Does Your Business Satisfy the Needs Based Test for a PPP2 loan?

As most businesses contemplating a Paycheck Protection Program – Round 2 (PPP2) loan know, borrowers are required to demonstrate a decline in gross receipts of 25 percent or more in any quarter of 2020 compared to 2019 or on an annual basis. However, borrowers are also required to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Some considerations that a business borrower may want to make are described below.

Borrowers under $2 million

While the SBA is not currently requiring the formal forgiveness questionnaire (Form 3509 for for-profit entities and Form 3510 for non-profits) to be completed by borrowers under $2 million, we would encourage all borrowers to contemplate and contemporaneously document their economic need giving rise to the additional, or first time, PPP funding. Here is a summary of some of the key questions currently asked by the SBA to document loan necessity, after-the-fact:

• Were any of the borrower’s employees compensated in an amount that exceeds $250,000 on an annualized basis?
• Did the Borrower directly receive any funds from any CARES Act program other than PPP, excluding tax benefits?
• As of the last day of the calendar quarter immediately before the loan application, how much did Borrower own in cash, savings, and temporary cash investments? Are there any restrictions on these funds?
• What were the changes in year-over-year gross revenues? Operating expenses?
• During the loan covered period, did the Borrower begin any new capital improvement projects not due to COVID19? What were the cash outlays for these projects?
• Has the Borrower prepaid any outstanding debts?

Borrowers over $2 million

Borrowers that received $2 million will be required to complete the loan necessity questionnaire provided by the SBA at the time of forgiveness. Upon receipt of the questionnaire (Form 3509 for for-profit entities and Form 3510 for non-profits), borrowers are given 10 business days to return the completed form and required supporting documents to the lender. In addition to addressing all of the questions posed above, we would encourage those receiving the questionnaire to be thoughtful in their responses and consider an enhanced narrative to accompany the questionnaire that addresses:

• the liquidity needs of the business requiring the PPP funding,
• how the business had to adjust to the COVID environment, and
• consider including the Freedom of Information Act (FOIA) exemption on this documentation if you believe the documentation would fall under “Exemption 4: Trade secrets or commercial or financial information that is confidential or privileged.”

Additional resources:
https://www.sba.gov/document/sba-form-3509-paycheck-protection-program-loan-necessity-questionnaire-profit-borrowers

https://www.sba.gov/document/sba-form-3510-paycheck-protection-program-loan-necessity-questionnaire-non-profit-borrowers