January 12, 2021

New SBA Guidance on the PPP Changes and Second Draw PPP Loans

On December 27, 2020, a new COVID-19 relief bill, the Consolidated Appropriations Act, 2021, passed into law. A portion of that bill, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”), changes the Paycheck Protection Program (“PPP”), including reopening the program to new borrowers, and allows certain existing borrowers to obtain a Second Draw Loan. On January 6, 2021, the Small Business Administration (“SBA”) issued Interim Final Rules on the PPP, as amended, and the Second Draw Loans.

The following is what you need to know about both sets of new rules:

  • First Draw Loan Eligibility: New borrowers that were in operation on February 15, 2020 and that fall into certain categories are eligible for a First Draw Loan. The groups who may receive a First Draw Loan include the following:
    • Certain businesses with 500 or fewer employees;
    • Sole proprietors, independent contractors, and self-employed individuals;
    • Nonprofits or business leagues; and
    • Restaurants, hotels, and other similar establishments with less than 500 employees.
  • Second Draw Loan Eligibility:PreviousPPP recipients may apply for another loan, provided they:
    • Have used or will use the full amount of their First Draw Loan for eligible uses on or before the expected date on which the Second Draw Loan will be disbursed;
    • Have 300 or fewer employees at the time of the application; and
    • Can show a 25% or greater gross revenue decline in any 2020 quarter, as compared to the same quarter in 2019.
  • Maximum Loan Amount: In general, borrowers may receive a loan of up to 2.5 times the borrower’s average monthly payroll costs. Restaurants, hotels, and other similar establishments may receive up to 3.5 times the average monthly payroll costs. The maximum amount for a First Draw Loan remains $10 million; the amount of the Second Draw Loan will be capped at $2 million.
  • Eligible Expenses: The costs eligible for loan forgiveness still include payroll, rent, covered mortgage interest, and utilities. The Economic Aid Act adds new types of eligible expenses:covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures.
  • Forgiveness Eligibility: As with the PPP, to be eligible for full forgiveness, the total eligible costs must be comprised of at least 60% payroll costs over the covered period. The covered period may now be anywhere between 8 to 24 weeks, at the borrower’s discretion, rather than 8 or 24 weeks as was previously required.
  • Simplified Forgiveness Process: A recipient of a PPP loan of $150,000 or less shall receive forgiveness if the borrower signs and submits to the lender a certification that is not more than one page in length, includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. The SBA must create the simplified application form within 24 days of the bill’s enactment and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements.That form has not yet been provided.Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
  • Availability: Loans issued through the PPP, as amended, or as a Second Draw Loan will only be available through March 31, 2021.

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