PPP loans or to learn more about our Necessity Analysis reports, please contact your BT advisor by calling 770.396.2200.