By: Colleen Lyons | February 16, 2021
For almost a month, certain businesses that previously received a Paycheck Protection Program (“PPP”) Loan have been eligible to apply for a second PPP loan. These Second Draw PPP Loans were authorized as part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) enacted in late December. To assist potential borrowers in evaluating eligibility for a Second Draw PPP Loan, the United States Small Business Administration (“SBA”) has issued both an Interim Final Rule on Second Draw Loans (“IFR”) and more detailed informal guidance with respect to the required supporting calculations (“Informal Guidance”).
To be eligible for a Second Draw PPP Loan, the Economic Aid Act generally requires that:
- the borrower (and affiliates if applicable) have 300 or fewer full and part-time employees;
- the borrower received and used or will use the full amount of its first PPP loan (“First Draw PPP Loan”) on eligible expenses on or before the expected date the Second Draw PPP Loan will be disbursed; and
- the borrower experienced a revenue reduction of 25% or greater in 2020 relative to 2019.
The IFR states that a borrower’s revenue reduction can be demonstrated either (i) on a quarterly basis by comparing gross receipts for any calendar quarter of 2020 against the corresponding quarter of 2019 or (ii) on an annual basis by comparing 2020 gross receipts to 2019 gross receipts if the borrower was in operation for all four quarters of 2019. The Informal Guidance provides that for this purpose, the gross receipts of a for-profit business include all revenue in whatever form received or accrued (in accordance with the entity’s accounting method (i.e. cash or accrual)) from whatever source but excluding the amount of any forgiven First Draw PPP Loan or Economic Injury Disaster Loan. A borrower must substantiate its qualifying reduction in gross receipts by providing one of the following (i) quarterly financial statements signed, dated and initialed by the borrower; (ii) quarterly or monthly bank statements for the entity showing deposits from the relevant quarters and annotated if necessary for any exclusions; or (iii) annual IRS income tax filings for the entity provided that if the borrower has not yet filed its 2020 tax return, it may provide a signed proforma form and agree to use the same values on its 2020 tax return when filed.
In general, qualified borrowers may request a Second Draw PPP Loan in an amount equal to the lesser of 2.5 times the borrower’s average monthly payroll costs and $2,000,000. The borrower’s average monthly payroll costs for this purpose can be based on either calendar year 2019 or 2020. The Informal Guidance includes detailed instructions as to how to compute average monthly payroll depending on the type of entity (sole proprietorship, partnership, S or C- corporation) and also for seasonal businesses and farmers and ranchers as well as the documentation that must be provided to the lender to support the same. Second Draw PPP Loans will bear interest at 1% and mature in five years and may be forgiven if during the 8-24 week period following disbursement the loan proceeds are used to pay payroll and other eligible expenses.
The Economic Aid Act and IFR include special rules that apply to borrowers in the accommodation and food services businesses and that have been assigned a NAICS code beginning with 72. For those borrowers, the 300 employee limit is measured on a per physical location basis, provided that the physical location also meets the 25% revenue reduction threshold. The amount of the Second Draw PPP Loan for these businesses is based on the lesser of 3.5 times average monthly payroll and $2,000,000.
The Second Draw Borrower Application Form was originally released on January 8th and updated effective February 17, 2021. As with First Draw PPP Loans, a completed application and the required supporting documentation must be submitted to a qualified lender for processing. Borrowers that elect to use calendar year 2019 payroll information and the same lender to process their Second Draw PPP Loan will not need to resubmit the supporting payroll documentation. For Second Draw PPP Loans in excess of $150,000, the borrower must also provide appropriate documentation to the lender to substantiate the required 25% decline in gross receipts at the time the application is submitted. For loans of $150,000 or less, that supporting documentation does not need to be delivered until the borrower submits its forgiveness application.
Borrowers will again be required to certify that “current economic uncertainty makes the loan request necessary to support the ongoing operations of the Applicant.” Based on prior guidance, 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 Second Draw Application Form also includes a lengthy set of new certifications which track the requirements of the Economic Aid Act and related IFR, including that the borrower is not (i) primarily engaged in political or lobbying activities; (ii) owned by certain members of the federal government and their spouses; (iii) a publicly traded company; or (iv) organized or has ties with the People’s Republic of China or the Special Administrative Region of Hong Kong.
Qualified lenders have been accepting and processing Second Draw Borrower Application Forms for several weeks, but the SBA has been using enhanced validation processes which have resulted in approval delays for a significant percentage of applicants. In an effort to improve processing times, the SBA issued a Procedural Notice on February 10th allowing lenders to resolve certain types of hold and compliance codes relating to things like mismatches of employer identification numbers, social security numbers and legal names, and then permitting the lender to certify the same to the SBA to allow the Second Draw PPP Loan to fund. The documentation collected by the lender supporting its certification to the SBA will then be submitted with the borrower’s loan forgiveness application. If, however, a borrower’s First Draw PPP Loan is under review by the SBA or the SBA has information indicating that the borrower may have been ineligible for its First Draw PPP Loan, a Second Draw PPP Loan will not be approved until those issues are resolved by the SBA. While the Economic Aid Act provides that March 31, 2021 is the last day to apply for and receive a Second Draw PPP Loan, demand may exceed the amount appropriated and so interested borrowers should submit their applications as soon as possible.
 The Informal Guidance provides additional computational direction for businesses which did not operate for all of calendar 2019.