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SBA Releases Loan Necessity Questionnaire’s for Large Borrowers

By: Travis Miskowitz

After many months of waiting and speculation, on Monday October 26th, 2020 the Small Business Administration issued a notice stating the intended release of two new forms available here relating to FAQ – questions #31, which describes each borrowers good faith certifications that current economic conditions made the PPP loan necessary to support ongoing business operations.

While this guidance was not available at the time business could apply for the PPP loan (the loan application window has been closed since August 8th, 2020), Wiss has previously communicated guidance on how borrowers should document their PPP application decision.  The loans were designed to be forgiven if borrowers maintained headcount and used the funds to cover payroll expenses, so the new questionnaire may be unsettling for some. The questionnaire appears to go against the stated and intended purposes of the program, which was for small businesses to maintain headcount and provide funds to cover their payroll costs over an 8- or 24-week period. It is strange that the questionnaire attempts to evaluate borrower liquidity at the application date and a short period thereafter, as the applications good faith certification and FAQ # 31 address the borrower’s good faith only as of the application date. With dozens of guidance modifications since the program was rolled out in April, this is the latest update in ever-changing PPP guidance.

The SBA notice is applicable to all borrowers that, in aggregate with their affiliates, received a PPP loan of $2 million or more. The SBA believes these forms are applicable to approximately 52,000 borrowers, 42,000 for profit borrowers and 10,000 not for profit borrowers. While the notice or forms are not yet available on the SBA’s website, borrowers have already started to receive the questionnaire. Borrowers that receive the questionnaire have 10 days to complete the form and submit to the lender that is servicing their PPP loan. After receipt of the completed form by the lender, the lender has 5 days to upload and transmit to the SBA.

The new forms are Form 3509 – Loan Necessity Questionnaire which is to be completed by for profit borrowers and Form 3510 – Loan Necessity Form to be completed by Not for Profit borrowers. While the forms are being used primarily for information gathering purposes, we can glean some insights into how the SBA will approach the borrower’s eligibility and business necessity provisions of FAQ # 31. The forms request information regarding the busines activity and liquidity of the borrower.

Form 3509 – Loan Necessity Questionnaire (For Profit Borrowers)

The first section of this form is the Business Activity Assessment containing 7 detailed questions and 1 open ended question regarding Covid’s impact on the business, including financial and operational metrics. For each question detailed below the borrower is required to provide supporting documentation as part of the submission:

  • Question 1 – Borrower’s gross revenue for Q2 2020 and Q2 2019. If a seasonal or new business, the form provides for alternative time periods.
  • Question 2 – Has the borrower been required to shut down by a local or state authority due to Covid-19?
    • If yes, borrower must detail which state or local authority issued the shutdown order
    • Borrower must provide the start and end dates of the shutdown order
  • Question 3 – Since March 13, 2020, has the busines had to alter operations due to state or local order due to Covid-19?
    • If yes, borrower must provide the start and end dates of the altered operations
    • Borrower must also include detailed information on their altered operations, including:
      • Limitations to the borrower’s facility capacity
      • Whether service was restricted to outdoor activity only
      • Other – open ended; borrowers in this situation should use this space to frame their application decision favorably in their light. Include relevant quantitative and qualitive facts when possible
      • If operations were altered, what were the cash outlays for the mandatory alterations?
  • Question 4 – Since March 13, 2020, has the business voluntarily ceased or reduced its operation due to Covid-19?
    • Borrower must provide the start and end dates of the shutdown order
    • If yes, did borrowers’ employees’ contract Covid?
    • Were there disruptions to the supply chain?
    • Other – open ended; borrowers in this situation should use this space to frame their application decision favorably in their light. Include relevant quantitative and qualitive facts when possible
  • Question 5 – Since March 13, 2020, has the borrower voluntarily altered its operations due to Covid-19, other than ceasing or reducing operations?
    • Borrower must provide the start and end dates of the shutdown order
    • If service was restricted to outdoor activity only
    • Employee workspaces were reconfigured
    • Other – open ended; borrowers in this situation should use this space to frame their application decision favorably in their light. Include relevant quantitative and qualitive facts when possible
    • If operations were altered, what were the cash outlays for the mandatory alterations?
  • Question 6 – Between March 13, 2020 and the end of the covered period, did Borrower begin any new capital improvement projects not due to Covid-19?
    • If yes, what were the approximate cash outlays related to the project?
  • Question 7 – Borrower to provide their six-digit NAICS code
  • Question 8 – Optional – this section to be used by borrowers to include any additional information regarding their Business Activity Assessment Borrowers should use this space to include any additional information that supports their PPP application decision. This field should incorporate quantitative as well as quantitative information regarding their application decision.

