Most small-business clients exhausted most, if not all, of their Paycheck Protection Program (PPP) loan proceeds before the end of 2020. Fortunately, the year-end stimulus package allocated a new round of funding that also includes funds for “second draw” PPP loans. Like the original loan program, these loans are issued on relatively favorable terms and can be forgiven if used for permitted purposes.
The Small Business Administration (SBA) began accepting applications from small lenders Jan. 15, and the pool was opened to all lenders beginning Jan. 19. Small-business clients that need additional financial help may qualify for a second loan — but it’s important to pay close attention to the details, which have changed since the program was first created.
Qualifying for Second-Draw PPP Loans
As an initial matter, only businesses with fewer than 300 employees qualify for a second-draw PPP loan. The law created an exception for hotels and restaurants assigned an NAICS code beginning with 72 — these hard-hit business owners may qualify if they employ more than 300 employees in the aggregate, as long as no more than 300 employees work in any one location.
The business must not be permanently closed (temporarily closed businesses may apply). Further, the business must have been in operation on Feb. 15, 2020, to qualify.
To receive a second loan, the business must have fully exhausted the initial PPP loan proceeds and the proceeds must have been spent on eligible expenses like employee wages, rent and employee health insurance costs.
Note that small-business clients are permitted to apply for a second-draw PPP loan even if they haven’t already spent their first-draw loan proceeds. However, the second-draw loan proceeds will not be disbursed until the entire first-draw loan has been spent.
The business must also demonstrate at least a 25% reduction in gross receipts in any quarter of 2020, when compared with the same quarter in 2019. The SBA rules define “gross receipts” fairly broadly, to include all revenue from any sources, including sales, interest, dividends, rent, royalties, etc. The SBA has also clarified that amounts that were forgiven for the business’s initial PPP loan are not included in gross receipts for 2020.
Recognizing that very small businesses might not have quarterly information readily available, if the business existed for all of 2019, the SBA will allow the business to determine whether it experienced a 25% reduction by comparing annual receipts in 2020 to 2019. Business owners who elect to use this method will be required to submit annual tax forms to verify the required decline.
Differences Between First- and Second-Draw PPP Loans
While second-draw PPP loans generally have the same terms and conditions as first-draw loans, there are some key differences aside from the initial eligibility requirements. First, a business can continue to receive up to 2.5 times its average monthly payroll costs (3.5 times for hospitality businesses), but all second-draw PPP loans are capped at a firm $2 million (rather than $10 million for first-draw loans).