Expertise Beyond the Numbers

PPP Borrower Update: SBA Releases 2 New Loan Necessity Questionnaires

On October 26, 2020, the Small Business Administration (SBA) issued a notice in the Federal Register which included two new Loan Necessity Questionnaires associated with its Paycheck Protection Program (PPP).  The two proposed forms (Form 3509 to be used by for-profit borrowers and Form 3510 for nonprofit borrowers) are expected to be a required step for all borrowers that obtained a PPP loan of $2 million or greater.  Lenders will provide the appropriate form to affected borrowers, once they are made available by the SBA.  The $2 million threshold further aligns with the SBA’s previous announcement that all such loans would be subject to an audit.

SC&H’s Key Takeaways

  • These new forms are due in a short time frame upon receipt from your lender
  • These forms appear to be the beginning of the SBA’s efforts to review/audit all PPP loans of $2 million or more as it related to necessity and other issues
  • There is concern that much of the impetus of PPP loans was to address uncertainty that existed back in March that may not have materialized or perhaps just not yet
  • The rules regarding PPP loans continue to rest on shifting sands and these forms add to the effort required for loan forgiveness applications

The purpose of the forms is to assist the SBA in evaluating the “good-faith certification” borrowers made as part of their original PPP loan application.  The PPP loan application required borrowers to certify that, among other items, the borrower’s “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant”.  While the original application provided little to no detail on what would be deemed “necessary” in the eyes of the SBA, these new questionnaires are shedding light on how the SBA interpreted this certification.  Both forms involve an assessment of two areas:  Activity and Liquidity. Below are some key items requested for each area. The questionnaires in their entirety can be reviewed here: SBA Form 3509 (For-Profit Borrowers) and SBA Form 3510 (Non-Profit Borrowers).

Activity

  • Gross revenue (for-profit) and gross receipts (nonprofit) comparisons for Q2 2019 vs. Q2 2020
  • Nonprofits must also provide expense and contribution/grant/gift comparisons for Q2 2019 vs. Q2 2020
  • Existence of any orders from state or local authorities to shut down or significantly alter the business in response to COVID-19
  • Existence of any voluntary reduction or shut down of operations and the reasoning behind such voluntary action, along with funds expended on alterations to the workspace related to COVID-19
  • The amount of cash, if any, disbursed for capital improvement projects unrelated to COVID-19

Liquidity

  • Documentation for cash held by the borrower as of the last day of the calendar quarter prior to the date of the PPP loan application
  • Amount of any dividends or capital distributions (beyond tax distributions) made during the forgiveness period
  • Amount of any outstanding debt amounts that were prepaid during the forgiveness period
  • Amount of any employee and owner compensation during the forgiveness period that exceeded $250,000 on an annualized basis
  • Various disclosures around borrower equity securities that are listed on public exchanges, private equity ownership, parent and affiliate relationships and foreign ownership

Nonprofits must also provide support for the value of endowment funds and information regarding any restricted funds

What does this mean if you are requested to complete a Loan Necessity Questionnaire? According to the SBA, receipt of this form does not mean the SBA is challenging the borrower’s certification.  The SBA may request additional documentation after they have completed their review of the form and intend to make any determination based on the totality of the borrower’s circumstances.  Timely completion of the forms will be necessary as the SBA requires the form to be completed within 10 business days from the request by your lender.  The forms have yet to be formally released on the SBA website, so we expect further guidance to be forthcoming.