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PPP Update: Loan Necessity Questionnaires

11/2/20 – Emir Hodzic

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The SBA (Small Business Administration) released two additional forms on October 30th, 2020, titled loan necessity questionnaires that concern PPP (Paycheck Protection Program) borrowers with loans over $2 million.

Form 3509 for For-Profit BorrowersForm 3510 for Nonprofit Borrowers

The release of these forms surprised many, as the SBA only gave notice that they were working on necessity questionnaires on October 28th. Many businesses have been concerned how SBA was going to review their good faith certification made when applying for the PPP loan, as required by the CARES Act, that “current economic uncertainty makes this loan request necessary to support the ongoing operations” of the business.

The questionnaires will be requested to be completed from businesses who borrowed more than $2 million by their lenders. Many lenders began accepting loan forgiveness applications as early as August of 2020, as borrowers only have 10 months from the end of their covered period to apply for loan forgiveness. The questionnaires are due to the lender within 10 days of receipt by the borrower, and the lender must submit them to the SBA within 5 days of their receipt of completed questionnaire. Borrowers who have already submitted their loan forgiveness application and have a loan greater than $2 million should anticipate that they will be requested to complete the questionnaire.

There are two primary focuses of the questionnaires, first, the Business Activity Assessment and second, the Liquidity Assessment. The Business Activity Assessment section contains 8 questions which include a comparison of 2nd Quarter 2020 gross revenue relative to 2nd Quarter of 2019, and request details surrounding government mandated orders after March 13, 2020 to shut down or significantly alter the operations of the borrowing business. It would appear that the SBA is expecting that borrowers meeting the required needs certification would have been shut down or significantly impacted by COVID 19 in terms of revenue or business operations.  Many businesses that were deemed essential and remained operating throughout this time should be concerned how that will impact the SBA’s decision.

The second section, Liquidity Assessment, contains 13 additional questions starting with how much cash the borrower had prior to applying for the PPP loan. The following questions then target the borrowing business’s equity and debt transactions. Question 2 asks if the borrower has paid any dividends or other capital distributions, other than for estimated tax purposes, to its owners during the covered period.

The vast majority of small businesses are pass through entities such as S Corporations or Partnerships, and many make regularly scheduled tax estimate payments that fall during covered periods of those entities. During 2020, a borrower may have made estimated tax payments on June 30, 2020, as well as their 2019 extension tax payments on July 15, 2020 and then subsequently another estimated tax payment on September 30, 2020 and finally on October 15, 2020 a final 2019 payment. The questionnaires do address that distributions designed for owners’ estimated quarterly tax payments are expected, with some additional stipulations, however they don’t address any 2019 taxes that distributions were made for and paid during the covered period.

Additional scrutiny will be applied if the borrower had any employees and owners earning more than $250,000 on an annualized basis during the covered period. Questions 6 and 7 focus on borrowers who have equity securities listed on a national securities exchange or are owned 20% or more by a publically traded company. If, the borrower is not publically traded or owned by a publically traded company, they are asked to provide their book value on the last day of the calendar quarter immediately before the date of their PPP loan application, which in most cases will be March 31, 2020. Book value is commonly calculated as assets less liabilities. Questions 9 through 11 concern borrowers who are owned by other companies, private equity funds, or foreign corporations and more information is required for each if applicable. If the borrow received any additional CARES Act funding other than the PPP, borrowers will be required to provide more information and funding amount. Common other programs are the EIDL, as well as provider relief funds offered to many healthcare entities.

The nonprofit questionnaire shares many of the common themes, however also focuses on the nature of contributions and grants they have received during the covered period and takes into consideration any restrictions the nonprofit borrower may have had on their net assets. Schools, colleges, and universities must also answer whether or not they’ve offered additional financial assistance to their students during the 2019 – 2020 academic year due to COVID-19 and if they’ve experienced a decrease in tuition revenue due to COVID 19 relative to the 2018 – 2019 academic year.

Borrowers will be able to comment in some fields, however responses are limited to 1,000 characters or less. Additional certifications are required to be made at the end of the questionnaire that submitted information is true and correct in all material respects. The final certification reminds borrowers of the harsh penalties they may face if they knowingly make a false statement to obtain the loan or loan forgiveness.

How Can VonLehman Help?

VonLehman has established a process where we will assist businesses in filling out their loan forgiveness application and gathering the necessary information to submit to their lenders. We will be utilizing anonline platform to facilitate this process, which will produce a completed loan forgiveness application. If you are interested in this service please contact us here.

VonLehman experts have compiled a COVID-19 Resource Center at vlcpa.com, Here, you can find numerous resources, specific to your industry, to help you navigate these difficult times. For any questions related to this article, contact Emir Hodzic at ehodzic@vlcpa.com or 800.887.0437.