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PPP Update: Second Round Of Funding Proceeds Quickly; Treasury Resolves To Audit Larger Borrowers; Guidance On Certifications; New Interpretations

The Paycheck Protection Program (PPP) has been reinvigorated with the $310 billion of new funding as part of the $484 billion Stimulus Package signed into law by the President on Friday, April 24. That program was implemented under the CARES Act (Act) and offers 1% interest, SBA-guaranteed, loans of up to $10 million to small businesses including non-profits for support of payroll, utilities, rent and mortgage interest. Loans may be forgiven to the extent payments for such items are made over the 8-week period following funding, subject to potential reductions for declines in employment or salary levels relative to certain base periods.

Lenders began accepting applications for the first round of the program on April 3 and committed the full $349 billion such loans authorized under the program by April 16. Estimates are that during the first 24 hours since the acceptance of applications on Monday morning, the number of loans processed exceeded by 30% the largest number of applications processed during any single day during the first round according to the President. Funds in the second round are expected to be depleted quickly.

Following public outcry over funding to some large companies such as Ruth’s Chris Steak House, Shake Shack, and J. Alexanders Treasury, Treasury Secretary, Steven Mnuchin announced on Tuesday, that the SBA will perform a “full audit” of all loans in excess of $2,000,000, and other loans as appropriate, before the SBA will forgive such loans. The SBA will assess whether such companies met the needs criteria to which they certified in their loan applications. Reports earlier this week indicated that 22 of some 234 public companies receiving the loans had agreed to repay them including the three listed above.

Since Thursday, the SBA has adopted further legal guidance on the PPP with the addition of another 7 Frequently Asked Questions and its Fourth Interim Final Rule. Most notably these include an expanded interpretation of the certification that borrowers’ made on their PPP applications as to their degree of need for funding that expands on the scope, as well as guidance of the measurements of “payroll costs” and “employees” under the Act. PPP applicants should review these new self-certification guidelines, and consider taking steps to ensure they are in compliance.


Every borrower under the program has signed a certification on its loan application that reads as follows: “Economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA provided no metrics to define what is “uncertainty” or need for support, such as decline in revenues or net income tests. In fact, the Treasury provided many indications that it was then taking a lenient approach to eligibility for funding. It eliminated the requirement in other Section 7(a) SBA lending programs that an applicant show that it is unable to obtain “credit elsewhere“. It also recited in the Act’s provisions that defer interest and principal payments that the SBA Administrator shall “consider each eligible recipient that applies for a covered loan to be an impacted borrower.” The Act also expands the eligibility for such loans under Section 7(a) to include in addition to small business concerns, other business concerns with up to 500 employees (or larger numbers for borrowers in certain industries), non-profits and veterans organizations and waived the affiliation rules for hospitality and restaurant industries allowing large chains like Ruth’s Chris to obtain loans at each location.

With the public backlash over the perceived inappropriateness of well-capitalized large public companies that have access to liquidity borrowing under the PPP, the Treasury and SBA have changed their position. The SBA in its FAQ #31 has re-interpreted the self-certification relating to need.

The question posed by the FAQ is: “Do businesses owned by large companies with adequate sources of liquidity to support their ongoing operations qualify for a PPP loan?” However the SBA in its answer makes clear that is addressing all borrowers and not just large companies.

The SBA states that all borrowers “must assess their economic need for a PPP loan.” It says further that they should “review carefully” their certification relating to their economic uncertainty. And they must “make this certification in good faith taking into account . . . their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.

The SBA in FAQ #31 has not added metrics to the certification, but is saying that all borrowers must assess their need and whether they have alternative sources of liquidity that, if they were to avail themselves of, would not be “significantly detrimental” to their business.

The FAQ goes on to issue the following warning to large companies: For example, 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 a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.” The statement cautions large and small borrowers alike that the Treasury will be reviewing their certifications and need to make a showing of compliance. This comports with Secretary Mnuchin’s declaration on Tuesday that the SBA will be conducting audits in connection with forgiveness applications.

Finally, the FAQ provides a safe harbor as follows: “Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.” This language is repeated again in the fourth Interim Final Rule. If a business in assessing its need and access to alternative sources of liquidity, believes it cannot make its certification in good faith, the SBA allows that borrower to return the money by May 7 and will be deemed to have acted properly as it relates to the certification.

