Article written by:
Rebekah Smith, CPA, CFF, CVA, MAFF
Director of Forensic & Dispute Advisory Services
Dustin Minton, CPA, MBA
Director, Restaurant Services
Director, Accounting & Business Advisory Services
The SBA has created a new information request form titled “Paycheck Protection Program Loan Necessity Questionnaire” with two versions: for-profit (Form 3509) and non-profit (Form 3510). This article focuses on Form 3509. Borrowers with PPP loans of more than $2 million (including as aggregated by affiliated borrowers) will be required to file Form 3509 to document the economic uncertainty necessitating their PPP loan.
What is asked by Form 3509?
Form 3509 is nine pages and asks for basic “demographic” information about the borrower and then asks questions in each of two sections – business activity assessment (seven questions, some with sub-parts) and liquidity assessment (12 questions, some with sub-parts).
The business activity assessment requests information about a borrower’s gross revenues during the 2nd quarters of 2019 and 2020 (or the 3rd quarters for seasonal borrowers), governmental orders shutting down or altering the borrower’s operations, voluntary closures or operational changes made by the borrower and capital projects after March 13, 2020.
The liquidity assessment requests information about certain financial metrics prior to the initial PPP loan application and during the PPP loan covered period, including cash balances, distributions, debt repayments, owners and employees that are paid in excess of $250,000 on an annual basis and the ownership of the borrower (including by publicly traded companies or venture equity firms).
Both sections require that documents supporting the borrower’s answers be submitted with Form 3509 and provide the borrower the opportunity to provide 1,000 characters worth of additional comments.
What does Form 3509 mean?
At this point, it is unclear how the information gathering request will be used. The form itself states:
The information collected will be used to inform the SBA’s review of your good-faith certification that economic uncertainty made your loan request necessary to support your ongoing operations. Receipt of this form does not mean that the SBA is challenging that certification. After this form is submitted, the SBA may request additional information, if necessary, to complete the review. The SBA’s determination will be based on the totality of your circumstances.
We hypothesize that the information provided may be a “roadmap” for the SBA to target and prioritize which borrowers to “audit.” Similar to IRS audits, there may be certain answers to questions that could move a borrower to a higher scrutiny category. For example, large cash balances, distributions to owners, paying down debt, and having highly compensated owners or employees may be viewed unfavorably in the context of evaluating the “necessity” of the PPP loan. The questions surrounding distributions and a footnote in the form seem to imply that tax distributions may be excluded while distributions of capital or profits must be included and could be cause for additional scrutiny.
The liquidity section also delves into ownership questions such as whether the company is publicly traded or owned by a private equity (or similar) entity. This is consistent with the infamous FAQ 31 issued earlier this year that advised companies with access to capital that they should rethink obtaining a PPP loan and specifically identified publicly traded companies.
What is missing from Form 3509?
As we review Form 3509, it seems to be “backward” looking from now rather than asking about the environment and thought process at the time of the PPP loan application – when the borrower was actually assessing its need for a PPP loan. In addition, there is limited space for the borrower to provide additional context for its answers. For example, a borrower’s cash balance is relative to many other financial and business factors and cannot be meaningfully analyzed without the context of those other factors. Being publicly traded or having an investment from a private equity firm does not mean that a borrower had endless access to cash.
Further, it seems like Form 3509 is missing some relevant questions. For example:
- How many jobs were retained as a result of the PPP loan?
- How many employees would have been laid off without the PPP loan?
- How did the trillions of dollars of economic stimulus change the borrower’s business from what was originally anticipated?
The requirement to provide supporting documents (and the two 1,000 character comment sections) may allow borrowers to provide additional information and context not specifically requested by the questions on Form 3509.
Is there any action I can take?
It appears that there may be an opportunity to provide feedback on the form. The SBA posted a “Reporting and Recordkeeping Requirements Under OMB Review” which has a comment period open until November 25, 2020 (comments can be submitted using the link above). Comments are to focus on, “the collection of information necessary for the SBA to properly perform its function and whether there are ways to enhance the quality, utility and clarity of the information.” GBQ believes that comments about the appropriateness of the questions asked (and those not asked), go to the heart of the quality, utility and clarity of the information being requested by Form 3509.
You may also write to your Congressional representatives explaining the potential problems with the forms. If you would like to send a letter, we are pleased to provide a template for you to customize as well as a list of potential contacts to whom it can be sent.
When will I receive the form and when is it due?
It would appear that the form will be forwarded to you from your bank if it is determined that the SBA wants you to fill it out. The completed form is due to the lender servicing your PPP loan within ten business days of receipt from your lender.
If you have a loan in excess of $2 million, you may want to start looking at the form now so you can be prepared to turn it around in ten days. Further, if you have a loan in excess of $2 million, you may want to hit pause on applying for forgiveness until more information around this process can be determined. In addition, you should ensure that you have all your contemporaneous documentation (i.e. good faith memo, projections, emails, etc.) as to your rationale behind the good faith justification ready in case you have to fill out the form.
What happens once I fill it out?
Within five business days after you provide a complete form to the lender with all required responses, supporting documents, and signatures and certifications, the lender servicing your loan is required to upload the form and documents to the SBA Paycheck Protection Forgiveness Platform and separately input your responses to each question into the web form available in the platform.
What happens if I do not fill it out if requested?
Failure to complete the form and provide the required supporting documents may result in the SBA’s determination that you were ineligible for either the PPP loan, the PPP loan amount, or any forgiveness amount claimed, and SBA may seek repayment of the loan or pursue other available remedies.
If you have questions, reach out to your GBQ advisor. As always, GBQ’s SBA PPP team is here to assist you with any aspect of the program or questions you may have. Contact Rebekah Smith, Dustin Minton, or Jeremy Bronson today.