Paycheck Protection Program (“PPP”) Second Draw Loans

Client Alerts / January 2021

On December 27, 2020, the Consolidated Appropriations Act of 2021 (the “CAA”) was signed into law. The CAA sets forth a $900 billion COVID relief package, including $284 billion of additional funding for Paycheck Protection Program (“PPP”) loans. The new infusion of funds provides qualifying businesses who did not receive a PPP loan during the first round in 2020 (a “First Draw PPP loan”) a chance to apply for PPP funds and allows qualifying businesses who have used up their First Draw PPP loan to apply for a second round of funding (a “Second Draw PPP loan”).

This Client Alert focuses on borrowers seeking to obtain a Second Draw PPP loan.

Who is eligible to receive a Second Draw PPP loan?

To qualify for a Second Draw PPP loan, a borrower must meet the following requirements:

  1. Be a business, independent contractor, eligible self-employed individual, sole proprietor, nonprofit organization, a veteran’s organization, tribal business concern, housing cooperative, small agricultural cooperative, an eligible 501(c)(6) organization or eligible nonprofit news organization;
  2. Have 300 or fewer employees;[1]
  3. Experience a revenue reduction of 25% or greater in 2020 compared to 2019;
  4. Have previously received a First Draw PPP loan; and
  5. Have used or will use the full amount of its First Draw PPP loan on or before the expected date on which its Second Draw PPP loan is disbursed.

The 25% revenue reduction requirement can be calculated in many different ways:

  • Compare the borrower’s quarterly gross receipts for one quarter in 2020 with gross receipts for the corresponding 2019 quarter.
  • For borrowers who were in operation for all four quarters of 2019 and 2020, compare the borrower’s annual receipts for 2019 with the borrower’s annual receipts for 2020.
  • For borrowers not in business during the first, second or third quarter of 2019, but were in business during the fourth quarter of 2019, compare the borrower’s gross receipts during the first, second, third or fourth quarter of 2020 to the fourth quarter of 2019.
  • For borrowers not in business during 2019, but were in operation on February 15, 2020, compare the borrower’s gross receipts during the second, third or fourth quarter of 2020 to the first quarter of 2020.

Borrowers obtaining a Second Draw PPP loan under $150,000 do not have to provide documents evidencing a 25% revenue reduction with their Second Draw PPP loan application, but such borrowers will need to provide evidence of such reduction when applying for loan forgiveness. If a borrower does not submit a loan forgiveness application, such evidence must be provided upon the request of the U.S. Small Business Administration (“SBA”).

Borrowers will not include any PPP loan forgiveness received in 2020 as part of its gross receipts.

How much may a borrower receive under a Second Draw PPP loan?

Generally, the maximum amount a Second Draw PPP loan borrower may receive is the lesser of (a) 2.5x its average monthly payroll costs or (b) $2 million. Borrowers with a NAICS code beginning with 72 can obtain a loan that is the lesser of (x) 3.5x its average monthly payroll costs or (y) $2 million.

To calculate a borrower’s payroll costs for a Second Draw PPP loan, lenders will generally either look at the 12-month period prior to when the loan is made or calendar year 2019.

Businesses that are part of a single corporate group will not receive more than $4 million of Second Draw PPP loans in the aggregate.

 What are the general terms of a Second Draw PPP loan?

The terms and conditions of a Second Draw PPP loan are similar to a First Draw PPP loan in that: 

  • The SBA guarantees 100% of the loans to the extent the borrower spends such funds on eligible expenses;
  • No collateral will be required;
  • No personal guarantees will be required;
  • 1% interest rate, non-compounding;
  • 5 year maturity; and
  •  Loans will be processed by approved lenders; lenders will be permitted to rely on borrower certifications to determine the borrower’s eligibility and use of loan proceeds.

 Are Second Draw PPP loans eligible for loan forgiveness?

Second Draw PPP loans are eligible for loan forgiveness on the same term and conditions as First Draw PPP loans.

When can prospective borrowers obtain a Second Draw PPP loan?

Community financial institutions will be able to make First Draw PPP loans starting Monday, January 11, 2021 and Second Draw PPP loans starting Wednesday, January 13, 2021. The program will be opened to all participating lenders shortly thereafter.

The program will end on March 31, 2021, or earlier if funds run out.

Link to the SBA’s Interim Final Rule on Second Draw PPP loans can be found here.

[1] Note: Borrowers with a NAICS code beginning with 72 (Accommodation and Food Services) may employ 300 or fewer employees per physical location and be eligible for a Second Draw PPP loan. Each location may apply for a separate PPP loan using its unique EIN.

Information contained in this alert is for general information purposes only. It should not be considered as legal advice or the sole source of information when analyzing and resolving a legal issue. If you have specific questions regarding your particular circumstances, please do not hesitate to contact your CH& counsel.