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Substantiating loan necessity for the Paycheck Protection Program

February 5, 2021 / 3 min read

Forgivable loans have eased stress for many businesses, but proving the necessity is a challenge. Our experts offer suggestions to help you provide the right context to your PPP loan forgiveness application.

Government support during the pandemic has emerged in many forms, from eased tax regulations and increased credits to tax deferrals and Paycheck Protection Program (PPP) forgivable loans. To be eligible for both First Draw and Second Draw PPP Loans, the borrower needs to certify that “current economic uncertainty makes the loan request necessary to support the ongoing operations of the Applicant.”

While these circumstances should be based on what was happening at the time of application, the Small Business Administration (SBA) has issued follow-up questionnaires that include subsequent borrower financial performance, as most audits do, to evaluate the necessity.

While a forgivable loan certainly eased the stress for many businesses, the thought of proving one’s necessity for the original loan has added anxiety. Without knowing exactly how an individual company’s fact pattern will be viewed by the SBA, we offer some questions and liquidity considerations as you work through providing context and facts to help you document your loan necessity.

Questions to consider

What was happening at the time of application?

Given the extra process and expected costs required by health authorities, what kinds of changes were anticipated to your operations to remain open?

What concerns or questions were your employees raising at that time?

Did you prepare an updated budget or forecast (aka, a COVID-19 budget)?

What government shutdowns were you facing?

What was the state or local health department advising businesses?

What advice did you receive from others?

While a forgivable loan certainly eased the stress for many businesses, the thought of proving one’s necessity for the original loan has added anxiety. 

Addressing your liquidity

While the SBA has waived the need to show an inability to secure additional financing, they will look at liquidity when looking at your loan necessity. In addition to the questions above, consider the following items on liquidity as you work through documenting your loan necessity:

This is not an all-inclusive list. We hope it will aid in your documentation of “loan necessity.” A process to review all factors (both positive and negative) can be helpful to show you were balanced in assessing your need for the loan. If you find you only have a few factors supporting the need, the impact could result in the SBA determination that you were not eligible, resulting in the loan requiring to be repaid.

In addition to this article, we have comprehensive resource centers for COVID-19 and the CARES Act, including additional discussions on the PPP loans. If you have additional questions, please reach out to your Plante Moran advisor.

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