Stock and Leader’s COVID-19 Business Response Team previously reported on the passage of Consolidated Appropriations Act (the “Act”) which, among other things, renews and updates the Paycheck Protection Program (the “PPP”). That Act, in part, makes available a second round of PPP loans for businesses that need assistance beyond that provided by the initial PPP loan.
The Small Business Administration is currently accepting PPP loan applications from participating community financial institutions and lenders with under $1 billion in assets, which includes approximately 5,000 institutions, including community banks, credit unions, and farm credit institutions. The program will open to all lenders on January 19, 2021 and is currently slated to close on March 31, 2021. Business owners who plan to apply for a second PPP loan should gather the necessary information as soon as possible.
If a business received an initial PPP loan, it will qualify for a second round of funding, provided the following requirements are met:
- It has no more than 300 employees.
- It has used or will use the full amount of its first PPP loan.
- It can show a drop of at least 25% in annual gross receipts or for any quarter of 2020, compared with the same quarter in 2019.
- It has not permanently closed. Businesses that have temporarily closed or suspended operations are eligible to receive a second-draw loan.
If a business did not receive an initial PPP loan, it will qualify for an initial PPP loan in 2021 if the following requirements are met:
- It was operational before February 15, 2020
- It is still open and operational
- It has no more than 500 employees
- If the business has multiple locations, it has no more than 500 employees per location
The 2021 PPP loans are available to businesses, certain nonprofits, self-employed individuals, independent contractors, sole proprietors, housing cooperatives, small agricultural cooperatives, veterans’ organizations and tribal businesses.
The formula for the second draw loans is similar to that of initial loans: Borrowers can receive up to 2.5 times their average monthly payroll costs. Average monthly payroll costs can be calculated using one of the following methods:
- The 12 months prior to the loan.
- Calendar year 2019.
- Calendar year 2020.
- Seasonal businesses (typically operating for less than seven months in a calendar year) and new businesses in operation on Feb. 15, 2020, but not open for a full 12 months, will use a separate formula to calculate average monthly payroll. Seasonal businesses: Average total monthly payroll for any 12-week period between Feb. 15, 2019, and Feb. 15, 2020. New businesses: Total payroll costs divided by the number of months those costs were paid out.
Hotels, restaurants and other accommodation and food service businesses can borrow up to 3.5 times their average monthly payroll costs.
Unlike the initial loans, the maximum amount for second-draw PPP loans is just $2 million. (First-time PPP loans max out at $10 million.)
The 2021 PPP loan funds are forgivable, provided they are spent on covered costs, including:
- 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.
To apply for a second-draw PPP loan, businesses will need to submit documents to verify payroll costs and revenue loss, such as tax forms or bank statements. Some paperwork can be avoided by using the same lender for first and second-draw loans, if 2019 payroll figures are used when applying for the second loan. Borrowers seeking $150,000 or less need not prove revenue loss when applying for a second-draw loan but will need to do so to apply for loan forgiveness.
Second-draw loan funds can be forgiven if they are used on covered costs within 8 to 24 weeks of receiving the loan. At least 60% of the total second-draw loan must be used on payroll expenses to qualify for full loan forgiveness. Up to 40% can be used on other covered expenses detailed above.
The Business Group at Stock and Leader can assist business owners to navigate funding sources along with any other legal needs. Contact a member of Stock and Leader’s COVID-19 Business Response Team for further guidance: