PPP: SBA Announces New Loan Necessity Questionnaires

November 23, 2020

The Small Business Administration recently announced new questionnaires for purposes of gathering information from borrowers related to the economic necessity certification under the Paycheck Protection Program.

The Small Business Administration (SBA) published two new form questionnaires, SBA Form 3509 (for for-profit borrowers) and SBA Form 3510 (for nonprofit borrowers) in the federal register on October 26, 2020. SBA signaled an intent to use these forms for the purposes of collecting certain information from borrowers under the Paycheck Protection Program (PPP). The questionnaires would be issued to borrowers that, together with affiliates, received loans in the aggregate with an original principal amount of at least $2 million in order to “inform SBA’s review” of the necessity certification made by these borrowers in the PPP loan application.

Although the nonprofit form deviates in certain respects in order to take into account the unique characteristics of nonprofit entities, the forms are largely consistent with one another. References to “the form” are intended to refer to each form, as applicable for a particular borrower.

Background: The Necessity Certification and Related Guidance

The PPP loan application contained a certification that “the uncertainty of current economic conditions makes necessary the loan request to support [such borrower’s] ongoing operations.” In guidance released on April 23,[1] the SBA clarified that borrowers must take into account “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”[2] Such guidance further provided that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to the SBA, upon request, the basis for its certification. On April 28, 2020, the SBA indicated that the same consideration with respect to access to capital applies to private companies as well.[3]

On May 13, 2020, the SBA advised PPP borrowers of its intent to review each loan greater than or equal to $2 million to determine whether the borrower had an adequate basis for making the required necessity certification[4]:

  • Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.[5]
  • For borrowers with loans in an amount greater than $2 million, if SBA determines in the course of its review the borrower lacked an adequate basis for having made the necessity certification, SBA will seek repayment of the outstanding PPP loan balance. SBA will also inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or its own referrals to other agencies based on its determination with respect to the certification concerning necessity.

The New Questionnaires: Contents and Procedural Elements

The instructions for the new forms note they are required from each borrower that, together with its affiliates, received loans in the aggregate equal to at least $2 million. Accordingly, our working assumption is that each such borrower, and not merely those borrowers with respect to which the SBA is conducting a heightened review, will receive the form from their PPP lender regardless of whether they elect to submit a forgiveness application. The borrower must complete the form within 10 business days of receipt of the form from the lender. Although the form indicates that the information will be used to “inform SBA’s review” of the necessity certification, it further provides both that the SBA may request additional information and that the necessity determination will be based on the “totality of [the borrower’s] circumstances.”

As noted above, the April 23 guidance articulated two first-order factors PPP borrowers should take into account in making the necessity certification: the current “business activity” of the borrower and its access to “liquidity.” The SBA has utilized the framework articulated in its FAQs in the forms and has categorized the questions into a “Business Activity Assessment” and a “Liquidity Assessment.”

The Business Activity Assessment in the for-profit form is composed of a series of questions related to the operations of the borrower’s business, including:

  • Gross revenues in each of Q2 2020 and Q2 2019 (or Q3 2020/2019 for “seasonal borrowers”)
  • Whether the borrower has been ordered to shut down since March 13, 2020 (the date of President Trump’s COVID-19 National Emergency Declaration)
  • Whether the borrower has significantly altered its operations since March 13, 2020, including the nature of such alterations and related cash outlays, either voluntarily or as a result of mandatory order
  • Whether the borrower has voluntarily ceased or reduced its operations due to COVID-19, including whether employees contracted COVID-19 and whether the borrower’s supply chain was disrupted as a result of COVID-19
  • Whether the borrower has begun any new capital improvement projects “not due to” COVID-19
  • An optional field for the borrower to provide supplementary information regarding the Business Activity Assessment

The Business Activity Assessment in the nonprofit form is generally consistent with the questions in the for-profit form, with distinctions to account for the nature of a nonprofit (e.g., references to gross receipts, and the portion of gross receipts derived from charitable contributions, etc., rather than gross revenues).

The Liquidity Assessment in the for-profit form is composed of a series of questions related to the borrower’s cash management, its deployment of cash, and its treatment of existing non-PPP debt, including:

  • The amount of cash and cash equivalents held by the borrower as of the last date of the calendar quarter immediately preceding the date of the loan application
  • Payments of dividends/distributions to owners (other than tax distributions)
  • Prepayments of debt between March 13, 2020 and the end of the covered period for the applicable loan
  • Compensation to employees or owners exceeding $250,000 on an annualized basis
  • Whether, on the date of the loan application, the borrower’s equity was publicly traded, or whether an owner of 20% or more of any class of the borrower’s outstanding securities was a public company, and the associated market capitalization of the borrower or such owner as of the date of the loan application
  • If not a public company, the book value of the borrower as of the last day of the calendar quarter immediately preceding the date of the loan application
  • The borrower’s parent entity, including whether it is organized in the United States or in a foreign jurisdiction and whether or not it is public
  • Whether 20% or more of the equity securities of the borrower were owned by a private equity firm, venture capital firm or hedge fund as of the date of the loan application
  • Whether the borrower is an affiliate of a foreign, state-owned enterprise or of a department, agency or instrumentality of a foreign state as of the date of the loan application
  • Whether the borrower received funds from any other CARES Act program (other than tax benefits)
  • An optional field for the borrower to provide supplementary information regarding the Liquidity Assessment

