SBA Begins Effort to Assess Economic Necessity for PPP Loans Over $2 Million


By Rick Krueger of CliftonLarsonAllen
Published November 3, 2020

Last week, the Small Business Administration (SBA) issued a notice related to two new forms developed to collect information for determining the necessity of a Paycheck Protection Program (PPP) loan for borrowers with loans in excess of $2 million.

SBA Form 3509 – Loan Necessity Questionnaire (For-Profit Borrowers) and SBA Form 3510 – Loan Necessity Questionnaire (Non-Profit Borrowers) are expected to be completed by approximately 42,000 borrowers and 10,000 borrowers, respectively.

Until these forms are published on the SBA website, they should be considered as drafts, subject to change. Nevertheless, they provide useful insight into the SBA’s plan for enforcing the economic necessity requirement.

Why loan necessity forms?

In May, the SBA released FAQ #46, which provided a safe harbor for loans less than $2 million—automatically deeming a good faith certification concerning the necessity of the loan for borrowers that, together with their affiliates, received PPP loans with an original principal amount less than $2 million. However, for loans of at least $2 million, the necessity of the loan was still on the table for the SBA to review and potentially challenge. The SBA loan necessity forms bring clarity on this topic.

Has anything changed?

The high-level framework for forgiveness eligibility is consistent with guidance issued last spring (see background below). However, now we can start to fill in the blanks with specifics about what the SBA plans to consider when assessing the economic necessity topic for loans of $2 million or more.

Forgiveness eligibility background

When PPP loans first opened to applicants on April 3, guidance on forgiveness eligibility was sparse. Later in April, the SBA released FAQ #31, which addressed PPP loan eligibility specific to a borrower’s necessity of the loan. FAQ #31 was further clarified in FAQ #37 and FAQ #43. The basic concept is this:

  • In the application form, the borrower is asked to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
  • Borrowers must take into account two criteria when making the application certification:
  • Borrower’s current business activity
  • Borrower’s ability to access other sources of liquidity sufficient to support its ongoing operations in a manner that is not significantly detrimental to the business or organization

What should borrowers do now?

The short answer is, continue to follow the SBA guidance. If you are a borrower with a PPP loan of $2 million or more, use the SBA loan necessity forms as guidance and begin to assemble documentation supporting your loan’s necessity.

Don’t panic if you receive a loan necessity form. The SBA instructions state that “receipt of this form does not mean that SBA is challenging that certification.”

  • If you have received the form, work with your advisors to accurately complete and consider where you may need additional backup.
  • If your loan is $2 million or more and you haven’t received the form, now’s the perfect time to create or refresh your documentation with these questions in mind.

What do the forms look like?

SBA Forms 3509 and 3510 are broken into two sections: 1) business activity assessment and 2) liquidity assessment.

Questions include the following topics: 

  1. Business activity assessment
  • Gross revenue in portions of 2020 compared to 2019
  • Information about the impact of COVID-19 on operations 
  • Capital improvement outlays not related to COVID-19
  1. Liquidity assessment 
  • Levels of cash and cash equivalents (for-profit), and cash, savings, and temporary cash investments (nonprofit) in the quarter preceding the loan
  • Distributions (other than for pass-through estimated tax payments) to owners between March 13 and the end of the covered period (for-profit)
  • Debt prepayments
  • Employee and owner compensation in excess of $250,000 on an annualized basis
  • Restrictions on use of net income and assets (nonprofit)
  • Endowment information (nonprofit)
  • Access to public capital markets, private equity, or other sources (for-profit)
  • Additional information for specific types of nonprofit entities such as health care and education
  • Other CARES Act funding received

The questions are extensive and may take some time to complete. The instructions state that “SBA’s determination will be based on the totality of your circumstances.”

Rick KruegerRick Krueger is Principal, National Assurance with CliftonLarsonAllen. He can be reached at or 414.721.7577.