Signed into law on December 27, 2020, The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act creates a second opportunity for businesses that have utilized the full amount of their First Draw Paycheck Protection Program (“PPP”) loans. The rules and application process for Second Draw PPP loans generally mirror the rules for the First Draw PPP loans, with several key differences relating to loan amounts, loan eligibility, and forgivable uses. In furtherance of the SBA’s focus on small businesses and self-employed individuals, the Second Draw PPP loans include set-asides for certain small businesses, sole proprietors, and independent contractors, more streamlined application requirements, and the option to apply with information already provided or information as calculated by existing payroll mechanisms.
Most borrowers can receive the lesser of 2 ½ months’ average monthly payroll costs or $2,000,000. Hospitals and restaurants can receive the lesser of 3 ½ months’ average monthly payroll costs or $2,000,000. These amounts are calculated on the same basis as First Draw PPP loans.
The Second Draw PPP loan targets a narrower scope of borrowers. Eligible borrowers are generally those that:
- Have received a First Draw PPP loan (if your business has not received a First Draw PPP loan, it can apply for a First Draw PPP loan through March 31, 2020);
- Have used or will use the full First Draw PPP loan on eligible expenses before the Second Draw PPP loan is disbursed to the borrower – an application for First Draw PPP loan forgiveness need not be filed to request a Second Draw PPP loan;
- Employ 300 or fewer employees (500 employees with 300 or less per physical location for hotels and restaurants);
- Are not permanently closed;
- Are not public companies; and
- Experienced a 25% reduction in quarterly gross receipts in 2020 when compared against the same quarter of 2019 or if in operation for all of 2019, experienced a 25% reduction in annual receipts in 2020 when compared to 2019. The SBA has provided special definitional rules for what is included within “gross receipts” and for how to calculate gross receipts for businesses involved in a purchase or sale of a business. Forgiven First Draw PPP loans will not be included in 2020 gross receipts. Please note that this comparison is gross receipts, not profits. This requirement should serve to reduce the monopolization of PPP funds by large entities that were better able to weather the COVID-19 pandemic, helping to ensure that funds remain available for small businesses affected most by the pandemic.
To apply for the loan, a borrower must submit SBA Form 2483-SD, which was recently released by the SBA and is available on the SBA’s website. If the borrower is relying on the same documentation submitted to the lender for the borrower’s First Draw PPP loan and is seeking a Second Draw PPP loan from the same lender, it will not need to supply the same documentation again.
Entities or individuals that would be eligible for Second Draw PPP loans less than $150,000 are not required to provide documentation evidencing a revenue reduction at the time of application and may wait until applying for loan forgiveness; however, they will need to certify that they meet the revenue reduction requirement at the time of application. This can help very small businesses, sole proprietors, individual service providers, and others complete and submit the application in a timely manner, allowing them to compete with the rush to apply experienced for First Draw PPP loans.
Please note that the Second Draw PPP loan application will require similar certifications to those made in the borrower’s application for the First Draw PPP loan, including the certification “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing obligations” of the borrower. The SBA previously required recipients of loans $2 million or greater to complete a necessity questionnaire in relation to this certification; it is unknown whether the addition of the revenue reduction requirement will prevent the SBA from seeking more information from borrowers regarding economic necessity in the future.
Like First Draw PPP loans, Second Draw PPP loans are entirely forgivable so long as the funds are utilized for eligible expenses, with at least sixty percent of loan proceeds spent on payroll costs, which now includes certain employee benefits. New for the Second Draw PPP loans and for borrowers seeking a First Draw PPP loan, eligible expenses now also include certain operations expenditures, costs for property damage due to 2020 public disturbances that were not covered by insurance, essential supplier costs pursuant to a contract in effect before applying for the loan, and expenses for personal protective equipment and other expenses to comply with COVID-19 guidelines. The allowance for use on operations expenses will be of significant import to many small businesses and service providers, as eligible costs include computing services, product or service delivery, costs of payroll expenses, human resources, sales, accounting, and inventory management.
The Small Business Administration were scheduled to open Second Draw PPP loans on January 13, 2021, with the SBA accepting PPP loan applications only from community financial institutions for at least the first two days after the PPP loan portal opens. The first round of PPP funding, comprising $349 billion, was spoken for within the first weeks of the program, and there is no evidence that this second round of $284 billion will remain available for long. The application window will close March 31, 2021.