For the last seven months, the U.S. Small Business Association (“SBA”) and U.S. Treasury Department have administered one of the Federal government’s widely supported COVID-19 response programs, the Paycheck Protection Program (“PPP”). Found within the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the PPP has been a lifeline for millions of small businesses across the United States, in addition to many here in Virginia. In 2020, the SBA disbursed over $500 billion in forgivable PPP loans to millions of small businesses. However, due to stringent government-imposed shutdowns to thwart the spread of COVID-19, more businesses sought funding than the PPP could support, and the program quickly depleted its funds and stopped accepting applications near the middle of last year. Hiring a trusted small business attorney can help ensure you are up to date on the latest SBA processes.
Following December’s $900 billion bipartisan relief package, the PPP received and is slated to provide close to another $300 billion in forgivable loans to struggling small businesses. On January 11, 2021, the new round of funding or “Second Draw” applications opened. Federal officials are actively attempting to avoid the major pitfalls that plagued the system in the spring and summer of last year. For example, during the initial PPP disbursement, the government faced outcry when “small businesses,” with millions in payroll, were receiving exorbitant amounts of funds while struggling mom & pop stores potentially missed out. Due to this failure to first address the neediest businesses, the SBA’s new disbursement is proceeding in a phased process where large lenders had to wait until smaller lenders and community banks could process their customers first. This is an intentional effort on the part of the SBA to respond to those justified criticisms of PPP funds going to large corporations. Additionally, the SBA released a streamlined, one-page form for loan forgiveness, simplifying the application process, and newly revised forms outlining the requirements for the latest PPP funds. In doing so, the SBA is actively seeking to avoid the confusion that beset both borrowers and lenders in May of last year.
Those who qualify for a “Second Draw” from the PPP include small businesses that: (1) previously received a “First Draw” (from the initial PPP payments) and will, or has used, such funds for authorized uses; (2) has no more than 300 employees; and (3) Can demonstrate at least a 25% reduction in gross receipts from comparable quarters between 2019 and 2020.
The majority of borrowers seeking a Second Draw may receive up to 2.5x their average monthly 2019 (or 2020) payroll costs, up to $2 million. However, certain businesses in the “Accommodation and Food Services” may receive up to 3.5x their monthly average 2019 (or 2020) payroll costs up to $2 million.
If you are unsure of your business’s classification, the SBA directs business owners to the U.S. Census Bureau’s North American Industry Classification System (“NAICS”) for confirmation. Hiring an experienced small business attorney can also be beneficial in the overwhelming process of understanding how your business is classified and what that classification means.
To be clear, on January 11, 2021, the SBA offered new PPP funds for first time borrowers seeking loans for the first time. While the new round of funding is only one-half of the original PPP funds, struggling small businesses who did not request or receive funds during the first round may still seek federal assistance now.
The qualifications for First Draw candidates are looser than those seeking their second round. For example, the SBA states that the following businesses are eligible: sole proprietors, independent contractors, and self-employed persons; any small business, which meets the SBA’s size standards; a 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or tribal business concern, with the greater of 500 employees or meets the SBA industry size standard if greater than 500.
Finally, while the SBA revised and simplified its forgiveness applications, it did little to alter the general terms with which a borrower must abide to have their loan forgiven. For example, borrowers seeking their First Draw of PPP funds need only do the following during the 8-24 week period following the loan disbursement to be eligible for loan forgiveness: (1) maintain employee and compensation levels (2) the borrower spends the loan proceeds on payroll costs and certain eligible expenses, and (3) at least 60% of the proceeds are spent on payroll costs. Comparatively, the Second Draw terms are identical for loan forgiveness, other than the minor deviation on point (1), which states that employee and compensation levels remain the same as required for the First Draw PPP loan. Of the SBA’s new PPP forgiveness forms, Form 3508S and 3508-EZ are streamlined for borrowers who meet certain requirements and borrowed less than $150,000. Each borrower’s individual lender will be able to provide additional guidance as to how to complete the forgiveness applications and whether they are eligible for either the 3508S or 3508-EZ.
Many have rightly criticized Congressional gridlock and the slow roll to get additional funds into the PPP, but this new round of funding comes at a crucial juncture. Not only are many small businesses who received funds under the First Draw starting to run out, new vaccine production and distribution means a light at the end of the tunnel regarding COVID related shutdowns. These funds will likely be the bridge business owners so desperately need to weather the remainder of the storm and come out alive on the other end. A trusted small business attorney can help ensure you have what you need to keep your business afloat during these unprecedented times.
