Eligible borrowers who would like to obtain or increase their Paycheck Protection Program (PPP) funding will be able to act as early as this week, due to recent action by Congress and the U.S. Small Business Administration (SBA). On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (EAA) (included within the Consolidated Appropriations Act of 2021) became law. On January 8, 2021, the SBA announced that the portal to accept PPP loan applications, pursuant to the EAA, will re-open Monday, January 11, 2021. To promote access to capital, the SBA will initially only accept First Draw PPP Loan applications, including requests for increases on First Draw PPP Loan amounts, from community financial institutions. Second Draw PPP Loan applications will be accepted beginning January 13, 2021.
Second Draw PPP Loans are generally subject to the same terms, conditions and requirements as First Draw PPP Loans. Some of the basic PPP terms are as follows:
- No collateral will be required;
- No personal guarantees will be required;
- The interest rate will be 100 basis points or 1%, calculated on a non-compounding, non-adjustable basis; and
- The maturity is five years.
The SBA’s Consolidated First Draw PPP regulations (IFR), Frequently Asked Questions (FAQs), and other guidance about PPP loans under the Small Business Act apply to Second Draw PPP Loans, except as specified by an IFR. Certain terms and conditions specific to Second Draw PPP Loans as found in the Second Draw IFR are summarized below.
Second Draw Eligibility Generally: The EAA made the eligibility requirements for Second Draw PPP Loans narrower than the eligibility requirements for First Draw PPP Loans. Specifically, the EAA provides that a borrower is eligible for a Second Draw PPP Loan only if (1) it has 300 or fewer employees and experienced a revenue reduction in 2020 relative to 2019; (2) has received a First Draw PPP Loan; and (3) has used, or will use, the full amount of the First Draw PPP Loan (on eligible expenses) on or before the expected date on which the Second Draw PPP Loan is disbursed to the borrower. The “full amount” of a borrower’s First Draw PPP Loan includes the amount of any increase on such First Draw PPP Loan made pursuant to the EAA.
Second Draw Revenue Reduction Requirement: As noted above, the EAA provides that, to be eligible for a Second Draw PPP Loan, the borrower must have experienced a revenue reduction of 25% or greater in 2020 relative to 2019. A borrower calculates this revenue reduction by comparing the borrower’s quarterly gross receipts for one quarter in 2020 with the borrower’s gross receipts for the corresponding quarter of 2019. Alternatively, a borrower that was in operation in all four quarters of 2019 is deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of 25% or greater in 2020 compared to 2019 and the borrower submits copies of its annual tax forms substantiating the revenue decline (allowing annual tax return forms to substantiate a revenue reduction). This method will be particularly important for small borrowers that may not have quarterly revenue information readily available.
While the EAA does not include a general definition of gross receipts for purposes of determining a borrower’s revenue reduction, gross receipts is defined in the IFR to includes all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. Generally, receipts are considered “total income” (or in the case of a sole proprietorship, independent contractor, or self-employed individual “gross income”) plus “cost of goods sold,” and excludes net capital gains or losses as these terms are defined and reported on IRS tax return forms. Gross receipts do not include the following:
- Taxes collected for and remitted to a taxing authority if included in gross or total income (such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees);
- Proceeds from transactions between a concern and its domestic or foreign affiliates; and
- Amounts collected another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.
All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer's request, investment income, and employee-based costs such as payroll taxes, may not be excluded from gross receipts. Further, the EAA regulations specifies that any forgiveness amount of a First Draw PPP Loan that a borrower received in calendar year 2020 is excluded from a borrower’s gross receipts.
For Second Draw Loans greater than $150,000, the applicant must submit documentation (tax forms, quarterly financial statements or bank statements) with the Second Draw application adequate to establish that the applicant experienced a revenue reduction of 25% or greater in 2020 relative to 2019. For loans with a principal amount of $150,000 or less, such documentation is not required at the time the borrower submits its application for a Second Draw PPP Loan, but must be submitted on or before the date the borrower applies for loan forgiveness of the Second Draw Loan.
Second Draw Excluded (ineligible) Entities: An entity that was ineligible to receive a First Draw PPP Loan under the CARES Act or Consolidated First Draw PPP IFR is also ineligible for a Second Draw PPP Loan. The EAA also prohibits several additional categories of borrowers from receiving a Second Draw PPP Loan. These categories of prohibited borrowers are listed as:
- A business or entity primarily engaged in political activities or lobbying activities, including any entity that is organized for research or for engaging in advocacy in areas such as public policy or political strategy or that describes itself as a think tank in any public documents;
- Certain entities organized under the laws of, or with other specified ties to, the People’s Republic of China or the Special Administrative Region of Hong Kong;
- Any person required to submit a registration statement under Section 2 of the Foreign Agents Registration Act of 1938;
- A person or entity that receives a grant for shuttered venue operators under section 324 of the EAA;
- Entities in which the President Vice President of the United States, or the head of a U.S. Executive department, or a Member of Congress, or the spouse of any such person owns, controls, or holds at least 20% of any class of equity;
- A publicly traded company, the securities of which are listed on an exchange registered as a national securities exchange;
- An entity that has already received a Second Draw PPP Loan; or
- An entity that has permanently closed – noting a borrower that has temporarily closed or temporarily suspended its business remains eligible for a Second Draw PPP Loan.
Second Draw Loan Amount: The maximum loan amount for a Second Draw PPP Loan is equal to the lesser of two and half months of the borrower’s average monthly payroll costs or $2 million. The EAA provides that the relevant time period for calculating a borrower’s payroll costs to determine a Second Draw PPP Loan amount is either the twelve-month period prior to when the loan is made or calendar year 2019. The IFR notes that Second Draw PPP Loan borrowers who are not self-employed (including sole proprietorships and independent contractors) are also permitted to use the precise 1-year period before the date on which the loan is made to calculate payroll costs if they choose not to use 2019 or 2020 to calculate payroll costs. For borrowers assigned a NAICS code beginning with 72 at the time of disbursement, the EAA provides that the maximum loan amount is equal to three-and-a-half (3.5) months of payroll costs rather than two-and-a-half (2.5) months for all other borrowers. Finally, the EAA provides that businesses that are part of a single corporate group shall in no event receive more than $4,000,000 of Second Draw PPP Loans in the aggregate.
First Draw PPP Loans Under Review: If a borrower’s First Draw PPP loan is under review by SBA and/or information in SBA’s possession indicates that the borrower may have been ineligible for the First Draw PPP Loan it received or for the loan amount it received, a lender will receive notification from SBA when the lender submits an application a Second Draw PPP Loan and will not receive an SBA loan number until the issue related to the unresolved borrower’s First Draw PPP Loan is resolved.
If you are or think you are eligible for a Second Draw PPP Loan or wish to seek an increase on your First Draw PPP Loan, you should reach out to your PPP lender to inquire about an application or online portal for filing under the EAA. Additionally, Borrowers should start the process now to gather and adequately document the “necessity certification” (see this Law Alert) for a Second Draw PPP loan. Second Draw PPP loans may be more scrutinized than First Draw PPP Loans with a vaccine being widely distributed and the nation moving towards a post pandemic economy.