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PPP Loans: Whether to Keep Your Loan or Send It Back?

That is the pivotal question confronting many business owners who have received PPP loans and are grappling with recent guidance from the Small Business Association (SBA) regarding loan necessity.  While the SBA issued further clarification on the loan necessity certification that should bring comfort to many borrowers, business owners should still carefully review their certifications, including the necessity certification, to ensure compliance with the law.  To take advantage of the so-called safe harbor, which protects applicants from further scrutiny with respect to the necessity certification, borrowers must return their funds by May 18th.  Even if the deadline has passed, you should still consider returning your funds after conducting a careful review of all your certifications.

What is the Necessity Certification?

All businesses applying for a PPP loan certified that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant."  In earlier guidance, the SBA advised that in order to make this so-called “Necessity Certification” in good faith, businesses are required to take into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing business operations in a way that is not detrimental to the business.

How Has the SBA Clarified its Guidance on Loan Necessity?

With limited time left before the expiration of the safe harbor, the SBA issued additional guidance, which separates borrowers into two groups: those with loans under $2 million and those with loans over $2 million.

  • Loans less than $2 million: The SBA will presume that the Necessity Certification was made in good faith.
  • Loans more than $2 million: The SBA will conduct audits to determine whether the Necessity Certification was made in good faith pursuant to SBA guidance.

Does that Mean You Are Free of Government Audits and Investigation if Your Loans is Less than $2 Million?

No.  The SBA has told borrowers that it will audit loans falling below the $2 million threshold as it deems “appropriate.”  You can, therefore, expect the SBA to conduct random audits, looking for potential fraud and abuse, just like the IRS does when people file taxes.  If a loan raises a red flag, you can also expect that the SBA will analyze the loan in its entirety, including the veracity of your certifications.  In this circumstance, borrowers will not be able to simply rely on the SBA’s presumption of good faith.  As with a tax audit, the government may ask for proof and documentation to support a borrower’s certification.

What are the Potential Penalties?

If the SBA determines that a loan was not necessary, it well send a notification to the borrower before taking further action.  This notice will inform the borrower that the loan is not eligible for forgiveness and will request repayment of the loan in its entirety.  So long as the borrower repays the loan, the SBA has said that it will not pursue administrative enforcement or refer the loan to other agencies.  If a borrower refuses to pay the loan or if the SBA finds other fraud or abuse, including with respect to other certifications, the borrower could potentially face criminal or civil penalties, such as treble damages under the False Claims Act.

What Does This Mean for You?

Regardless of whether you have a loan greater than or less than $2 million, you will want to review all your certifications, and ensure that they are true and accurate and made in good faith.  With respect to the Necessity Certification, in particular, you should analyze a number of factors regarding your current business situation to determine whether the loan is, in fact, necessary, and you should document those reasons in case questions are asked later.

You should also be mindful that the safe harbor has just been extended until May 18th.  This safe harbor will provide protection from further audits and investigation if your loan proceeds are returned by that date.

For assistance with this assessment process, or to obtain an independent evaluation from our corporate team, please email us at and reference “Necessity Certification” in your subject line.