Round 2 of the SBA’s Paycheck Protection Program (PPP) opened on Monday, Jan. 11, 2021. For the first week of PPP2, the program is only available to small businesses applying at community financial institutions (CFIs). These lenders provide funding for small businesses in underserved communities, including minority-owned businesses that had a hard time securing funding during the initial round of PPP lending. CFIs include Community Development Financial Institutions (CDFIs), Minority Depository Institutions, Certified Development Companies, and microloan intermediaries.
The SBA and the U.S. Treasury Department, which oversee the PPP plan to open the program to all small businesses soon, and while the exact date is still not confirmed, it is likely to be sometime during the week beginning Jan. 18. The second round of PPP lending, part of an overall COVID economic stimulus package, The Economic Aid Act, passed at the end of December, provides for a $284 billion pool of money to help struggling businesses survive during the pandemic. Eligible companies include companies that previously received a PPP loan during the first round of lending, as well as those applying for the first time.
PPP2 includes changes to bolster truly small businesses, rather than larger ones, including corporations that have access to capital markets. For instance, in Round One of PPP, Shake Shack was among the corporations that applied for and were granted a $10,000,000 PPP loan that the burger chain later returned. Interestingly, according to Crain’s, Shake Shack now has plans to open 60 new restaurants across the country this year at a time when independent restaurants are still struggling to survive. Fortunately, for smaller eateries, there are new provisions in the PPP legislation to aid hard-hit restaurants and hotels.
The process can be intimidating, particularly for business owners that are trying to survive one day at a time. Frequently they have questions. Some of the most common questions business owners want answered about PPP right now are:
How long will it take for PPP2 to go live?
When the Economic Aid Act was passed on December 27, 2020, the legislation gave SBA 10 days to provide guidance on the contents and execution of the bill. With the opening of applications for CDFI lenders going live this week, it should not be much longer before the program is opened up to the vast majority of lenders and borrowers.
The SBA commenced a soft launch roll-out to the very smallest lenders, and the program is expected to fully launch soon once the SBA has confirmed procedural and operational changes. To prepare for the opening of this second Paycheck Protection Program, businesses should pre-apply now with a provisional PPP application. Once the pre-application process is complete, applicants will be able to submit their funding request as soon as the SBA and the Treasury Department open up the program.
How do I measure a 25% decrease in revenue or gross receipts?
Businesses may qualify for a second PPP loan by showing a 25% decrease in revenue. According to the latest Interim Final Rule (IFR) on second draw PPP loans, revenue is captured using gross receipts. The IFR generally defines gross receipts to include all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns, and allowances.
A borrower can calculate revenue reduction with gross receipts by taking any one quarter of 2020 and comparing it to the corresponding quarter from 2019.
Do I need to apply for PPP loan forgiveness before taking a second PPP loan?
No. If a company a received PPP loan in the first round of funding, there is no requirement to apply for PPP forgiveness before applying for a second PPP loan. However, the legislation does state that the business must have used all funds from the first PPP loan or have plans to use those funds before they may apply for a second loan. More SBA guidance on intent to use funds may be coming soon.
If my company took the maximum 2.5x payroll in the first round, am I still eligible for a second PPP loan?
Yes. Because the new Economic Aid Act is focused on supporting hard-hit businesses, companies may still qualify for a second PPP loan (known as a 2nd Draw loan). Eligibility for a second PPP loan is based on proving a decrease in business revenue that is greater than or equal to 25% of the business’s gross receipts.
If I am a hotel or restaurant do I automatically qualify for 3.5x payroll?
Yes. The Economic Aid Act has provided for all businesses with a NAICS code starting with 72 to qualify for a loan amount up to 3.5 times payroll. First draw businesses with NAICS codes beginning in 72 will qualify if they have no more than a total of 500 employees. Second draw businesses with NAICS codes beginning in 72 are eligible if they employ no more than 300 people per location and meet the revenue reduction requirements. Restaurant and hotel locations with a shared parent company that operate as separate legal business entities can apply separately.
Can I use PPP2 funding to pay for rent, utilities, and other expenses?
There is greater flexibility in how PPP funding can may be used. For a loan to be fully forgiven, at least 60% of the money has to go towards payroll expenses. The remaining 40% or less can be used to cover a broader swath of business expenses than was allowed during the initial round of PPP lending. Beyond mortgage or rent payments and utilities, PPP money may now cover the costs of personal protective equipment and other expenses incurred to meet government-imposed COVID restrictions, as well as property damage, cloud computing, and supplier costs.
PPP2 is a lifeline for companies that might otherwise go bankrupt during these challenging times. Eligible applicants that did not receive a PPP loan prior to August 8, 2020, now have the ability to apply for a PPP First Draw Loan on or before March 31, 2021. Eligibility for these loans has been revised to include additional types of entities and the covered eligible expenses have been expanded. In some cases, certain borrowers may request an increase to their original PPP loan amount.
A firm is generally eligible for a PPP Second Draw Loan if the borrower previously:
- Received a PPP First Draw Loan and has used (or will use) the full loan amount only for eligible expenses before the PPP Second Draw Loan is disbursed,
- Has no more than 300 employees, and
- Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.