|Footnotes for this article are available at the end of this page.
On October 31, 2020, the U.S. Small Business Administration (“SBA”) published a Notice in the Federal Register seeking approval from the Office of Management and Budget for the collection of information through, among other forms, SBA Form 3509 (Loan Necessity Questionnaire – For-Profit Borrowers) and SBA Form 3510 (Loan Necessity Questionnaire – Non-Profit Borrowers).1 These Paycheck Protection Program (“PPP”) Loan Necessity Questionnaires “will be used by SBA loan reviewers to evaluate the good-faith certification that you made on your PPP Borrower Application…that economic uncertainty made the loan request necessary.” Both Loan Necessity Questionnaire forms – one for for-profit borrowers and one for non-profit borrowers – state that SBA is “reviewing these loans to maximize program integrity and protect taxpayer resources,” emphasizing, if there was any doubt, that SBA intends to search for and investigate possible fraud, waste, and abuse in the PPP.
Back in late March of 2020, when SBA rolled out the PPP, it provided very limited guidance on the definition of the “economic uncertainty” that was the underpinning for any loan. PPP loan applicants were required to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
Pressed for more detail regarding the meaning of “economic uncertainty,” SBA responded in its Frequently Asked Questions (“FAQ”) No. 31 only that PPP loan Borrowers needed to “make such certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that was not significantly detrimental to the business.” Borrowers were warned that it would be “unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.” Subsequently, in FAQ No. 39, SBA informed borrowers that it would review all PPP loans in excess of $2 million following the lender’s submission of the borrower’s loan forgiveness application, but did not offer any further criteria for the term “economic uncertainty.”
Now, eight months after companies were first required to make that economic uncertainty certification, SBA has outlined numerous and detailed objective criteria for the term in the Loan Necessity Questionnaires.
Who Must Answer the Questionnaires?
For-profit and non-profit borrowers that received PPP loans of $2 million or more are required to complete and submit, along with required supporting documentation, to their lenders. According to Federal Register notice, 85 FR 67809 dated October 26, 2020, SBA expects approximately 52,000 respondents (42,000 for SBA Form 3509— (For-Profit Borrowers) and 10,000 for SBA Form 3510 –(Non-Profit Borrowers)) to fill out these forms.
Eligible “for-profit borrowers” include sole proprietors, partnerships, C-corporations, S-corporations, limited liability companies, independent contractors, eligible self-employed individuals, Tribal businesses, and electric and telephone cooperatives exempt from federal income taxation under section 501(c)(12) of the Internal Revenue Code. Eligible “non-profit borrowers” include 501(c)(3) non-profits, 501(c)(19) veterans organizations; non-profit hospitals owned by governmental entities if they are described in Internal Revenue Code (“IRC”) §501(c )(3)(or otherwise adhere to the parameters of IRC §501(c )(3) and rely on the income exclusion under IRC §115) and receive less than 50 percent of their funding from state or local government sources, exclusive of Medicaid; and churches, and integrated auxiliaries of churches that meet the requirements of IRC §501(c )(3)(even if they have not applied to the IRS to receive recognition of tax-exempt status).
What Types of Questions Will Borrowers Need to Answer?
PPP Loan Necessity Questionnaire (For-Profit Borrowers)
The For-Profit Loan Necessity Questionnaire includes two sections – one entitled, “Business Activity Assessment” and one entitled, “Liquidity Assessment.” The instructions state that “you must include supporting documentation” and also that “SBA may request additional supporting documentation as part of the loan review.”
The Business Activity Assessment for-profit borrowers consists of eight questions, some of which have multiple sub-parts, and requests detailed information and supporting documentation related mainly to:
- GROSS REVENUE: Gross revenue for Q2 of 2019 and 2020 (or Q1 of 2020 if borrower did not exist in 2019);
- MANDATORY SHUT DOWN: Whether borrower was ordered to shut down or significantly alter its operations by a state or local authority since the COVID-19 National Emergency Declaration issued by President Trump on March 13, 2020;
- VOLUNTARY SHUT DOWN: Whether borrower voluntarily ceased, reduced, or altered its operations due to COVID-19; and
- NEW CAPITAL IMPROVEMENT PROJECTS: Whether between March 13, 2020 and the end of the loan forgiveness covered period of the PPP loan, borrower began any new capital improvement projects, not due to COVID-19.
