Second-Draw PPP Loans: What Advisors Should Know

Small businesses that took out a PPP loan may qualify for a second one, but they should be mindful of key differences.

Robert Bloink and William H. Byrnes

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). 

Second-draw borrowers are required to prove the required revenue reduction — while first-draw borrowers were generally required only to make a good-faith certification. Borrowers who request less than $150,000 in second-draw proceeds don’t have to verify a revenue reduction up front, but will be required to provide documentation if they apply for forgiveness.

The list of permitted uses has also been expanded under the new law. Proceeds can, of course, continue to be used to cover payroll costs and operating expenses. They can also be used to pay for personal protective equipment and modifications to the business that are necessary to adapt the business to meet new health and safety standards. These capital expenditures might include physical barriers, ventilation systems, expansion of outdoor spaces, and health screening facilities.

PPP funds can also be forgiven if they’re used to repair damage caused by protests and other disturbances in 2020, as long as the damage wasn’t covered by insurance. Proceeds can now be used to cover supplier costs, which include expenses related to contracts and other purchase orders for supplies that were in effect before the business took out the second-draw loan.

Payments for operations expenses like cloud computing services, business software, accounting or HR needs also qualify.

The new rules give business owners flexibility to choose the length of their “covered period,” which is the period over which at least 60% of loan proceeds must be spent on qualifying expenses. That period begins on the date proceeds are disbursed and ends at least eight weeks later, but no more than 24 weeks later. 

Some business owners may be eligible for larger loans under the new rules. The SBA will allow those businesses to request an increase in their loans if eligible, either by returning all or a portion of the loan or requesting an increase if the business hasn’t yet accepted the loan proceeds. Those requests must be made electronically to the SBA no later than March 31 under current rules.

Conclusion

The new PPP loan rules are detailed and complex. It’s also expected that, as with the first round of loans, the SBA will continue to release guidance on a rolling basis. Small-business clients should be advised of these and other changes so that they can take full advantage of the new rules.

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