The Small Business Administration (SBA) announced in April 2020 that it will audit all loans of $2 million or more (including loans made to covered affiliates) at the time that loan forgiveness is sought, and other loans, as appropriate, will be reviewed for eligibility, fraud, abuse, and compliance with loan forgiveness requirements. SBA has now issued Loan Necessity Questionnaires (Questionnaires) through SBA Form 3509 and 3510, applicable to for-profit and not-for-profit borrowers respectively, to facilitate the collection of supplemental information from borrowers to be used during the review process. These Questionnaires are distributed by the lender and must be returned within 10 business days of receipt.

Generally, the Questionnaires are broken into two sections: the Business Activity Assessment and the Liquidity Assessment. The Business Activity assessment seeks additional information about the business’s comparative financial position in the second quarter of 2020 and 2019, including revenues and expenses. It also seeks specific information about the pandemic’s impact, if any, on business operations. Specifically, borrowers are asked whether the business was ordered to shut down or significantly reduce or alter operations by a federal, state, or local authority and the details of such order(s), along with the associated financial impact of compliance. The Questionnaire also inquires about voluntary reductions, cessations, or alterations in business activity in response to the pandemic, along with the financial impact. 

The Liquidity Assessment seeks specific detail about the borrower’s financial position in the time period immediately preceding the borrower’s PPP loan application through the end of the loan forgiveness period. This section seeks information regarding ownership of cash and cash equivalents, payments of dividends or other capital distributions, compensation over $250,000 paid to employees or owners, endowment assets for non-profit borrowers, as well as certain corporate formation questions. The final section of the Liquidity Assessment offers borrowers an opportunity to address their financial position and business conditions in a thousand word narrative.

On December 9, 2020, SBA updated its Frequently Asked Questions to add FAQ #53, providing additional guidance regarding the Loan Necessity Questionnaires. As explained in the FAQ, a request to complete a Questionnaire does not mean that SBA is challenging a borrower’s good-faith certification of necessity—even if subsequent developments resulted in the loan no longer being necessary. The FAQ emphasizes that the Questionnaires give borrowers the opportunity to provide a narrative response to SBA explaining the circumstances that provided the basis for their good-faith loan necessity certification.

Although SBA has created an appeal process for loan review decisions, the Questionnaire is an important opportunity for borrowers to show their eligibility and compliance with PPP loan and forgiveness requirements to try to avoid an adverse determination by SBA in the first place. Borrowers should approach the Questionnaire in that vein and consider the following when completing it and providing the supporting documentation:

  • Don’t just turn the form over to an accountant to fill in the numbers and submit it. The borrower’s Questionnaire responses should tell a story, particularly if the numbers themselves could raise questions about whether the loan was necessary.

  • Use the submission of the Questionnaire and supporting documentation as an opportunity to show what impact the pandemic has had on the business.

  • Even if the business has been able to keep operating, think about the ways in which the pandemic led to changes in operations and additional costs. For example, did you have to purchase equipment or supplies for remote work or additional cleaning costs and PPE for in person operations? Did the business lose productivity from social distancing or employees dealing with childcare issues or technology or just being less productive?

  • If the financial position of the business has actually improved during the pandemic, explain what the uncertainty was that led to the loan application. Remember, you had to act in good faith as of the time you applied for the loan and took the money. The fact that things went better than expected does not mean the loan was improper, but you need to explain why you needed the loan at the time.

  • If you shifted the business based on the pandemic, explain the shift, such as producing pandemic-related products or other changes in the business model. If that is the case, you likely were not sure how the business would shift, or if it would be successful when you applied for the loan. Don’t be afraid to express those considerations.

  • Don’t forget to submit documentation that supports your narrative, which may include documentation that goes beyond just submitting financial documents that are required.

  • Documentation to support your narrative may include documentation that you assembled at the time of the loan application to support your original certification and other documentation that shows the business risks you were concerned about. For example, documentation from the board of directors about why they authorized the loan application is helpful to show the contemporaneous reasons for applying for the loan. That could be a memo to the board explaining the reasons for the loan, as well as the board resolution and board minutes showing the discussion of the risks.

  • Even less formal documentation may be helpful. You may have emails with customers about delayed orders, or from vendors about delays in getting supplies needed to produce deliverables.

  • Remember that there are potential criminal penalties for false certifications. If it is clear that there were problems with the original loan application or with the loan forgiveness application, consult with counsel before you compound the issue with another certification and additional documentation.

Contact the authors for assistance in evaluating how to answer the questions based on your individual circumstances and for legal review and guidance of your draft submission. 


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