The Liquidity Assessment consists of 13 questions, some of which have multiple sub-parts, and requests detailed information and supporting documentation related mainly to:
- CASH ON HAND: How much borrower owned in cash and cash equivalents (not defined) as of the last day of the calendar quarter immediately prior to the date of borrower’s PPP loan application;
- CAPITAL DISTRIBUTIONS: Whether borrower has paid any dividends or other capital distributions (other than pass-through estimated tax payments) to its owners between March 13, 2020 and the end of the loan forgiveness covered period of the PPP loan;
- PREPAID OUTSTANDING DEBT: Whether borrower prepaid any outstanding debt (i.e., paid before contractually due) between March 13, 2020, and the end of the loan forgiveness covered period of the PPP loan;
- COMPENSATION TO OWNERS OR EMPLOYEES OF MORE THAN $250,000: Whether any of borrower’s employees or owners (for owners – those who work at borrower) were compensated by borrower in an amount that exceeds $250,000 on an annualized basis during the loan forgiveness covered period of the PPP loan (compensation for this purpose covers gross salary, gross wages, gross tips, gross commissions, and allowances for dismissal or separation);
- LISTING ON NATIONAL SECURITIES EXCHANGE: Whether any of borrower’s equity securities were listed on a national securities exchange on the date of borrower’s PPP loan application;
- PUBLIC COMPANY OWNERSHIP OF 20% OR MORE: Whether any publicly traded company owned 20 percent or more of any class of borrower’s outstanding equity securities on the date of borrower’s PPP loan application;
- BOOK VALUE: The book value (shareholder’s equity value) of borrower as of the last day of the calendar quarter immediately prior to the date of borrower’s PPP loan application;
- SUBSIDIARY STATUS: Whether borrower was a subsidiary (i.e., was at least 50 percent of borrower’s common equity, or equivalent equity interest, owned by) of another company (the parent company) on the date of borrower’s PPP loan application;
- PRIVATE EQUITY OWNERSHIP OF 20% OR MORE: Whether 20% or more of any class of borrower’s outstanding equity securities were owned by a private equity firm, venture capital firm or hedge fund (including a fund managed by such firm) on the date of borrower’s PPP loan application;
- AFFILIATE OF FOREIGN, STATE-OWNED ENTERPRISE: Whether borrower was an affiliate or a subsidiary (i.e., was at least 50 percent of borrower’s common equity, or equivalent equity interest, directly or indirectly owned or controlled by) of a foreign, state-owned enterprise (i.e., a company at least 50 percent owned by a foreign state) or of a department, agency or instrumentality of a foreign state on the date of borrower’s PPP loan application;
- OTHER CARES ACT FUNDS: Whether borrower directly received funds from any CARES Act program other than the PPP, excluding tax benefits.
PPP Loan Necessity Questionnaire (Non-Profit Borrowers)
The Non-Profit Loan Necessity Questionnaire also includes a “Non-Profit Activity Assessment” and a “Liquidity Assessment.” While the ten questions in the Non-Profit Activity Assessment section are similar to those in the For-Profit “Business Activity Assessment,” they are tailored to non-profit borrowers and, therefore, request such information as the borrower’s gross receipts from gifts, grants, contributions and similar amounts, as well as its expenses in Q2 of 2019 and 2020 (or Q1 of 2020 if borrower did not exist in 2019). In the non-profit “Liquidity Assessment,” the 11 questions add an extra layer of specificity. Question No. 8 asks, “Does Borrower provide health care services?” and, if the answer is yes, includes several more questions. Question No. 10 asks, “Did Borrower directly receive any funds from any CARES Act program other than PPP, excluding tax benefits?” and, if the answer is yes, the borrower must provide the funding amount and the program name or funding source for those funds.
Both Questionnaires require the borrower to certify, “that the information provided in this questionnaire and in all supporting documentation is true and correct in all material respects” and that the borrower makes this certification “after reasonable inquiry of people, systems, and other information available to Borrower.” The borrower also must certify that he or she “understands that knowingly making a false statement to obtain a guaranteed loan or forgiveness of an SBA-guaranteed loan is punishable under the law… by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.”
How SBA Intends to Use the Collected Information
The Questionnaires state that [t]he information collected “will be used to inform SBA’s review of your good-faith certification that economic uncertainty made your loan request necessary to support your ongoing operations. Receipt of this form does not mean that SBA is challenging that certification. After this form is submitted, SBA may request additional information, if necessary, to complete the review. SBA’s determination will be based on the totality of your circumstances.”
The Questionnaire is triggered by the submission of the loan forgiveness application. As borrowers have only ten business days to submit the questionnaire after receiving it from the lender, borrowers with loans of $2 million or more should begin preparing their responses and collecting supporting documentation now. Borrowers who have concerns about issues related to the questionnaire should consult legal counsel promptly and certainly prior to the submission of any completed questionnaire.
Why Preparing to Answer These Questionnaires In Advance is Critical
SBA is expecting a very quick turn-around of these very complicated Loan Necessity Questionnaires. Once a company receives the questionnaire from the lender, it has only ten business days to complete and submit the form to the lender. And, within five days of receiving the completed form with all required responses, supporting documentation, signatures, and certifications, the lender is required to upload the form to SBA’s PPP Forgiveness Platform, and separately input the responses to each question into the web form available in the platform (an arduous chore for the lenders).
It is critical that PPP recipients of loans with an original principal amount of $2 million or greater complete the Questionnaires with supporting documentation, etc., within the ten business day window to respond. Failure to complete the form and provide the required supporting documentation may result in SBA determining that the company was ineligible for the PPP loan, the PPP loan amount, or any forgiveness amount claimed, and SBA may seek repayment of the loan – or worse –pursue other available remedies. Companies would be well advised to start the process of answering these questionnaires before being faced with an unusually short ten business day deadline in the coming weeks and months.
 Note that SBA has not yet – as of the date of publication of this Client Alert – published these Loan Necessity Questionnaires on its PPP website page at https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program, but these forms can be obtained on the Internet using a Google search.