Did the Rules Change Again? SBA Issues New PPP Loan Necessity Questionnaire
By Katz, Sapper and Miller - November 3, 2020
As the Paycheck Protection Program has evolved, borrowers have become increasingly anxious as program parameters have seemingly changed mid-stride. With its recent introduction of the loan necessity questionnaires, the U.S. Small Business Administration continues to surprise borrowers with new requirements after loans have been issued.
Although there has not been any formal announcement from the Department of the Treasury or SBA regarding the official release of the loan necessity questionnaires – Form 3509 for for-profit borrowers and Form 3510 for non-profit borrowers – they are expected to be required for borrowers with an original loan amount of $2 million or greater (together with affiliates). The loan necessity questionnaires will be utilized to inform the SBA’s review of the good-faith certification that economic uncertainty made the loan request necessary to support ongoing operations. Lenders are expected to deliver the questionnaires to borrowers.
In general, receipt of the form is not an indication that the SBA is challenging the borrower's necessity certification. However, failure to complete the form may result in the SBA determining that the borrower is ineligible to receive loan forgiveness, and the SBA may seek repayment of the loan. It’s important to note that additional documentation will be required to substantiate responses and that borrowers only have 10 business days from date of receipt to complete the form and return it to the lender.
Both versions of the loan necessity questionnaire address two key areas – business activity and liquidity – and are looking for substantially similar information. Outlined below are some key questions on Form 3509:
Business Activity Assessment
What was the borrower’s gross revenue in the second calendar quarter of 2019 and 2020?
As a result of COVID-19, has the business been ordered to shut down by a state or local authority?
Has the business voluntarily ceased or reduced operations due to COVID-19?
Did the business begin new capital improvement projects not due to COVID-19?
What was the amount of cash and cash equivalents on the last day of the last calendar quarter before applying for the PPP loan?
Has the borrower paid any dividends or capital distributions to owners (other than pass-through estimated tax payments)?
Has the borrower prepaid outstanding debt?
Were any employees compensated in an amount that exceeds $250,000 annualized?
Were any of the borrower’s equity securities listed on a national securities exchange? If not, what was the book value (shareholder’s equity value) of the borrower?
Was more than 20% of the borrower’s outstanding equity owned by a private equity firm, venture capital firm, or hedge fund?
Were any other funds received under another provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act?
Notably missing from the loan necessity questionnaires are any questions regarding business decisions made because the borrower received the PPP loan. For instance, would the borrower have reduced the workforce if it had not received the PPP loan? In addition, many questions revolve around events that occurred after the loan application submission, which seems inconsistent with the certification of loan necessity that was made at the time of the loan application.