On January 6, 2021, the Small Business Administration (SBA) issued its first round of formal guidance for the new Paycheck Protection Program (PPP) and the second-draw PPP loans, which we first discussed here. SBA also gave some indication of plans for the second round of the PPP. SBA’s guidance can be found here for the next phase of PPP and here for the second-draw program. Below are key updates for businesses that need access to this important source of relief funding.
As most of you know, there was a major backlash against the original PPP for funding large companies or companies who were well connected and not as in need of relief. SBA wants the initial focus of the next round of PPP loans to be squarely on very small businesses or businesses owned by people of color, women, and veterans who, largely, were left out of the initial scramble for PPP funding last April. The new guidance serves to address those criticisms.
Specifically, SBA has noted that it plans on only accepting applications from community financial institutions for a few days when the new portal opens. This should ensure that those organizations, which traditionally assist communities who are underserved (or not served at all) by traditional banking institutions, have access to the funding.
Additionally, SBA plans to set money aside for certain types of organizations instead of opening the full amount up on a first come, first served basis. To that end, $15B will be set aside for community development financial institutions; $15B for banks and credit unions with under $10B in assets; and $40B for businesses with fewer than ten employees. This is for both first- and second-draw PPP loans. The idea is to allow these organizations to have the first opportunity to access the funds, so they are not used up by larger businesses. It should also ensure that the set-aside funding will still remain for assistance, even when large businesses are able to apply.
As to the specific details outlined in the guidance, SBA noted the following.
First-Time Borrowers – New PPP Program:
- Loan Limits – Loans are limited to less than $10M or an amount calculated using a payroll-based formula. Because PPP loans in 2020 used 2019 payroll or payroll from one year before the date on which the loan was made, new borrowers in 2021 are also able to use the precise one-year period before the date of the loan to calculate their payroll costs if they choose not to use their 2020 or 2019 figures. Seasonal businesses, the self-employed, and farmers and ranchers use different methods for calculating their maximum loan amount.
- Forms – Applicants must provide an Internal Revenue Service Form 941 or any other document that provides annual wage and tip amounts, any equivalent payroll processing records, and any evidence of health insurance or benefits contributions. Applicants only need to provide the forms for the year used to calculate their loan amount.
- Employees – With some exceptions, first-time borrowers can generally have up to 500 employees, the same limit that round-one PPP borrowers had last year.
- Eligibility – Companies needed to have been in business as of February 15, 2020, and have had employees who received salaries and paid payroll taxes. Additionally, payroll and bank records, Form 1099-MISC, and other documents may need to be included as necessary to verify eligibility requirements.
- Ineligible Entities – Entities that were ineligible under the first-draw PPP loan and are still ineligible include lobbying organizations, certain companies organized under the laws of China and Hong Kong, those registered under the Foreign Agents Registration Act of 1938, and any publicly traded company. However, housing cooperatives, nonprofits, religious entities, and small news organizations are eligible for loans.
- Only One First-Draw Loan – New borrowers eligible for a PPP loan may only receive one such loan.
Second-Draw Borrowers – PPP Program:
- 25% Gross Receipts Reduction Requirement – PPP forgiveness received from first-round draws will be excluded from the gross receipts calculations so as not to punish firms who receive forgiveness.
- Businesses with Multiple Locations – Hotels and restaurants, as well as some news organizations, can have 300 employees per location, whereas for other borrowers it is 300 employees total, across all locations and affiliates.
- Affiliation Rules – Other than the reduction in employee count from 500 to 300, all other affiliation rules apply the same as they did for the first-draw PPP loan.
- Ineligible Entities – Entities who were ineligible under the first-draw PPP loan are ineligible for a second-draw loan as well. This includes lobbying organizations, certain companies organized under the laws of China and Hong Kong, those registered under the Foreign Agents Registration Act of 1938, and any publicly traded company.
- Only One Second-Draw Loan – Companies that are eligible for a second-draw loan may only receive one such loan.
- Loan Limits – Loans are limited to less than 2.5 months of payroll or $2M. Average payroll is generally calculated using the average payroll in 2019 or the 12-month period prior to when the loan is made. Seasonal businesses are different, as are farmers and ranchers. Further, hotels and restaurants have a 3.5-month or $2M limit that is used based on the new SBA guidance.
- Aggregate Loan Limits – Businesses part of a single group, when combined, are limited to a total second-draw loan of $4M. SBA chose this amount as it is proportionate to the $20M cap from the first-draw PPP loans (i.e., it is double the amount a single borrower can receive under the new program).
- Second Draw Subject to SBA Review of First-Draw Loans – If a borrower’s first-draw loan is under review by SBA, or if SBA has in its possession information which calls into question a borrowers eligibility for a first-draw PPP loan, no loan number will be issued for the second-draw loan until such time as the review is resolved.
- New Forms – Second-draw PPP loans will use a new loan application form, Form 2483-SD. This should be open soon, but as noted above, certain organizations will get a head start on the second-draw application process. Form 2483-SD has not yet been released.
- Evidence of 25% Reduction in Gross Revenues – Borrowers seeking second-draw loans of more than $150K must submit evidence of the 25% reduction in gross revenues with the second-draw application, whereas borrowers with loans of less than $150K need only do so at time of forgiveness. Note that, regardless of loan amount, it would still be a false claim to submit a loan application without having the requisite reduction in revenue.
- Loan Increases – If a borrower previously did not accept the full amount of their first-draw PPP loan, they can request an increase up to the amount previously approved. This request would not be a second-draw PPP loan, since it is an increase of the previous loan.
- Returned Loans – If a borrower partially returned their first-draw PPP loan, they can reapply for a loan in the amount equal to the difference between what they kept and the maximum amount previously approved. Additionally, if a borrower returned their entire first-draw PPP loan, they can reapply for an amount that they are eligible for under the current PPP rules. Both of these scenarios would most likely be considered second-draw PPP loans, since they would have had to have accepted a first-draw PPP loan previously.