The second section of this form is the Liquidity Assessment which contains 12 detailed questions and 1 open ended question regarding Covid’s impact on the business’s liquidity position. For each question contained in the assessment, the borrower is required to provide supporting documentation as part of the submission. The assessment is principally concerned with the following information:

  • Question 1 – The cash position of the borrower at the end of the quarter immediately preceding the PPP application date
  • Question 2 – Has the borrower paid any dividends or other capital distributions, other than pass-through tax payments, between March 13, 2020 and the end of the covered period?
  • Question 3 – Has the borrower repaid any debt before being contractually due?
  • Question 4 and 5 – Requests information regarding the number and amount of compensation paid to employees and owners whose compensation exceeds $250,000 on an annualized basis during the borrowers covered period
  • Question 6, 7, 8, 9 and 10– Requests information regarding the ownership and valuation of the borrower as of the PPP application date, including:
  • The market capitalization of the borrower on the PPP application date if publicly traded in the United States
  • Borrower must report if 20 percent or more of the entity was owned by a private equity, venture capital or hedge fund
  • The Book Value of the borrower on the last day of the quarter immediately preceding the PPP application date (if the entity is not publicly traded)
  • If the borrower is owned by another entity, indicate the name of the parent company, whether the parent company is located in the US or Internationally, and the related market capitalization of the parent entity
  • On the borrower’s PPP application date, was 20% or more of the Borrower’s equity owned by a private equity, venture capital, or hedge fund?
  • Question 11 – Was the borrower an affiliate or a subsidiary (50% owned by or under control of the parent entity) of a foreign, state-owned enterprise or of a department, agency, or instrumentality of a foreign state?
  • Question 12 – Whether the borrower received any funds from any CARES Act programs other than the PPP, excluding tax benefits.
  • Question 13 – Optional; this section to be used by borrowers to include any additional information regarding their Liquidity Assessment Borrowers should use this space to include any additional information that supports their PPP application decision. This field should incorporate quantitative as well as quantitative information regarding their application decision.

Form 3510 – Loan Necessity Questionnaire

Applicable to Not for Profit borrowers only and is similar in form and substance to Form 3509.

Business Activity Assessment – Similar to For Profit entities but the definition of gross receipts includes grants, gifts and contributions. Borrowers are also required to provide and submit Q2 2010 and 2019 expenses. Borrowers will be required to provide similar information related to government mandated stay-at-home orders, ceased or alter operations, cash outlays related to altered operating environment, etc.

Liquidity Assessment – Similar to Form 3509, borrowers will be required to provide the following information including supporting documentation:

  • Cash, cash equivalent, and short-term investment position of the borrower in addition to the value of the borrowers’ non-cash investments (equity, bond, real estate holdings) for the calendar quarter immediately preceding the PPP application date
  • If the borrower prepaid any debt before being contractually due
  • The number and amount of compensation paid to employees who earned more than $250,000 on an annualized basis
  • Is the borrower subject to any restrictions using net income, cash, savings, or temporary cash investments for payroll and nonpayroll costs otherwise eligible for PPP forgiveness?
  • Does the borrower directly or indirectly hold assets in any endowment funds?
  • If the borrower is a school, college, or university, the median tuition paid per student for the 2019-2020 academic year, and whether the borrower offered additional financial assistance to students for the 2019-2020 academic year due to Covid-19? Did the borrower experience a decline in tuition revenue due to Covid-19?
  • If the borrower provides healthcare services, the amount of its program service revenue relating to patient care in Q2 2019 and 2020
  • Whether the borrower received funds from other CARES Act programs other than the PPP, excluding tax benefits

Questions about the PPP loan necessity questionnaire? Reach out to a Wiss expert for assistance.

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