The New “Automatically Necessary” PPP Loan Rule: Is It a Free Pass?

The original Payroll Protection Program (PPP) rules included strict requirements to prove that the loan was necessary to save your business, and imposed hefty financial and criminal penalties for those that tried to get a handout when they didn’t really need one. But on May 13, 2020, the Small Business Administration (SBA) lightened up on small businesses.

The Relief: FAQ #46

In this new release, the SBA stated that loans of less than $2 million are automatically assumed to be necessary, even if the loan applicant doesn’t explicitly declare it. This is great news for small businesses who have been confused by conflicting guidelines and worried about whether they made a mistake answering the “necessity” question on their PPP loan application.

Why the SBA’s change of heart? They figure that any business whose maximum qualifying loan amount is less than $2 million (2.5X the average monthly payroll cost) is extremely unlikely to have any other sources of liquidity that wouldn’t significantly damage the business. They would rather devote their limited auditor resources to larger loans where there would be a greater return on their effort if they find compliance issues.

Are Small Businesses Completely Off the Hook?

The short answer is no. Even if you don’t answer the question about necessity, the SBA assumes that you have claimed: “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”

That means you still must meet the necessary requirements and are subject to a compliance review. Though the chance of that happening is small as of right now, there’s always a possibility that someone — perhaps a disgruntled employee or someone who sees you getting a loan when their own small business didn’t — could file a complaint with the SBA about your fraudulent loan application.

What Actions Are Businesses Subject to if the Loan Wasn’t Necessary?

The first thing that would happen is that you would have to pay the loan back. If you do that as soon as you’re notified by the SBA, it “will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning the necessity of the loan request.”

If you don’t pay it back, the possible consequences include fines, penalties, interest, and prosecution for perjury.

What Other Ways Can Businesses Protect Themselves?

Given the fast-changing guidance from the SBA, we suggest that you attach an addendum to your loan application stating that you are relying on FAQ #46 in assuming that the loan is necessary due to the current economic uncertainty


This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.


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