On December 27, 2020, President Trump signed the 2021 Consolidated Appropriations Act, which also contained the latest stimulus relief bill. Part of that bill was the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act, which made changes to all Paycheck Protection Program (PPP) loans, re-opened the PPP program for new loans, and allowed certain borrowers to obtain a second PPP loan.
This post specifically looks at the changes implemented by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act (the “Act”) that affects new PPP borrowers. The changes previously discussed that will affect all PPP borrowers will also generally affect Second Draw PPP loans, and the changes previously discussed that only affect new PPP loans will also generally apply. The discussion below is based on the text of the Act, and may be further modified or clarified by subsequent regulations or guidance.
Ability to Apply for a Second PPP Loan. While the CARES Act originally limited eligible small businesses to one PPP loan, Section 311 of the Act creates a new opportunity for certain PPP borrowers (including those that received a PPP loan in 2020 or that will receive a new PPP loan in 2021) to apply for one additional PPP loan, a so-called “second draw” loan. In order to apply for a second draw loan, the PPP borrower will need to have utilized 100% of their prior PPP loan prior to distribution of the second draw loan. This requirement should presumably not be particularly burdensome for those that obtained their PPP loan in 2020, but may limit the ability of new PPP borrowers to obtain both a PPP loan and a second draw PPP loan in 2021.
The Act provides for up to $259 billion for second draw PPP loans, with $25 billion set aside for second draw PPP loans to entities with no more than 10 employees (in individual loan amounts not to exceed $250,000 and made to an entity in a low or moderate income neighborhood). Second draw PPP loans are to be available through March 31, 2021.
Eligibility – Number of Employees. In order to be eligible for a second draw loan, the small business may have no more than 300 employees (down from 500 employees for general PPP loan eligibility). Based on the language in the Act, it appears that the other means of eligibility for a small business to have qualified for a PPP loan, namely the revenue standards or the alternative size standard, will not be available to qualify for a second draw loan.
Eligibility – Revenue Decline. Unlike a primary PPP loan, eligibility for a second draw PPP loan is also conditioned on specific evidence that the business has been harmed by the pandemic. Specifically, to be eligible for a second draw loan, a small business will need to show that gross receipts during at least one quarter in 2021 was down at least 25% from the comparable 2019 quarter. The Act provides that for loans up to $150,000, borrowers may merely attest certification to this revenue standard, but would then be required to provide supporting documentation before submitting forgiveness.
Loan Size. Like the primary PPP loan, the size of the loan is generally set to be an amount equal to 2.5 times monthly payroll costs, however the maximum size of a second draw PPP loan will be $2 million. (As over 995 of the original PPP loans were for $2 million or less, this small size cap should not affect most borrowers.) In addition, the Act provides that small businesses that are classified under NAICS 72 code (generally those in the accomodation and food services sector) are eligible for a larger PPP loan, namely up to 3.5 times their monthly payroll costs (but still capped at $2 million).
Bank Fees. For second draw PPP loans up to $50,000, the bank that processes the PPP application will be entitled to receive a fee from the SBA equal to the lesser of 50% of the loan or $2,500. This eliminates the financial disincentive that previously existed for banks to originate small-dollar PPP loans. For larger loans, the bank fee arrangement for second draw loans is the same as for primary PPP loans. For loans of $50,000 to $350,000, banks will receive a fee equal to 5% of the second draw PPP loan, while for loans over $350,000, the bank fee will equal 3% of the loan size.
Public Companies and Entities Affiliated with Federal Officials Ineligible. If a company has securities listed on an exchange registered with the SEC, then it is ineligible for a second draw PPP loan. Any small business that is 20% or more owned by covered federal officials (generally the President, Vice President, cabinet member or member of Congress, and their respective spouses), is ineligible for a second draw loan.