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Client Alert - SBA Paycheck Protection Program Loan Forgiveness Considerations

October 1, 2020

By: Kayla M. Kuri and Matt Campbell

With the deadline to apply for a loan under the Paycheck Protection Program (“PPP”) having passed on August 8, PPP borrowers (“Borrowers”) have entered into the next phase of issues and concerns regarding the PPP loans. Many Borrowers who received loans under the PPP have likely spent most, if not all, of the funds issued to them and are now considering how to seek forgiveness of the loan in accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  In order to receive loan forgiveness, Borrowers need to submit Small Business Administration (SBA) Form 3508 (or the equivalent form provided by their lender). In order to fill out SBA Form 3508, Borrowers should gather their payroll records for their “covered period” to determine the amount of wages paid and the average number of full-time employees during such time. In addition, Borrowers will need to document all other non-payroll expenses which were paid with PPP proceeds. 
Borrowers receiving large PPP loans should expect delays in approval, and possible denials, of their loan forgiveness requests. On April 23, 2020, the SBA stated that it would review all PPP loans in excess of $2 Million to determine whether the Borrower was compliant with the certification made on the PPP application stating that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  In its April 23 statement, the SBA warned that businesses with substantial access to liquidity may not qualify for PPP loans. According to the SBA, Borrowers with loans below the $2 Million threshold were less likely to have had access to adequate sources of liquidity in the current economic environment than Borrowers who obtained larger loans. We advise any Borrower who received a PPP loan in excess of $2 Million to contact us prior to submitting their application for forgiveness in order to help prepare a good faith certification that the certification made by the Borrower in the PPP application was correct and to help ensure that such loan may be forgiven and that the Borrower’s certifying individual does not face criminal liability for a false application. If you have already been notified by the SBA or a lender that your business was ineligible for the PPP loan or ineligible for forgiveness of the PPP loan, you should contact an attorney immediately to discuss your appeal options. Borrowers receiving such notifications only have 30 days to file an appeal of that decision. If you have received a subpoena or notice of an investigation into your PPP loan, that does not necessarily mean that civil or criminal charges will be brought against you. However, any Borrower receiving such notice should immediately contact an attorney and begin compiling all documents submitted in connection with the PPP loan as well as records of all expenses paid using the funds. 
Any Borrower, or any person or business who is looking to acquire a Borrower who was a recipient of a PPP loan, should take the forgiveness of an outstanding PPP loan into consideration prior to entering into any letter of intent or definitive agreement for purchase and sale. Particularly, any Borrower should obtain approval from their lender prior to entering into any agreement to sell their business. Businesses should be aware that their lender may, as a condition of its approval, require that the PPP loan be repaid in full with the proceeds from the sales transaction. If this is required, the Borrower may be unable to recognize the forgiveness benefits of the PPP loan. If the Lender does not require the PPP loan to be immediately repaid, the purchaser may be able to receive the same forgiveness benefits as the original Borrower. However, there are many factors to consider when determining how to allocate the risk of a forgiveness application for a PPP loan being denied, as well as how to account for the value of the PPP loan in the purchase price of the business. Any person who is considering buying or selling a business that received funds under the PPP should contact their Hall Estill attorney prior to entering into any definitive agreement to discuss the risks and considerations related to that type of transaction.