Documenting Paycheck Protection Program Requirements of “Need and Liquidity”


There has been significant, additional attention and scrutiny surrounding the required Paycheck Protection Program (“PPP”) loan certification that states that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This scrutiny has come as a result of numerous public companies (75 according to one report) and other, seemingly large private companies applying for and receiving these loans meant for small businesses.  

The Small Business Association (“SBA”) has since cautioned that “Borrowers must make this certification in good faith, taking 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.”

The SBA will review all loans above $2 million (and other loans as necessary).  However, any borrowers (including their affiliates) with total loans of less than $2 million will be deemed to have made the required certification of necessity in good faith.  Further, if the SBA determines during the course of its review that a borrower lacked an adequate basis for the certification, the SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.  If the borrower repays the loan after receiving notification, the SBA will not pursue administrative enforcement.     

The SBA is allowing any loan proceeds to be returned prior to May 18, 2020 and will still deem the required certification in good faith.  


So, what should a dealership do now in preparation for any future inquiries by the SBA regarding the certification?  While detailed guidance surrounding the interpretation of these statements and implementation of the review procedures has not yet been provided, we recommend that borrowers do the following.

Current Business Activity

To address your dealership’s “current business activity,” consider analyses and comparisons of what would have happened “but for” COVID-19 and “but for” the PPP.  To do so, look at the following scenarios:

  1. Budget with COVID-19, but without a PPP loan;
  2. Budget with COVID-19 and PPP;
  3. Budget of expectations without COVID-19; and
  4. Prior year, same period results.

When preparing these analyses, consider such questions/items as:

  • What business decisions did my dealership make in response to the pandemic?
  • What alternative decisions would the dealership have made without a PPP loan?
  • Sales volumes  under each scenario (new autos, used autos, F&I, service, body shop repairs and parts); 
  • Was any part of your operations (i.e., showroom, etc.) shut down during any of the period?
  • Employee counts (i.e., would you have had to lay off or furlough employees without the PPP loan?);
  • Changes to employee pay and benefits – especially healthcare benefits (i.e., would you have had to lower pay without the PPP loan?); and
  • Status of manufacturers (anticipated plant closures and impact on inventory).

If the results of your analysis under (1) indicate a material deterioration in financial (or other) results compared to the other three analyses (or similar bottom-line results, but requires significant reductions in employees, pay, benefits, etc.), this may indicate that the PPP loan was necessary.

Specifically, carefully document how the PPP proceeds allowed you to do such things as: (a) maintain employee counts; (b) maintain employee pay and benefits; and/or (c) pay allowable expenses under the PPP (e.g., rent, utilities, and certain interest).

Ability to Access Other Sources of Liquidity

Unfortunately, the SBA has yet to define what “significantly detrimental to the business” means in regard to the ability to access other sources of liquidity.  Therefore, each dealership should consider access to other sources of liquidity like working capital (cash) and debt facilities (line of credit).  As part of that analysis, you should understand how using these other sources of liquidity may impact the business:

  • Covenants and Financial Statement Requirements –
    • Will the dealership violate or be close to violating bank loan covenants by using other sources of liquidity?
    • Will the dealership be in violation of manufacturer working capital and/or minimum-net-worth requirements?
  • Future Operations –
    • Would the use of other liquidity have a potential impact on future operations, especially if the effects of COVID-19 continue, such as:
      • Meeting ongoing payroll obligations beyond a near-term 30-, 60- or 90-day period?
      • The ability to satisfy manufacturer and vendor obligations in the normal course of business?
      • The ability to meet monthly floor plan interest and/or curtailment payment obligations?
      • Forcing additional floor planning of used vehicle inventory to accommodate near-term cash flow needs?

The list above is not all-inclusive, and a dealership should consider any specific facts and circumstances.


Until the SBA provides specific guidance regarding loan forgiveness and the “need and liquidity” requirements associated with the PPP, dealerships are flying a little blind.  However, performing the above analyses with appropriate documentation should provide support if the SBA reviews any PPP loan.  We recommend you continue to work with your tax advisor and/or attorney to consider what we know and to be ready to react as new guidance continues to be released.

For more information regarding this topic, please contact Steve Barber or Kathy Petrucci, co-chairs of the Automotive Services Group.

About Schneider Downs Automotive Services Group

For more than 45 years, the qualified professionals at Schneider Downs have advised automobile dealers on how to control expenses and optimize profits. Our professionals have extensive experience in every segment of the dealership business and realize what is important to you, whether it relates to retail sales, wholesale inventory, management of parts and supplies or financing for any size dealership.

Please visit our COVID-19 Resource Center for additional articles.

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