What you need to know about PPP second draws

Of critical importance, Congress appropriated an additional $284 billion toward the Paycheck Protection Program and created the opportunity for Covid-impacted businesses to take a second draw (abbreviated here as “PPP2”).

Here is what you need to know about PPP2, whether as a borrower or a lender:

• Eligibility for PPP2
  • In General – Borrowers must meet these criteria:
    • In business as of Feb. 15, 2020;
    • Cannot be publicly traded;
    • Certain non-profits excluded;
    • Not more than 300 employees;
  • Existing PPP Borrower – Must have used (or will use) the full amount of PPP1 loan.
  • Revenue Decline – Must demonstrate at least a 25 percent reduction in gross receipts during any quarter of 2020 relative to the same 2019 quarter.
    • Alternative timelines are available for businesses not in operation during all of 2019.
    • Documentation –
      • For loans up to $150,000, lenders may only require a certification on the loan application.
      • For loans exceeding $150,000, SBA regulations will likely determine the documentation required.
• Loan amount
  • In general – Principal amount of PPP2 loans are equal to 2.5-times the average monthly payroll costs in the one year prior to the loan or the 2019 calendar year, capped at $2 million.
  • Food services – The multiplier is 3.5 for establishments providing customers with lodging and/or preparing meals, snacks, and beverages for immediate consumption.
• Forgiveness credit
  • Categories of Forgiveness Credits – Loans will be forgivable, to the extent funds are used on:
    • PPP1 categories: Payroll costs (which is now clarified to include group insurance benefits), mortgage interest, rent, and utilities.
    • Covered operations expenditures. Software, cloud computing, and other human resources and accounting needs.
    • Covered property damage costs. Costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance.
    • Covered supplier costs. Expenditures to a supplier pursuant to a contract, purchase order, or order for goods in effect prior to taking out the loan that are essential to the borrower’s operations.
    • Covered worker protection expenditure. Personal protective equipment and adaptive investments to help a borrower comply with federal health and safety guidelines beginning March 1, 2020.
  • Retroactive Effect for PPP1 Loans – Loans made under PPP1 will be entitled to these expanded forgiveness credits.
  • Covered Period
    • Just as with PPP1, the covered period will last for 24 weeks after the loan origination. This is the time during which a borrower must spend the funds, in order to obtain forgiveness credits.
    • The covered period for PPP1 loans is extended potentially to March 31, 2021.
  • Reductions in Forgiveness
    • As with PPP1,
      • Forgiveness will be reduced if headcount falls or employees have pay cut by more than 25%, but there are safe harbors.
      • The amount forgiven must be comprised of at least 60% in payroll costs.
    • Congress repealed the reduction in forgiveness equal to the amount of an EIDL advance (normally $10,000).
• Lender Fees – To be paid by SBA no later than 5 days after disbursement:
  • For loans up to $50,000, the lender processing fee will be the lesser of:
    • 50 percent of the principal amount, and
    • $2,500.
  • For loans between $50,000 and $350,000, the lender fee will be 5%.
  • For loans $350,000 and above, the lender fee will be 3%.
• Timing
  • SBA is required to establish regulations by Jan. 6. I would expect loan applications to be accepted a week or 10 days after that.
  • The PPP2 program ends March 31, 2021.

Cavitch will be advising borrowers and lenders about PPP2 in the coming weeks. Contact me at [email protected]. (Feel welcome to read the 5,593-page bill by clicking here.)