SBA Updates Guidance on the “Necessity” Certification for PPP Loans

(Sixth in a series)

This article continues our series relating to the Covid-19 legislation and briefly addresses today’s updated guidance issued by the Small Business Administration (“SBA”) on the Paycheck Protection Program loan program under the CARES Act (“PPP Loan”).  Conflicting and insufficient information over the past several weeks has caused concern and confusion for many business owners after they submitted applications or received a PPP Loan over their certification of  “necessity” in taking out the loan.

The SBA initially set a “safe harbor” date of May 7, 2020 for a borrower to return its PPP Loan without scrutiny or penalty.  On May 5, the SBA extended that deadline to May 14, 2020 and stated that it would issue further guidance before the new May 14 date.

Today, the SBA provided additional guidance by adding FAQ #46, which addresses the “necessity” certification, read here.  FAQ #46 provides a safe harbor for PPP Loans of less than $2 million (aggregated with any affiliates), determining that the necessity requirement will be deemed to have been met when certification was made.

However, loans greater than $2 million (including lesser amounts if all affiliates’ loans total that amount) do not meet this safe harbor but may still have an adequate basis for making the required good-faith certification.  The SBA previously stated that all PPP Loans in excess of $2 million will be subject to review for compliance requirements set forth in the PPP Interim Final Rules and the Application Form.  FAQ #46 provides that if the SBA does conduct a review of such a loan and finds that a borrower lacked adequate basis for the required certification, the SBA will seek repayment of the PPP Loan and notify the bank that the borrower is not eligible for loan forgiveness.  Providing some relief to borrowers of PPP Loans over $2 million, FAQ #46 does provide that “if the borrower repays the loan [PPP Loan] after receiving notification from the SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity.”

While not exhaustive, the business should be prepared to show and document such things as impacted revenue projections, needs for liquidity, and need/intent to lay-off or furlough employees (if the PPP Loan had not been obtained).  In addition to making a showing as of the time the loan application was made, it may be helpful to demonstrate the need continued on an ongoing basis, including presently (while the business was considering whether to return the PPL Loan before the May 14 deadline). Generally, a borrower who does not meet the safe harbor should be working with their advisers (be it their accountant, banker, or attorney)  to assist with documenting necessity of the PPP Loan.



Financial Assistance Resources for Businesses Affected by COVID-19 – By: Anthony R. Jost, RBE Partner

COVID-19 Business Resource Developments – By: Donald S. Smith, RBE Partner

CARES Act – Business loans Available – COVID-19 – By: Ryan L. Leitch, RBE Partner

Paycheck Protection Program Guidance and Resources – COVID-19 – By: Anthony R. Jost, RBE Partner

The Department of Labor Issues Regulations Implementing New Leave of Absence Law – By: Donald S. Smith, RBE Partner

Ryan L. Leitch

Ryan L. Leitch


Author Ryan L. Leitch

Ryan Leitch represents businesses and business owners including in construction, manufacturing, retail, distributors, software and technology, sales and other service industries in a variety of matters, including entity selection and organization, shareholder disputes, mergers and acquisitions, loan transactions, and general contractual matters. Ryan has substantial experience in representing lenders in large, complex creditors’ rights cases. Ryan also represents individuals in estate and succession planning, business succession planning including Wills, Trusts, Power of Attorney and health care designations and other legal matters.

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Posted on May, 14 2020, by Ryan L. Leitch