It is worth noting that apparently a large fraction of the public companies receiving such loans to date (roughly 90%) have not as of yet decided to return their proceeds.

Suggestions for Borrowers:

  • Assess and Document Need and Uncertainty. The FAQ requires an assessment of need and envisions the possibility of an SBA review. Borrowers should review and document forecasts , expected declines in operations, customer losses, industry uncertainty and other factors that give rise to their uncertainty. These are strengthened to the extent supported by actual events to date such as job cuts, production stoppages, declines in orders. These may be easy calls for many businesses with many COVID-19 impacts already realized and others highly foreseeable.
  • Assess and Document Alternative Sources of Liquidity and Impact on Business. Is liquidity available to the business elsewhere? Could the business obtain a bank line? For many small businesses this may be an easy no-if for example the company is in payment or covenant default or receiving deferrals on their bank lines, likely their lender is not in a position to expand their borrowings. If liquidity is available, could a new facility close in time to meet the needs? Would the covenants, debt service and increased leverage jeopardize the business?


FAQ 32 provides useful insights into what expenses are includable in payroll when a borrower applies for forgiveness. It reads as follows:

FAQ Question: “Does the cost of a housing stipend or allowance provided to an employee as part of compensation count toward payroll costs?” Answer: “Yes. Payroll costs include all cash compensation paid to employees, subject to the $100,000 annual compensation per employee limitation.”

Analysis: This FAQ provides an expansive interpretation of the Act’s definition of “payroll costs”. The payment of payroll costs over the 8-week period following the funding of a PPP loan is the major part of the amount eligible for loan forgiveness. (At least 75% of loan forgiveness must be attributable to payroll costs.) “Payroll costs” under the Act is defined as part as follows: “the sum of payments of any compensation with respect to employees that is a- (AA) salary, wage, commission or similar compensation.”

As drafted, “payroll costs” under the Act include salary, wage and commission. Other items such as bonus payments that would ordinarily be included in compensation are not explicitly listed. The failure to include bonus payments in the definition would suggest such payments might have been intended to be excluded. In the SBA’s answer to FAQ 32, it confirms that the housing stipend would be included as a payroll cost. Since housing allowances are typically part of salary, this part of the SBAs answer would be expected under the Act-payroll includes salary.

But the SBA’s answer was more broadly stated to say that payroll includes all cash compensation. This would suggest that bonus payments, which are cash compensation, are included in payroll costs. It also would suggest that if compensation amounts are increased over the 8-week period, such as payments of hazard pay in the form of wage increases or one-time payments, these too are included as payroll costs eligible for forgiveness.


The SBA’s guidance in FAQ #36 bears on how the number of employees is computed under the PPP in two contexts:

  1. Determining eligibility as a borrower for a loan under the 500 employee limitation; and
  2. Determining potential reductions of forgiveness if there has been a drop in employment from the base period to the 8-week period.

The FAQ reads in part as follows:

“For purposes of loan eligibility, the CARES Act defines the term ’employee’ to include “individuals employed on a full-time, part-time or other basis. . . For example, if a borrower has 200 full-time employees and 50 part-time employees, each working 10 hours per week, the borrower has a total of 250 employees. By contrast, for purposes of loan forgiveness, the CARES Act uses the standard of “full-time equivalent employees ” to determine the extent to which loan forgiveness amount will be reduced in the event of workforce reductions.”

Analysis: The SBA confirms that when a borrower computes that it meets the size test for eligibility under the PPP (i.e. whether it employs more than 500 employees or, if applicable, the larger size standard for number of employees established by the SBA for its industry), not only are part-time employees included, but each is treated as if he/she were are a single employee. The example provided by the SBA makes this clear.

The SBA also confirms that for purposes of determining the potential reduction of forgiveness based on reduction of employment from the base period elected by the borrower as compared to the 8-week forgiveness period, the computation will be based on the average number of full-time equivalent employees (FTE) per month. The SBA does not, however, elaborate on how the FTE computation is to be made or provide examples. For example, if a part-time employee is paid on commissions rather than fixed hours, how is FTE computed for such employees?


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