On December 27, 2020, Congress passed the Economic Aid Act, another COVID-19 relief bill with changes to the Paycheck Protection Program (“P3”) and the possibility for many PPP loan recipients apply for a second loan, called a “Second Draw.” On January 6, 2021, the Small Business Administration (“SBA”) issued two draft final rules: one with specific guidelines on second draw loans and one with guidelines on first-draw loans. First-draw loans are subject to previous CARES law requirements for eligibility and loan limits. Second-draw loans are different: loan limits are smaller and eligibility is narrower. The dichotomy suggests that the SBA is trying to narrow the scope of businesses eligible for a second loan and discourage large businesses from participating. In addition, the new bill expands the list of forgivable (and permitted) uses for P3 funds and simplified the forgiveness process for First Draw loans under $ 150,000.
Who can get a loan under the new program?
- New applicants who have never received a PPP loan; Where
- Borrowers who have participated under the CARES Act who:
- Repaid part or all of the first loan1; Where
- Retained loan and used all proceeds for authorized purposes.
What are the eligibility criteria for a Second Draw loan?
- 300 employees or less (instead of 500 employees in the previous iteration), including all subsidiaries and foreign employees.
- Exceptions to membership:
- Businesses with primary NAICS codes starting with 72 (hotels and restaurants) are eligible if they employ 300 or fewer employees per location
(these entities continue to be exempt from the broader affiliation issues, subject to the limitation of physical location);
- News agencies with a primary NAICS code beginning with 511110 or 5151 (or majority owned or controlled by a company with these NAICS codes) may benefit from the affiliation exemption for second-draw PPP loans if they employ 300 employees or less by physical location;
- Franchises have assigned a franchise identification code by SBA; and
- Businesses that receive a loan from an SBIC approved lender, under the Small Business Investment Act.
- In the absence of a waiver of applicable membership, the same membership rules established and implemented under the CARES Act apply.
- The borrower was in operation on February 15, 2020.
- The borrower is not a publicly traded company.
- The borrower is not in bankruptcy proceedings.
- The borrower is not a hedge fund or a private equity firm.
- The loan must be necessary to support the day-to-day operations of the business.
- The SBA has released a necessity questionnaire confirming that the agency will be looking closely at necessity certifications for companies with first-draw loans exceeding $ 2 million. The form is intended to help the agency flesh out many facts about the borrower’s finances and financial performance. When issuing the form, many companies chose to repay PPP loans.
- The borrower must have used all funds from their first loan over authorized expenses (or, at least, all funds retained by the borrower).
- The borrower must have had a reduction of at least 25% in gross receipts during the first, second or third quarter of 2020 compared to the same quarter in 2019.
- The previous PPP loan is not included in gross receipts.
- Gross receipts from a former affiliate are not included.
- Gross revenue from a separable division of another business acquired in 2020 will not be included, but revenue from a separable division sold in 2020 will be included.
- The IFR allows borrowers to compare 2020, as a whole, to 2019 – using annual tax forms to show a 25% drop.
How much can a business borrow?
- First Draw Loans: 2.5x the average monthly payroll up to $ 10 million.
- The overall cap of $ 20 million for affiliate groups still applies.
- Second Draw Loans: 2.5x the average monthly payroll up to $ 2 million.
- For businesses whose primary NAICS code begins with 72, the business can borrow up to 3.5 times the monthly payroll, up to $ 2 million.
- There is an overall limit of $ 4 million for affiliated corporate groups on second draw loans.
What can the funds be used for?
The law and provisional final rules expand on the permitted and forgivable uses of PPP loan funds. These expanded uses also apply to PPP loans already issued if the loan has not been canceled by the date of the Economic Aid Act. In addition to the costs and expenses that were permitted and forgivable under the CARES Act, borrowers can also use (and obtain remittance of) PPP funds to:
- Covered operating expenses (such as software, human resources and accounting needs);
- Covered repairs of material damage related to public disturbances in 2020 (not covered by insurance or other compensation);
- Supplier fees covered (expenses incurred by a borrower to a supplier of goods essential to the borrower’s operations and incurred under a contract in place prior to the period covered for the applicable loan)
- Covered expenses for worker protection
- Drive through the installation window;
- Air pressure ventilation or filtration system;
- Physical barriers such as sneeze guards;
- Expansion of indoor / outdoor commercial space;
- Health screening capacity; and
- Personal protective equipment used to comply with federal, state or local health and safety guidelines
The borrower should always use at least 60 percent of the PPP funds for salary costs.
What changes have been made to forgiveness?
- Economic disaster loans (EIDLs) are no longer deducted from the forgiveness payment amounts.
- Borrowers with first draw PPP loans of $ 150,000 or less are no longer required to submit an application or documents to obtain the remission. They are still audited and must keep their employment records for four years, and all other records for three years after the loan is canceled.
- Second-draw PPP loan borrowers with a principal amount of $ 150,000 or less are required to provide income reduction documents if these documents were not provided at the time of loan application.
- Second-drawing loans are generally subject to the same forgiveness rules as first-drawing loans.
The last day to apply for and receive a PPP loan is March 31, 2021.