The year-end stimulus pack- age allocated a new round of funding that also includesfunds for “second draw” PPP loans.Like the original loan program, theseloans are issued on relatively favorable terms and can be forgiven if usedfor permitted purposes.
The Small Business Administrationbegan accepting applications in January.Small-business clients that need additional financial help may qualify for asecond loan — but it’s important to payclose attention to the details, whichhave changed since the program wasfirst created.
QUALIFYING FOR SECOND-DRAW
As an initial matter, only businesses withfewer than 300 employees qualify for asecond-draw PPP loan. The law createdan exception for hotels and restaurantsassigned an NAICS code beginning with72 — these hard-hit business ownersmay qualify if they employ more than300 employees in the aggregate, as longas no more than 300 employees work inany one location.
The business must not be permanently closed (temporarily closed businessesmay apply). Further, the business musthave been in operation on Feb. 15, 2020,to qualify.
To receive a second loan, the business must have fully exhausted theinitial PPP loan proceeds and the proceeds must have been spent on eligibleexpenses like employee wages, rent andemployee 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 pro-
ceeds will not be disbursed until the
entire first-draw loan has been spent.
The business must also demonstrateat least a 25% reduction in gross receiptsin any quarter of 2020, when comparedwith the same quarter in 2019. TheSBA rules define “gross receipts” fairlybroadly, to include all revenue from anysources, including sales, interest, dividends, rent, royalties, etc. The SBA hasalso clarified that amounts that wereforgiven for the business’s initial PPPloan are not included in gross receiptsfor 2020.
Recognizing that very small businesses might not have quarterlyinformation readily available, ifthe business existed for all of 2019,the SBA will allow the business todetermine whether it experienced a
25% reduction by comparing annual receipts in 2020 to 2019. Businessowners who elect to use this methodwill be required to submit annual taxforms to verify the required decline.
DIFFERENCES BET WEEN PPP1 AND PPP2While second-draw PPP loans generally have the same terms and conditionsas first-draw loans, there are some keydifferences aside from the initial eligibility requirements. First, a businesscan continue to receive up to 2. 5 timesits average monthly payroll costs ( 3. 5times for hospitality businesses), but allsecond-draw PPP loans are capped at afirm $2 million (rather than $10 millionfor first-draw loans).
Second-draw borrowers are requiredto prove the required revenue reduction — while first-draw borrowers weregenerally required only to make a good-faith certification. Borrowers who
By Robert Bloink and William H. Byrnes
Second-Draw PPP Loans: What Advisors
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