Last week, the Small Business Administration (“SBA”) opened up the second round of Paycheck Protection Program (“PPP”) loans to all lenders. The program had already reopened for community financial institutions and some small to midsize lenders, but has now expanded to all lenders.
This second round of PPP loans comes as the result of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, which was signed into law by former-President Trump on December 27, 2020 (“Economic Aid Act”). The Economic Aid Act added additional funding to the PPP, and revised certain rules for the program, the most significant of which is that it now allows for “second draw” PPP loans, i.e., certain qualifying borrowers who already received a PPP loan can apply for a second loan.
Eligibility Criteria
In order to be eligible for a second draw PPP loan, borrowers must satisfy a few criteria: they must:
(i) have fewer than 300 employees,
(ii) have used the full amount of their first PPP loan, and
(iii) be able to demonstrate a 25% decline in gross receipts in any 2020 quarter compared to the corresponding quarter in 2019.
Most borrowers satisfying the foregoing would be eligible to receive a second draw PPP loan of 2.5x their average monthly payroll costs (measured either from calendar year 2019 or 2020), capped at $2 million.
Note that borrowers must ensure that they have used, or will use, all of their first draw PPP funds prior to the disbursement of the second draw loans, but borrowers are able to apply for the second draw loan before they have spent all of the proceeds. So qualifying borrowers should not necessarily wait to apply for a second draw loan simply because some of their first draw proceeds have not yet been spent (as long as it will all be spent prior to disbursement of the second draw loan).
Gross Receipts
When demonstrating the reduction in gross receipts, the reference periods can be any calendar quarter of 2020 against the same quarter in 2019 or the annual gross receipts of 2020 compared to 2019 if the borrower was in business for all of 2019. If a borrower was not in business during 2019, but was in operation as of February 15, 2020, then the borrower must demonstrate that gross receipts in the second, third, or fourth quarter of 2020 were at least 25% lower than the first quarter of 2020.
Gross receipts for a for-profit business are generally all revenue in whatever form received or accrued per the borrower’s accounting method, but they specifically do not include taxes collected and remitted to a taxing authority (e.g., sales tax), amounts from a forgiven first draw PPP loan, EIDL advances, and proceeds from transactions between a concern and its domestic affiliates.
Note, however, that in most cases the gross receipts of an affiliate must be included in the borrower’s gross receipts total. In the case of an acquisition or merger during 2020, the borrower must include the gross receipts of the new affiliate for the entire reference period, and not just the period after the acquisition.
Non-Profit Gross Receipts
The gross receipts calculation is a little different for non-profit borrowers: it conforms to section 6033 of the Internal Revenue Code, and thus includes the gross amount received by the organization during its annual accounting period from all sources, without reduction for costs or expenses. This would include contributions, gifts, grants, dues, assessments, sales, and investment income. Non-profits can also exclude forgiven first draw PPP loans and EIDL advances.
Loan Terms
The basic terms of a second draw PPP loan are similar to those of the first round PPP loans: (i) the covered period for these loans is any date between 8 and 24 weeks at the choice of the borrower, (ii) 60% of the loan proceeds must be spent on payroll costs to be forgivable, and (iii) borrowers must maintain their payroll and employee levels (or eliminate any reductions to either by the end of the covered period) in order to receive 100% forgiveness.
One beneficial change for borrowers is the inclusion of additional forgivable categories of spending. Borrowers can now include as permitted expenses amounts spent on personal protective equipment for employees, costs associated with outdoor dining, certain supplier costs, certain costs associated with software, cloud computing and other human resources and accounting needs, and property damage costs due to public disturbances that occurred during 2020 that are not covered by insurance.
Bottom Line
The availability of second draw PPP loans will hopefully provide some respite for businesses as they continue to weather the effects of the pandemic.