By Andy Medici – Senior Staff Reporter, Washington Business Journal Oct 5, 2020, 2:39pm EDT The Small Business Administration is now allowing lenders — under certain conditions — to approve the sale or merger of companies that took Paycheck Protection Program loans.
The new guidance, issued Oct. 2 as part of a procedural notice by the agency, means that not all mergers or acquisitions have to receive SBA approval before going forward, although borrowers and buyers still need to adhere to specific rules. The lack of guidance — and the requirement that SBA approve all deals in advance — had caused headaches for some small-business owners.
“This is a whole new ballgame,” said PPP expert Tenley Carp, an attorney at law firm Arnall Golden Gregory LLP. “SBA has yet again changed the rules in the middle of the game.” Borrowers and lenders no longer need to seek SBA approval if the sale or transaction is less than 50% of the company's equity or assets, part of the SBA's definition of a change in control or ownership.
More importantly, if it's 50% or more of the equity or assets, SBA approval is no longer required if the borrower has completed a loan forgiveness application and submitted it to the lender and has also set up an interest-bearing escrow account with that lender to cover the PPP loan. The escrow account will then be disbursed to the surviving entity, minus satisfaction of any outstanding PPP balances, SBA said.
If the borrower cannot meet those terms, it will still need SBA approval and will have to submit documentation on reasons why it cannot meet those terms, the details of the transaction and sale documents to the SBA, which will render a decision within 60 days, the agency said.
SBA may also require other actions to mitigate the potential risk of not paying back the PPP loan, the guidance states, and it retains recourse in case of any issues. Carp said that businesses that fail to follow the new guidelines could find themselves the subject of an audit.
The purchasing entity would still be required to assume all the PPP borrower’s obligations under the PPP loan, including compliance on how that money is spent and other loan terms. None of these rules apply, however, if the borrower has fully repaid the PPP loan or if the loan has already been fully forgiven and the lender has received payment from the SBA, the agency noted.
The new rules benefit lenders, Carp said, who will be assured that any PPP balances will be paid, although now they have to set up escrow accounts and in some cases do more paperwork on these transactions. But it also puts some small businesses in a bind, as their lender would have had to open their PPP loan forgiveness portals and have the small business submit its application — which some banks have been slow to do.
It is unclear, however, if businesses that proceed without following the new guidance would risk the loss of loan forgiveness eligibility for their PPP loans, or what happens to businesses that closed transactions before the new guidance came out.
Businesses are only now expected to start receiving forgiveness decisions on their PPP loans, after the Treasury Department confirmed Oct. 1 that the agency will begin approving the lender decisions now and reimbursing the lenders. While SBA has not released a running tally of forgiveness decisions it has received from lenders, William Manger, SBA chief of staff, told a House Small Business Subcommittee in late September that lenders had submitted about 96,000 forgiveness decisions for the agency’s review. That’s up from Sept. 8, when 56,000 determinations had been turned over to the SBA.
And small businesses may still have to overcome various hurdles to fill out and turn in that application.
Comments