The Liquidity Assessment in the nonprofit form is tailored to the unique attributes of nonprofit entities, and, in addition to the same questions in the for-profit form with respect to initial cash position, debt repayment, employee compensation, other CARES Act programs and the supplementary field outlined above, includes questions with respect to the following matters:

  • Assets held in endowment funds by the borrower or a related organization
  • Restrictions on the use of cash and other current assets for payroll expenses and other expenses that are permitted uses of PPP proceeds (e.g., mortgage interest, rent and utilities), or similar restrictions applicable to endowment assets
  • Value of non-cash investments as of the last date of the calendar quarter immediately preceding the loan application
  • If the borrower is a school, college, or university, median tuition paid for the 2019-2020 academic year, whether financial assistance was offered to students during such year, and whether revenues from tuition declined as compared with the prior year (and the amount of such decline)
  • If the borrower provides healthcare services, its program service revenue in Q2 2020 and Q2 2019 (or Q3 2020/2019 for “seasonal borrowers”) and whether it offered a discount on its patient care services
  • If not a school/college/university or provider of healthcare services, whether the borrower offered a discount on its services due to COVID-19


The key takeaway from the content of these forms is that some of the information requests relate to periods that occur after the PPP loan application date both for purposes of the Business Activity Assessment and the Liquidity Assessment. The questions posed in the Business Activity Assessment appear to be designed to identify the ways in which, and the magnitude by which, COVID-19 impacted various aspects of the business that flow through its income statement (e.g., revenues, costs, etc.) during the period following loan disbursement. Similarly, the Liquidity Assessment provides a roadmap to track the borrower’s cash flows during the same period, and determine, even if PPP funds were applied for permitted uses, whether access to such funds allowed the borrower to pay excess cash to employees, owners and/or creditors.

The SBA has not provided any guidance as to how it intends to use these forms. Although nothing in the existing guidance or in the content of the forms suggests that the necessity certification, which by its own terms references to the “current economic uncertainty” of the borrower as of the time of the loan application, will be “brought down” on a date subsequent to the loan application, such as the date of the forgiveness application, the content of the new forms suggests that the SBA intends to use information regarding entity performance in the period following application for the loan to assess whether a borrower made the necessity certification in good faith as viewed through the lens of the bifurcated “business activity” and “liquidity” framework.

Put differently, it is more likely that a business that realized increased revenues during Q2 2020, had cash on hand (even with off-setting liabilities not identified in the questionnaire) and/or that had meaningful access to public or private markets for capital will present the appearance of not having the requisite economic necessity as compared with a business that struggled in Q2 2020 and is nearing insolvency. Accordingly, it may be that SBA will use the forms as a filtering mechanism to identify PPP borrowers for which it will apply a greater degree of scrutiny in the course of its overall review process.

Borrowers that have not previously assessed the strength of their necessity certifications against the type of information requested by the questionnaires should do so now. Further, borrowers completing the questionnaire that can substantiate a good faith certification based on information available at the time the loan application was submitted, but whose post-application circumstances have improved, should carefully consider whether to offer additional contextual information in the optional Liquidity Assessment field permitting provision of supplemental information.

As we have previously noted, these forms and all other aspects of a PPP application carry significant fraud risk (for a more detailed exposition as to this fraud risk, read our LawFlash, CARES Act’s Substantial Relief Funds Create Fraud Risk). In addition to a certification as to false statements and acknowledgment of potential criminal and civil penalties and imprisonment as a result thereof, the form contains a certification that the information provided in the questionnaire and supporting documentation is “true and correct in all material respects” and was made after “reasonable inquiry of people, systems and other information available to Borrower.”


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If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Andrew T. Budreika
Michelle Catchur
Kurt W. Rademacher
Andrew P. Rocks
Benjamin W. Stango

New York
Kristen V. Campana
Melissa M. Meyer
Crystal Fang

Sandra J. Vrejan
Ian M. Wenniger
Christopher L. Melendez

Elizabeth Khoury Ali
Tara McElhiney

Los Angeles
David V. Chang

Orange County/Los Angeles
Steven L. Miller

Washington, DC
Shah M. Nizami
Katelyn M. Hilferty


[1] See Enhancement Act at Pg. 11

[2] See April 23 FAQ, Question 31

[3] See April 28 FAQ, Question 37

[4] See May 13 FAQ, Question 46

[5] Note, however, that pursuant to the Interim Final Rule issued on May 22, 2020, “For a PPP loan of any size, SBA may undertake a review at any time in SBA’s discretion.”