The second round of Payroll Protection Program coronavirus stimulus loans is now available from the Small Business Administration, which was recently brought back to life in a bill passed by Congress and signed into law on Dec. 27, 2020. The funding and relief package designates $284.5 billion for PPP loans, of which $137 billion is pointed squarely at businesses applying for “second-draw” PPP loans.
This week, the Small Business Administration (SBA) announced that the program would begin accepting applications on Jan. 15, 2021, and will close the program on March 31, 2021. Initially, the Small Business Administration will accept First Draw and Second Draw loan applications from participating community financial institutions (CFIs) to promote access to the smaller businesses that need it. The loan process will then open to larger banks at a later date. There are several important points that are critical for borrowers.
Borrowing Specifics
These Second Draw loans, offered to businesses that took advantage of the first round of funding in mid-2020, have specific conditions. To be eligible for a Second Draw PPP loan, a business must:
- Have received a First Draw PPP Loan and will or has used the full amount only for authorized uses
- Have no more than 300 employees
- Demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020
According to the SBA, these loans are available to businesses, certain nonprofits, self-employed individuals, independent contractors, sole proprietors, housing cooperatives, small agricultural cooperatives, veterans’ organizations, and tribal businesses.
For most businesses, the formula for Second Draw loans is the same as those for initial loans. Borrowers can receive a maximum loan amount that is 2.5 times their average monthly 2019 or 2020 payroll costs, capped at $2 million. These costs can be calculated with one of three methods: the 12 months prior to the loan, calendar year 2019, or calendar year 2020. Businesses in the Accommodation and Food Services sector can receive 3.5 times the average monthly payroll costs up to $2 million.
Seasonal businesses (those open for less than seven months in a calendar year) and new businesses opened by Feb. 15, 2020 (but not a complete year) use a different formula for payroll calculation. Seasonal businesses will use average monthly total payroll for a 12-week period between Feb. 15, 2019, and Feb. 15, 2020. New businesses will calculate total payroll divided by the number of months to arrive at an amount.
How Can the Loan Proceeds be Used?
Proceeds from PPP loans may only be used for eligible covered costs which include:
- Payroll costs, including paid sick leave and group insurance benefits provided by the employer.
- Operating costs, including payments for mortgage, rent, utilities, software, and human resources and accounting needs.
- Property damage sustained during protests and disturbances in 2020, unless covered by insurance.
- Payments to a supplier covering contracts and purchase orders in effect before taking out the second-draw loan.
- Personal protective equipment and modification made to meet health and safety requirements.
For most businesses, the formula for Second Draw loans is the same as those for initial loans.
Borrowers will need to have documents to prove payroll costs and revenue losses. It is important to work with your tax professional to be sure you have the documentation you will need, and to act quickly.
If a borrower is applying for the second-draw loan, it may save some time and paperwork to use the same lender that was used for the first. Additionally, borrowers seeking $150,000 or less do not have to prove revenue loss during loan application but will need to prove it if they seek forgiveness.
Loan Forgiveness
Round two loan forgiveness will be fully digital, rather than paper-based, which presented many difficulties for borrowers during the forgiveness process for the first round of loans. These second-round funds can be forgiven if they are used on covered costs within 8 to 24 weeks of loan receipt. The borrower must spend at least 60% of the loan amount on payroll expenses to qualify for loan forgiveness and the other 40% can be used on the covered costs mentioned above. The goal of this program is to ensure that workers remain employed.
Borrowers that received less than $150,000 will need to provide the following when seeking forgiveness:
- Retained employee headcount because of the loan
- Estimated payroll costs covered by the loan
- Total loan amount
- Qualified revenue loss
Those borrowers that received more than $150,000 will complete the same forgiveness process as the first round loans, including detailed reporting of payroll expenses/head count, operating costs like lease and/or mortgage payments, supplier costs, and other covered expenses like personal protective equipment installed for worker safety.
First Round Loan Forgiveness Highlights
On Jan. 12, 2021, the SBA announced that it has forgiven 1.1 million PPP loans from the first round of funding, totaling more than $100 billion. So far, the SBA has received 1.3 million forgiveness applications out of 4.9 million PPP loans extended during the initial round in 2020.
