Paycheck Protection Program Second Draw Loans – What You Need to Know
By James A. Lozano
While we all celebrated the end of 2020 with renewed hope for what 2021 will bring, it is clear that at least the beginning of this year still has its challenges for many. Fortunately, The Economic Aid Act provides for a second stimulus program for businesses, not for profits and other types of organizations.
The following is a high-level overview of the “Second Draw PPP Loans” as described in the updated Interim Final Rule published by the U.S. Small Business Administration. The rules contain specific details on how to calculate loan amounts depending on entity type and what to do with businesses that were not operating for all of 2019. Those details are in the full interim final rules which you can access at the end of this article.
Read on for an overview of the key points of the program.
The SBA will begin accepting applications for these second draw loans on Wednesday, January 13. Check in with your lending institution to see when they will accept applications.
General Information / Loan Structure:
|The program is authorized through March 31, 2021
|The SBA will guaranty 100% of the loan
|No collateral is required
|No personal guarantees are required
|Five years from disbursement
|Maximum Loan Amount
|Loan Amount Calculation
|Generally – 2.5x average monthly payroll. For businesses with a NAICS code starting with 72 (Accommodation and Food Service), calculation is 3.5x average monthly payroll.
The relevant time period for calculating a borrower’s payroll costs for a Second Draw PPP Loan is either the twelve-month period prior to when the loan is made or calendar year 2019.
Primary Eligibility Requirements:
- The applicant must have previously received a PPP loan and have used or will use the full amount of the initial PPP loan for authorized purposes on or before the expected date of disbursement of the Second Draw PPP Loan.
- The applicant must have 300 or fewer employees.
- Only exception is for employers with a NAICS code starting with 72 (Accommodation and Food Service) – rule is 300 employees per each physical location.
- Revenue reduction of 25% or greater in 2020 relative to 2019. Calculated by comparing the applicant’s quarterly gross receipts for one quarter in 2020 with the applicant’s gross receipts for the corresponding quarter of 2019. For example, a borrower with gross receipts of $50,000 in the second quarter of 2019 and gross receipts of $30,000 in the second quarter of 2020 has experienced a revenue reduction of 40% between the quarters and is therefore eligible for a Second Draw PPP loan (assuming all other eligibility criteria are met).
- A borrower that was in operation in all four quarters of 2019 is deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of 25% or greater in 2020 compared to 2019 and the borrower submits copies of its annual tax forms substantiating the revenue decline.
- Forgiveness of a First Draw PPP Loan is excluded from a borrower’s gross receipts.
- The applicant business cannot be permanently closed – if the business is permanently closed, they are ineligible for a Second Draw PPP Loan. A business that has temporarily closed or suspended its business remains eligible.
- A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish you were in operation on February 15, 2020.
Additional Eligible Expenses
In addition to the allowable cost from the first round of PPP loans (Payroll, Rent, Interest on Mortgages and Utilities), the costs listed below can be paid for with PPP loan funds;
- Covered operations expenditures – Payment for any software, cloud computing, and other human resources and accounting needs.
- Covered property damage costs – Costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance.
- Covered supplier costs – Expenditures to a supplier pursuant to a contract, purchase order, or order for goods in effect prior to taking out the loan that are essential to the recipient’s operations at the time at which the expenditure was made. Supplier costs of perishable goods can be made before or during the life of the loan.
- Covered worker protection expenditure – Personal protective equipment and adaptive investments to help a loan recipient comply with federal health and safety guidelines or any equivalent State and local guidance related to COVID-19 during the period between March 1, 2020, and the end of the national emergency declaration.
Documentation Requirements to demonstrate 25% reduction in gross receipts:
- Loans greater than $150,000 must submit documentation adequate to establish that the applicant experienced a revenue reduction of 25% or greater. Such documentation may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, quarterly financial statements or bank statements.
- For loans with a principal amount of $150,000 or less, such documentation is not required at the time the borrower submits its application for a loan but must be submitted on or before the date the borrower applies for loan forgiveness. If a borrower does not apply for loan forgiveness, such documentation must be provided upon SBA’s request.
- SBA Form 2483-SD (Paycheck Protection Program Second Draw Borrower Application Form)
- Payroll Records – depending on entity type could include IRS Form 941s, state quarterly unemployment or payroll tax records, payroll processor records, evidence of any retirement and employee group health, life, disability, vision, and dental insurance contributions, IRS Form 1065 K-1s, IRS Form 1040 Schedule C, IRS Form 1099-MISC, bank statements, book of records, etc.
Other Eligibility Requirements:
- Same affiliation rules apply – the borrower is considered together with its affiliates to determine eligibility.
- If you were ineligible to receive a First Draw PPP Loan but received one anyways, you are still ineligible for a Second Draw PPP Loan.
- Categories of ineligible borrowers:
- Political or lobbying activities
- Ties to the People’s Republic of China or the Special Administrative Region of Hong Kong
- Any person required to submit a registration statement under section 2 of the Foreign Agents Registration Act of 1938
- Person or entity who receives a grant for shuttered venue operators. – There is a separate granting program for these entities in the most recent stimulus bill.
- President, Vice President, head of an Executive department, or Member of Congress has 20% or more ownership.
- Publicly traded company listed on an exchange registered with the SEC
- A single corporate group cannot receive more than $4.0 million in aggregate Second Draw PPP loans.
- If a borrower’s First Draw PPP loan is under review by SBA and/or information in SBA’s possession indicates that the borrower may have been ineligible for the First Draw PPP Loan it received or for the loan amount it received, the lender will receive notification from SBA when the lender submits an application for a guaranty of a Second Draw PPP Loan and will not receive an SBA loan number until the issue related to the unresolved borrower’s First Draw PPP Loan is resolved.
New Entity Types Eligible in this most recent stimulus bill
- Faith Based organizations (Churches, Synagogues, etc.)
- 501(c)6 organizations (Business Associations, Chambers of Commerce, Tourism organizations, etc.)
Link to Full Interim Final Rules of PPP Second Draw Loans