Continuing the trend of releasing amorphous guidance at the eleventh hour, this afternoon the Department of the Treasury (Treasury) and the U.S. Small Business Administration (SBA) released much-anticipated guidance as to whether Paycheck Protection Program (PPP) borrowers should return their loan proceeds before the safe harbor period expires tomorrow. This follows weeks of threats by Treasury Secretary Steven Mnuchin that borrowers who do not truly need PPP loans will face civil and criminal penalties if they do not return loan proceeds swiftly and voluntarily.


The new guidance was necessitated by confusion over a certification that borrowers are required to make when applying for a PPP loan. Specifically, a borrower must attest in good faith that “[c]urrent economic uncertainty makes [a PPP] loan request necessary to support [its] ongoing operations.” While this certification may seem non-controversial, it became the subject of debate after it was revealed that some public companies obtained loans despite being flush with cash. As a result, on April 23, 2020, Treasury and SBA issued guidance suggesting that borrowers could not make the required certification in good faith without “taking into account their current business activity and 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.”

Since this guidance had not been available when some borrowers acquired their loans, Secretary Mnuchin announced that borrowers could return the money without penalty until May 7, 2020. That safe harbor period was later extended to May 14, 2020, and SBA promised to provide additional guidelines before then.

New Guidance

Today’s guidance draws one bright line: borrowers who, together with their affiliates, acquired loans of less than $2 million will be deemed to have made the required certification in good faith without further inquiry. According to Treasury and SBA, this rule is appropriate because borrowers with smaller loans are less likely to have “adequate sources of liquidity” and it will allow SBA to focus its limited resources on larger loans.

On the other hand, the guidance provides little information as to how borrowers with loans of $2 million or more should determine whether or not to give back the proceeds. Without elaboration, the guidance states that borrowers with loans of this size might still “have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance.” In the case of borrowers who do not meet the unspecified criteria, SBA will seek to recoup the amount of the loan and notify the lender that the borrower is not eligible for forgiveness. However, SBA’s guarantee of the borrower’s PPP loan will remain intact.

Importantly, if the borrower repays the loan upon request, SBA will not “pursue administrative enforcement or referrals to other agencies.”

What Should Borrowers of Larger Loans Do Now?

What should borrowers with loans of $2 million or more do now to determine whether acquiring a PPP loan was truly necessary to support their ongoing operations? Insofar as the PPP was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the language of the statute is the first place that borrowers should look.

The law specifically states that PPP borrowers are not required to certify that they “cannot obtain credit elsewhere,” as they must in the case of other SBA loans. Under the relevant regulations (13 CFR 120.101), a borrower is able to obtain credit elsewhere when it can “obtain some or all of the requested loan funds from alternative sources without causing undue hardship.” Alternative sources include other loan facilities that do not involve a federal government guarantee, the resources of the business or the personal resources of owners with an interest of 20% or more.

What does this mean to the average borrower? In short, PPP loan forgiveness should not be jeopardized as a result of the fact that the business had access to a line of credit or some cash in the bank, and/or the ability to mortgage the business’ assets or borrow from its principals, among other things. This is true even though the previously issued guidance states that borrowers cannot properly certify that a PPP loan is necessary if they have “access to other sources of liquidity.” Indeed, while SBA can interpret the CARES Act in its guidance documents, it cannot change the legislation.

So, in what circumstances should a business return its PPP loan? With little to go on, businesses should look at their current and projected financial metrics and compare them to previous years. Among other things, businesses should consider:

  • Are revenues down?
  • Are customers or clients in default on their payment obligations?
  • Is the business’ physical location closed as the result of a government order?
  • Are there fewer projects in the pipeline?
  • Does the business have substantial cash on hand, far in excess of its short and medium term cash requirements?
  • Have key employees fallen ill?
  • In light of social distancing considerations, will the business face increased overhead due to the need to employ more workers or take longer to complete a job?
  • Does the industry rely on the type of travel that has been curtailed or eliminated as a result of the pandemic?
  • Is the business negatively impacted by supply chain disruptions?
  • If the business had not acquired a PPP loan, would it have furloughed or laid off employees, or did it terminate employees that were only rehired because of the PPP loan?

At bottom, the more negative comparisons that can be drawn between the current state of affairs and a business’ ordinary performance, the more likely that business will be to prove to SBA that the economic uncertainty of the Covid-19 pandemic made a PPP loan necessary to sustain its operations.

What happens if a business does not return its PPP loan during the safe harbor, and the SBA determines that it did not make the required certification in good faith? The practical import of today’s guidance is that such a business’ loan will not be forgiven but, as long as can the business can repay it, it will not face other civil penalties or criminal consequences. The guidance is silent as to what will happen to borrowers who cannot or do not repay the loan. Presumably, those borrowers can expect, at the very least, a legal battle with the federal government.


In sum, the new guidance provides a significant modicum of comfort to borrowers with loans of less than $2 million. Borrowers who acquired larger loans are in a position that is largely no different than the one they were in yesterday. They know that their loan forgiveness applications will be audited, but they do not know what circumstances will be considered sufficient to prove a good-faith certification. Those borrowers who believe that they acted in good faith and have the ability to repay their PPP loans might consider holding on to the money and waiting to see how their forgiveness applications fare. Those that are not able to repay their PPP loans should consult counsel right away.

If you have any questions regarding the Paycheck Protection Program, contact Jessica M. Baquet at (516) 393-8292