The CARES Act introduced the Paycheck Protection Program (PPP) in support of small businesses employing 500 or fewer employees and in need of funds to maintain ongoing operations while facing economic uncertainty. Ongoing publicity surrounding the PPP brought to light recipients that did not meet the standards for economic need, many of whom returned funds received under the safe harbor offered through May 14th. Along those lines, and beginning as far back as April of this year, the US Treasury and Small Business Administration (SBA) have stated that PPP loans of $2 million or more would be subject to review once the lender submits the borrower’s loan forgiveness application.
“We have noted the large number of companies that have appropriately reevaluated their need for PPP loans and promptly repaid loan funds in response to SBA guidance reminding all borrowers of an important certification required to obtain a PPP loan,” stated the April 28th joint statement by SBA’s Administrator and Secretary. “To further ensure PPP loans are limited to eligible borrowers, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.”
While some level of scrutiny has been expected for these loans, the manner in which the SBA would review good-faith certifications and the economic need tied to borrowers meeting this threshold had, until recently, been unclear.
The SBA recently created two Loan Necessity Questionnaires: Form 3509 targets for-profit borrowers and Form 3510 targets non-profit borrowers. As of October 26th, the SBA estimates a total of 52,000 borrowers will receive a questionnaire, 42,000 will be for-profits and 10,000 will be non-profits. These questionnaires are not technically finalized, as the SBA is seeking comments until November 25th; however, this hasn’t stopped the SBA from beginning the process. Some lenders have reported that they have already received the questionnaires from the SBA along with a request to send them within 5 business days to certain borrowers.
What should employers consider ahead of receiving a questionnaire?
The turn-around time for the questionnaire leaves no room to be unprepared. Once the questionnaire is received from the lender, the borrower only has 10 business days to submit the questionnaire, certifications, and documentation back to the lender. The lender has 5 business days to then submit the information to the SBA. The questionnaires both state, “Failure to complete the form and provide the required supporting documents may result in SBA’s determination that you were ineligible for either the PPP loan, the PPP loan amount, or any forgiveness amount claimed, and SBA may seek repayment of the loan or pursue other available remedies.”
Because the CARES Act granted the SBA only 90 days to approve loan forgiveness once an application is received, it is unlikely that extensions will be granted for Loan Necessity Questionnaires. The answers the questionnaire will provide them will be relevant as they make a determination on the loan’s forgiveness eligibility.
Although PPP guidance limited loan availability to one loan per controlled group of entities, it seems some members and affiliates were able to receive separate PPP loans. This means PPP borrowers who received a loan for less than $2 million may still receive a questionnaire if, together with their affiliates, they received PPP loans in aggregate of $2 million or more.
Be prepared to document and support the full use of PPP funds. Contrary to prior program guidance, the questionnaires ask borrowers to disclose data based on their use of funds throughout their covered period, rather than data only pertaining to their economic need at the time of their loan application.
To the right of every question, there is a designated area to mark whether you generally keep the information confidential. Because the release of PPP borrower information has been the subject of recent litigation, borrowers may want to mark these all as confidential since privacy and confidentiality concerns are heightened.
The questionnaires are 9 pages each and contain 21 questions each. Some of the questions have multiple parts, and 6 questions ask for supporting documentation. Much like the forgiveness application, what qualifies as “supporting documentation” isn’t explicitly spelled out. Some questions allow for “optional” explanations. Borrowers should take these opportunities to provide additional narrative about their economic need, as the SBA’s review determination will be based on the totality of a borrower’s circumstances. The questionnaires are broken down into sections that assess business/nonprofit activity and liquidity.
What questions will Form 3509 ask about business activity?
The Business Activity Assessment covers the impact of COVID-19 on for-profit borrowers’ business operations. The assessment asks for gross revenue for Q2 2020 and Q2 2019. It also asks whether the business was subject to mandatory or voluntary closures, whether the business made any changes in its operations, and whether the business made any capital improvements between March 13, 2020, and the end of the covered period.
What questions will Form 3510 ask about nonprofit activity?
The Nonprofit Activity Assessment covers the impact of COVID-19 on nonprofit borrowers’ operations. The assessment asks for gross receipts, including grants, gifts, and contributions, for Q2 2020 and Q2 2019, and for expenses for Q2 2020 and Q2 2019. It also asks whether the organization was subject to mandatory or voluntary closures, whether the organization made any changes in its operations, and whether the organization made any capital improvements between March 13, 2020, and the end of the covered period.
What will both Form 3509 and Form 3510 ask about liquidity?
- If the borrower prepaid any outstanding debt before it was contractually due, between March 13, 2020, and the end of the covered period.
- If any employees, including owners, were paid more than $250,000 on an annualized basis and the total number of employees and total compensation paid to those employees during the covered period.
- If the borrower received funds from any CARES Act programs other than the PPP, excluding tax benefits.
- Additional comments pertaining to any of the liquidity assessment questions.
What additional questions will Form 3509 ask businesses about liquidity?
- How much the borrower owned in cash and cash equivalents as of the last day of the calendar quarter immediately before the date of loan application.
- If the borrower has paid any dividends or other capital distributions (other than estimated taxes) between March 13, 2020, and the end of their covered period.
- If the borrower or any affiliate is publicly traded in the United States or a foreign country, and, if so, the total market capitalization.
- If at least 20% or more of the borrower was owned by a private equity, venture capital, or hedge fund.
- Book value of the borrower on the last day of the calendar quarter immediately before the PPP application date
What additional questions will Form 3510 ask nonprofits about liquidity?
- How much the borrower owned in cash, cash equivalents, and short-term investments as of the end of the calendar quarter immediately before the PPP application date.
- How much the borrower owned in non-cash investments, such as equity, bond, and real estate holdings, as of the end of the calendar quarter immediately before the PPP application date.
- If there are restrictions on using net income, cash, savings, or investments for payroll and non-payroll costs otherwise eligible for the PPP forgiveness.
- If assets are held in endowment funds.
- For a borrower that is a school, college, or university: if the borrower offered additional financial assistance to students and if the borrower had declines in tuition revenue due to COVID-19.
- For a borrower providing healthcare services: the amount of the borrower’s program service revenue relating to patient care in Q2 2019 and 2020.
What certifications are required on Form 3509 and Form 3510?
Before signing the questionnaire, the Authorized Representative of Borrower must certify that they:
- Have the authority to sign and submit the questionnaire on behalf of the borrower.
- Have provided information in the questionnaire and in all supporting documentation that is true and correct in all material respects, and they have made this certification after reasonable inquiry of people, systems, and other information available to the borrower.
- Understand that knowingly making a false statement to obtain a guaranteed loan or forgiveness of an SBA-guaranteed loan is punishable under the law.
The PPP’s FAQ Document on Loan Forgiveness and FAQ Document for Lenders and Borrowers provide further program guidance.
And take a look at some of our previous articles for more information:
3 Unintended Consequences of the Paycheck Protection Program and it’s Ongoing Changes
Fear & Loathing on your Paycheck Protection Program Forgiveness Application
Contact Commonwealth Payroll & HR
For questions or for more information, contact us today. Commonwealth Payroll & HR is also offering a PPP Forgiveness Coach Program to assist with certain aspects of the PPP Loan Forgiveness Application and process. We are also available to discuss how we can help with your PPP loan forgiveness strategy.
*The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. This article contains links to other third-party websites provided only for the convenience of the reader.