Paycheck Protection Program Second Draw Loans
GUIDANCE FOR SMALL BUSINESSES AND NOT-FOR-PROFIT ORGANIZATIONS
The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) was signed into law on December 27, 2020 as part of the Coronavirus Response and Relief Supplemental Appropriations Act, 2021 (“2021 Appropriations Act”). The Economic Aid Act authorizes the Small Business Administration (“SBA”) to disburse an additional $284 billion of funds through the second temporary loan program called the Paycheck Protection Program Second Draw Loans (“PPP Second Draw Program”). Specifically, the PPP Second Draw Program allows borrowers that previously received a loan through the Paycheck Protection Program (“PPP First Draw Program”) (see here for an article dated April 4, 2020 for information on the PPP First Draw Program), to apply for a second loan (“Second Draw PPP Loans”). The intent of the PPP Second Draw Program is to provide additional relief to hard-hit small businesses, including qualified not-for-profit organizations.
The below will provide a high-level understanding of the PPP Second Draw Program.
- Eligible Entities: Eligible entities include businesses, certain not-for-profit organizations (including religious organizations), housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives.[i] Congress has specifically included language clarifying that religious organizations are eligible to apply.[ii]
- General Requirements for Eligible Entities[iii]:
- Employs 300 or fewer employees per physical location;
- Experienced a reduction in gross receipts of at least 25% in the first, second or third quarter in 2020 compared to the same quarter in 2019. Borrowers may also utilize the gross receipts from the fourth quarter of 2020 (not-for-profit and veterans’ organizations may utilize gross receipts to calculate their revenue loss standard);
- Received a loan under the PPP First Draw Program; and
- Used or will use the full amount of the loan pursuant to the PPP First Draw Program on or before the Second Draw PPP Loan is disbursed.
- Maximum Loan Amount: $2 million which includes the loan amount received and not paid back under the PPP First Draw Program.[iv]
- Calculation of Loan Amount: Average monthly payroll costs for 2019 or 12 consecutive months prior to the loan application date multiplied by a factor of 2.5.[v] Compensation is capped at $100,000 per employee annually. For more information on the definition of “payroll”, see our article dated April 4, 2020 titled Economic Relief for Non-Profit Organizations Through the Paycheck Protection Program.
- Timeline: From January 13, 2021 (depending on the application process for each authorized lender) through March 31, 2021.[vi] Borrowers should apply as soon as possible because the funds will likely be depleted prior to March 31, 2021.
- Eligible Loan Expenses:
- Sixty Percent (60%) of the loan to be used on payroll costs over the covered period (between eight (8) and twenty-four (24) weeks)[vii];
- Covered expenses set forth in the guidelines for the PPP First Draw Program (payroll costs, mortgage payments, rental payments, utility payments)[viii]; and
- Additional covered expenses include but are not limited to: (a) payment of software or cloud computing services or other human resources needs and accounting needs. (i.e., purchase of Zoom, WebEx, Amazon Cloud, QuickBooks, etc.), (b) property damages costs from disturbance occurring in 2020 that are not covered by insurance, and (c) expenses for the adaptation of the entity to comply with CDC or other governmental regulations to be COVID-19 compliant.[ix]
- Loan Terms: Loan terms for Second Draw PPP Loans are generally the same as the terms applicable to PPP First Draw Program.[x] These terms include the following:
- Guaranteed 100% by the SBA;
- No collateral required;
- No personal guarantees required;
- The interest rate is 1%, calculated on a non-compounding, non-adjustable basis;
- The maturity is five (5) years; and
- Lenders may make such loans under delegated authority from the SBA and rely on borrower’s certifications to determine eligibility and use of loan proceeds.
- Loan Application: A sample application can be found through the SBA’s website here.[xi] However, it is important for borrowers to review the application and documentation required by their individual lender before submitting a loan application.
- Loan Forgiveness:
- Loans $150,000.00 or less: Borrowers submit a simplified one page certification attesting that the entity suffered the required revenue loss and has complied with PPP loan regulations for the use of the loan proceeds.[xii] However, borrowers are required to retain relevant employment records for four (4) years and other records for three (3) years.[xiii]
- Loans greater than $150,000.00: Borrowers will need to submit the same forgiveness application required under the PPP First Draw Program and documentation adequate to establish that the borrower experienced a revenue reduction of 25% or greater in 2020 relative to 2019.[xiv]
- Limitation on Number of Loans. An eligible borrower may only receive one (1) Second Draw PPP Loan.[xv]
GUIDANCE FOR FIRST TIME BORROWERS
The PPP First Draw Program has reopened for first-time borrowers to apply as of January 11, 2021. The rules for first-time borrowers under the PPP First Draw Program have generally adopted the same guidelines as the PPP Second Draw Program, with a few changes, including: (i.) the entity may employ 500 employees or fewer, (ii.) the maximum loan amount is $10 million, and (iii.) the calculation for payroll costs can be derived from 2019, 2020 or one (1) year before the date on which the loan is made.[xvi] The updated PPP First Draw Program loan application can be found through the SBA website here.[xvii]
ADDITIONAL RESOURCES & ARTICLES
Capell Barnett Matalon & Schoenfeld LLP has written comprehensive articles relating to the Paycheck Protection Program and the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act), which may be relevant to your not-for-profit corporation or small business. See the below links for more information:
- April 4, 2020: Economic Relief for Non-Profit Organizations Through the Paycheck Protection Program.
- April 6, 2020: THE CARES ACT: Expansion of the Economic Injury Disaster Loans.
- April 22, 2020: Reimbursement for Mandated Sick and Family Leave Pay.
The SBA website also offers an array of helpful resources for first-time and second-time borrowers:
- January 08, 2021: Top-line Overview of First Draw PPP.
- January 08, 2021: Top-line Overview of Second Draw PPP.
- January 08, 2021: Loan Forgiveness Terms for First Draw and Second Draw PPP.
- January 06, 2021: Interim Final Rule: Paycheck Protection Program (PPP) as Amended by the Economic Aid Act.
The information in this article is continuously changing and being updated, and several details of the PPP Loans are yet to be announced by the U.S. Treasury and SBA. This publication is for informational purposes only and does not constitute legal or business advice. Each entity, based on its specific circumstances, must determine whether to seek and secure an SBA loan. In no way is Capell Barnett Matalon & Schoenfeld LLP advising that it is appropriate for all entities to seek such loans. This publication is not intended to create and the transmission and receipt of it does not constitute, a lawyer-client relationship. If your not-for-profit organization requires assistance, please contact Jodi Warren, Esq., at firstname.lastname@example.org or Alexandra Columbo, Esq., at email@example.com.
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[i] Section 311 of the Economic Aid Act.
[vi] Section 343 of the Economic Aid Act.
[vii] Section 311 of the Economic Aid Act.
[ix] Section 304 of the Economic Aid Act.
[x] Section 311 of the Economic Aid Act. See also First Draw PPP Loans, https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program/first-draw-ppp-loans#section-header-2 (last visited January 14, 2021).
[xi] See SBA Form 2483-SD, https://www.sba.gov/document/sba-form-2483-sd-ppp-second-draw-borrower-application-form (last visited January 14, 2021).
[xii] Section 307 of the Economic Aid Act.
[xiv] Section 311 of the Economic Aid Act.
[xvi] See Top Line Overview of First Draw PPP issued by the SBA, https://www.sba.gov/document/support-top-line-overview-first-draw-ppp (last visited January 14, 2021).
[xvii] See SBA Form 2483, https://www.sba.gov/document/sba-form-2483-ppp-first-draw-borrower-application-form (last visited January 14, 2021).