February 1, 2021
On December 27, 2020, President Trump signed the Economic Aid to Hard-Hit Small Business, Nonprofits, and Venues Act (“Economic Aid Act”) into law. Under the Economic Aid Act, the United States Small Business Administration (“SBA”) may guarantee loans under the Paycheck Protection Program (“PPP”) Second Draw Program through March 31, 2021 (“Second Draw PPP Loans”) to borrowers that previously received a PPP loan under section 7(a)(36) of the Small Business Act (“First Draw PPP Loans”) and have used or will use the full amount of the First Draw PPP Loan for authorized purposes on or before the expected date of the disbursement of the Second Draw PPP Loan.
The Second Draw PPP Loans generally are guaranteed by the SBA under the same terms as First Draw PPP Loans. The SBA guarantees the full amount of the Second Draw PPP Loan given to a borrower and may forgive up to the full principal loan amount for the loan. The terms of the Second Draw PPP Loan are as follows:
- 100% guaranteed by SBA
- No collateral is required before receiving loan
- No personal guarantees are required
- The interest rate on the loan will be 100 basis points or one percent
- 5 year maturity period
Eligibility for Second Draw PPP Loan
Borrowers are eligible for a Second Draw PPP loan only if the borrower has 300 or fewer employees and experienced a revenue reduction of 25% or more in 2020 relative to 2019. The revenue reduction must calculate the revenue reduction using the borrower’s quarterly receipts for one quarter in 2020 with the borrower’s gross receipts for the same quarter in 2019. Additionally, to receive a Second Draw PPP Loan, a borrower must have received a First Draw PPP Loan and has used, or will use, the full amount of the First Draw PPP Loan on or before the expected date on which the Second Draw PPP Loan will be disbursed from the Borrower.
Amount of Second Draw PPP Loan
The maximum loan amount for a Second Draw PPP Loan is equal to the lesser of two and a half months of the borrower’s average monthly payroll costs or $2 million (for certain businesses classified with a NAICS Code beginning with 72 such as restaurants or hotels, the amount is three and a half months of the borrower’s average monthly payroll costs or $2 million). The relevant time period for calculating a borrower’s payroll costs for a Second Draw PPP loan is either the twelve month period prior to when the loan is made, calendar year 2020, or calendar year 2019. In calculating payroll costs, a borrower must subtract any compensation paid to an employee in excess of $100,000 on an annualized basis, as prorated for the time period during which the payments are made or the obligation to make the payments is incurred.
Second Draw PPP Loans are entitled to forgiveness as the same terms and conditions as the First Draw PPP Loans. However, Second Draw PPP Loan recipients receiving $150,000 or less do not need to submit evidence of a revenue reduction until the time it submits for loan forgiveness.
If during any time between 8 weeks and 24 weeks after receiving the Second Loan PPP Loan (“Covered Period"), a borrower maintains employee and compensation levels pursuant to the same terms and conditions as the First Draw PPP Loan, the loan proceeds are used for payroll and other eligible business expenses, and at least 60% of the loan is used for payroll costs, the borrower will be entitled to forgiveness. In addition to payroll costs, rent, mortgage interest and utilities, other eligible expenses include: (a) life, disability, vision, and dental insurance, (b) certain operational expenses for business software needed for operations, payroll, and recordkeeping, (c) property damage costs incurred in 2020 related to public disturbances not covered by insurance, certain supplier costs for any payment made to suppliers of goods under a contract in effect, and certain worker expenses for items such as personal protection equipment and new filtration systems.
Certain ambiguities still exist. Please reach out to any of the authors of this article should you have any clarifying questions or concerns. However, borrowers may continue to apply for Second Draw PPP Loans from any qualified lender.
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