Liquidity, Necessity and FAQ31

May 1, 2020 Update  

By Heather E. Kimmel,  General Counsel,  United Church of Christ

I have received a number of questions about SBA FAQ #31, liquidity, and necessity as it relates to the PPP Program. The SBA recently issued guidance reminding organizations that they have to certify the loan is necessary, and that if the company’s loan is audited and found not to be necessary then the company may be subject to some adverse action. Here is an answer I gave to a similar question on the issue.  Here is the most recent version of the SBA guidance; review question 31: Paycheck Protection Program FAQ

The FAQ recently issued by the SBA that refer to other sources of liquidity and need for a loan have raised more questions than they have answered for religious and other organizations.  Note that the FAQ was updated yesterday but the guidance did not change significantly.  The guidance was issued in response to large public companies that received loans that likely were not necessary given those companies’ access to capital markets.

Section 7(a)(2)(G)(i) of the Small Business Act, as amended by the CARES Act, and the SBA’s form of PPP loan application, requires an applicant to certify that a loan is “necessary” to support the borrower’s ongoing operations. The necessity standard is vague, but there has been general agreement that current protection of jobs is the bedrock principle and should form a key part of the support for any church’s decision to apply for a PPP loan.

All of the information I am reading suggests the following:

• Companies that borrow $2 million or more should expect to be audited with respect to their certification of need for the loan (based on the Treasury Secretary’s statements).  Companies that borrow less may be audited, though the risk is lower.
• Companies (including churches) should assess their need for the loan in light of other available sources of money that can be accessed without serious detriment to the business.  Some of those sources may be an undrawn revolving credit line, cash in the bank, etc., though this is not an exhaustive list.
• Companies should document their assessment of need for the loan.  For a church, this may include minutes of a meeting or meetings supported by documentation considered at the meeting.

I’ve received several questions asking whether this information means that I am recommending that churches return loans.  I am not.  I am not in a position to recommend any particular course of action to any particular organization.  What I am recommending is that any church or Conference that applies for a loan take the certification that the loan is necessary seriously by documenting why the loan is necessary, so that in the event that a church is audited, it can support its certification that the loan is necessary. Such documentation might include (but will vary based on the church’s circumstances) a memo offering an analysis of the consistency of current and future revenue, net assets of the church and the availability of cash reserves, access to alternative sources of financing, and how detrimental it would be to the church to access these alternative resources.