SBA Provides New Guidelines Regarding PPP Loans and Changes of Ownership and Simplifies Forgiveness Process for Smaller PPP Loans
The Paycheck Protection Program (“PPP”) was created under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in March 2020.
These loans provide necessary help to small businesses that have lost revenue because of the COVID-19 pandemic. Many companies continue to struggle. Some find it necessary to sell their businesses, creating a buyer’s market and increasing the volume of sales.
The Small Business Administration (“SBA”), in its latest Procedural Notice issued on October 2, removes a major hurdle to the closing of business sale transactions involving PPP borrowers. The Notice allows a PPP borrower to avoid the requirement to obtain prior SBA approval for a sale of its business or other “change of ownership” transaction. To take advantage of the new guidance, the borrower must submit its completed loan forgiveness application and establish an escrow account with its PPP lender in an amount equal to the outstanding balance of the loan.
The requirement to obtain prior approval from the SBA can significantly delay the closing of a business sale. The SBA has 60 days to respond to a request for its approval, but the volume of outstanding loans and the backlog of requests can result in even longer delays. The SBA’s Notice benefits all parties by allowing a transaction to proceed without the delays involved with the SBA prior-approval process.
Prior to the closing of any change of ownership transaction, the borrower must give written notice to its PPP lender of the impending transaction and provide copies of the transaction agreements. If the PPP loan is still outstanding at closing, the following additional requirements apply:
- SBA prior approval is not required if the transaction is a merger, a transfer of 50% or less of the ownership interests of the borrower or a transfer of less than 50% of its assets.
- If the transaction is a sale of more than 50% of the ownership interests in a PPP borrower or a sale of 50% or more of the PPP borrower’s assets, prior SBA approval is not required if (a) the borrower completes the loan forgiveness application and submits it, with all supporting documentation, to its PPP lender and (b) an interest-bearing escrow account equal to the outstanding balance of the loan is established with the PPP lender.
The original PPP borrower is liable for all obligations relating to the PPP loan. After the loan forgiveness process is complete, the escrowed funds must be used first to repay any remaining PPP loan balance plus interest.
For more details about the escrow requirements and approval process, read the full text of the Procedural Notice.
Additional relief for borrowers with relatively smaller PPP loans has been provided in the form of a Department of the Treasury Interim Final Rule issued on October 8 as a joint exercise of rulemaking authority by the Department and the SBA. The Interim Final Rule provides exemptions for companies with PPP loans of $50,000 or less from certain penalties (in the form of reduced loan forgiveness amounts) that can result from workforce or wage reductions. The SBA has also issued a simplified form of the loan forgiveness application, for use by borrowers relying on the new exemptions. The SBA estimates that 9% of outstanding PPP loans fall under $50,000.
In addition, on October 7, the SBA issued an updated list of frequently asked questions relating to the PPP program. Read the full list here.