The Small Business Administration (SBA) announced in April 2020 that it would audit all loans of $ 2 million or more (including loans to covered affiliates) at the time the loan forgiveness is requested, and d Other loans, if any, will be reviewed for eligibility, fraud, abuse, and compliance with loan forgiveness requirements. SBA has now issued loan necessity questionnaires (questionnaires) via the SBA form 3509 and 3510, applicable to for-profit and non-profit borrowers, respectively, to facilitate the collection of additional information from borrowers for use during the review process. These questionnaires are distributed by the lender and must be returned within 10 business days of receipt.

Typically, questionnaires are divided into two sections: assessment of business activity and assessment of liquidity. The business activity assessment aims to gain additional information on the comparative financial position of the company in the second quarter of 2020 and 2019, including revenues and expenses. It is also looking for specific information on the impact of the pandemic, if any, on business operations. Specifically, borrowers are asked whether the business has been ordered to shut down or downsize or significantly change its operations by a federal, state or local authority and the details of those orders, as well as the impact financial compliance associate. The questionnaire also covers voluntary reductions, cessations or changes in business activity in response to the pandemic, as well as the financial impact.

The liquidity assessment aims to obtain specific details about the borrower’s financial position in the period immediately preceding the borrower’s PPP loan application until the end of the loan forgiveness period. This section aims to obtain information on the ownership of cash and cash equivalents, payments of dividends or other distributions of capital, compensation over $ 250,000 paid to employees or owners, endowment assets for non-profit borrowers, as well as some questions on starting a business. The final section of the Liquidity Assessment gives borrowers the opportunity to approach their financial and business circumstances in a thousand word story.

On December 9, 2020, the SBA updated its frequently asked questions to add FAQ n ° 53, providing additional guidance on the questionnaires on the need for loans. As explained in the FAQ, a request to complete a questionnaire does not mean that the SBA is contesting the good faith certification of a borrower’s need, even if subsequent developments have made the loan no longer necessary. The FAQ points out that the questionnaires give borrowers the opportunity to provide a narrative response to the ASB explaining the circumstances that served as the basis for their good faith certification of the need for a loan.

Although SBA has created a appeal process for loan review decisions, the Questionnaire is an important opportunity for borrowers to show their eligibility and compliance with PPP loan and remission requirements in an attempt to avoid an adverse SBA decision in the first place. Borrowers should approach the questionnaire with this in mind and consider the following when completing it and providing supporting documentation:

  • Don’t just give the form to an accountant to fill in the numbers and submit. Responses to the borrower’s questionnaire should tell a story, especially if the numbers themselves could raise questions about the need for the loan.
  • Use the submission of the questionnaire and supporting documents as an opportunity to show what impact the pandemic has had on the business.
  • Even though the business may have continued to operate, think about how the pandemic caused changes in operations and additional costs. For example, did you have to purchase equipment or supplies for remote work or additional cleaning costs and PPE for in-person operations? Has the business lost productivity due to social distancing or employees struggling with childcare or technology issues or simply being less productive?
  • If the company’s financial situation did improve during the pandemic, explain what was the uncertainty that led to the loan application. Remember, you had to act in good faith when you applied for the loan and took the money. Just because things turned out better than expected doesn’t mean the loan was inappropriate, but you need to explain why you needed it at the time.
  • If you have changed your business based on the pandemic, explain the change, such as the production of products related to the pandemic or other changes in the business model. If so, you probably didn’t know how the business would turn out or if it would be successful when you applied for the loan. Don’t be afraid to express these considerations.
  • Remember to submit documents that support your story, which may include documents that go beyond simply submitting the required financial documents.
  • Documentation to support your story may include documentation that you gathered when you applied for the loan to support your original certification and other documents that show the business risks you were concerned about. For example, documentation from the board of directors as to why they authorized the loan request is useful in showing contemporary reasons for the loan request. This could be a memo to the board explaining the reasons for the loan, along with the board resolution and board minutes indicating the risk discussion.
  • Even less formal documentation can be useful. You may receive emails with customers regarding delayed orders or suppliers regarding delays in obtaining the supplies necessary to produce deliverables.
  • Remember that there are potential criminal penalties for false certifications. If it is clear that there were issues with the original loan application or with the loan forgiveness application, consult a lawyer before compounding the issue with further certification and documentation.

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