After months of stalling, weeks of fierce negotiations, and too many false starts to count, President Trump has signed a new bill to help businesses and individuals across the country find relief from the economic devastation created by the COVID-19 pandemic. The Consolidated Appropriations Act includes funding earmarked for small business loans, including a new round of the Paycheck Protection Program (PPP). It’s a sequel to the original.
The Paycheck Protection Program (PPP) was established last spring under the CARES Act. While many small businesses were able to take advantage of to access capital. Flaws in the program prevented many businesses, that truly needed funding, from getting it. Updates to the Paycheck Protection Program (PPP) under the new bill aim to address these issues (for first-time loan recipients) and enable a second draw (for those who have already received a PPP loan).
So, here’s everything you need to know about the second round of PPP loans.
PPP Round 2: The Basics
The PPP is a loan program managed by the Small Business Administration (SBA) that enables certain lenders (including banks, FinTech companies, and community lenders like CDFIs and MDIs) to distribute PPP loans on behalf of the SBA to small businesses. If your business has suffered a loss in revenue in 2020, you may be eligible for a second PPP loan.
Guidance is yet to be released, but it appears these loans will have the same terms as the original PPP loan. Hence, like the first PPP loan, the second round of PPP loans will also be fully forgivable if at least 60% of the loan is spent on payroll and the rest is spent on other eligible expenses.
If the loan is not forgiven, these loans would have an interest rate of 1% and a term of five years. Payments would be deferred for 10 months after the covered period ends or when you receive a forgiveness verdict, whichever comes first.
Do you want a quick look at everything that’s changed under the new bill? Here’s PPP under the Consolidated Appropriations Act, 2021 at a glance:
- $284 billion has been allocated to PPP (including $138 billion of unspent loans from the first round that were reinvested) and the program has been extended to March 31, 2021
- Second-draw loans are available for businesses with under 300 employees
- Businesses eligible for PPP loans have been expanded
- Loan limitations have been expanded for certain businesses
- Forgiveness for loans under $150K have a new, simplified one-page application
- Eligible expenses for forgiveness have been expanded (for first-draw loans that have not yet been forgiven and for second-draw loans)
- While expenses eligible for forgiveness still require a 60/40 split of payroll costs/other eligible expenses, group health insurance benefits, life insurance, disability benefits, vision, and dental insurance are now included in payroll costs
- Borrowers can choose a covered period that is any time between eight and 24 weeks
- PPP funding includes dedicated set-asides for community lenders (CDFIs and MDIs) and business that operate in low-income areas
- A clarification has been made indicating that interest rates on PPP loans are non-compounding and non-adjustable
- A clarification has been made indicating that forgiven PPP loans are not taxable AND forgiven expenses are tax-deductible
Who Is Eligible for a Second PPP Loan?
Second-round PPP loans are available to businesses that were operational prior to February 15, 2020. They are open to all businesses regardless of whether they received a PPP loan in 2020 or not. To be eligible for a second PPP loan, you must show a loss in revenue in 2020. This is proven by showing a 25% (or more) reduction in gross receipts from any quarter in 2020 relative to that same quarter in 2019.
For example, if a business made $20,000 in sales in the second quarter (Q2) of 2019, it must show a reduction of at least 25% of that amount in the same quarter of 2020. So, if the business recorded $15,000 or less in Q2 sales in 2020, they are eligible to apply for a second PPP loan.
Only certain businesses are eligible to receive a PPP loan, and these specifications are different for first-time loan recipients and second-draw recipients.
To be eligible for a first-draw PPP loan:
- Your business has less than 500 full-time, part-time, or seasonal employees.
- Your business was operational before February 15, 2020, and remains operational.
To be eligible for a second-draw PPP loan:
- Your business has less than 300 full-time, part-time, or seasonal employees; if you have multiple locations, you may not have more than 300 employees per location.
- You can demonstrate a revenue reduction of at least 25% in the any quarter of 2020 (when compared with the same quarter in 2019).
- You have used or will use the full amount of the first-draw PPP.
- Your business was operational before February 15, 2020, and remains operational.
Businesses eligible for first and second-draw PPP loans include:
- Sole proprietors
- Independent contractors
- Self-employed individuals
- Certain non-profits (the new bill has expanded eligible businesses to include certain 501(c)(6) non-profit organizations)
- Seasonal employers; the new bill has clarified the definition of these to be businesses that operate no more than seven months within a year or earn no more than a third of gross receipts within a six-month period
- Faith-based organizations that have less than 150 employees
- Housing cooperatives that employ less than 300 people
The following businesses remain ineligible for PPP loans:
- Lobbying organizations
- Organizations involved in political activities or public policy
- Lenders or financial services businesses
- Cannabis businesses (or any other businesses that deal with products that are illegal at the Federal level)
- Household employers (such as those who employ housekeepers or nannies)
- Businesses that have defaulted on SBA or Federal loans
- Any business that is at least 20% owned by someone who is currently incarcerated, on probation, on parole, or subject to an indictment
- Any business that is at least 20% owned by someone who has been convicted of a felony within the last five years
- Entities affiliated with the People’s Republic of China or Hong Kong or that have a member on their board of directors that is a resident of the People’s Republic of China
- Registrants under the Foreign Agents Registration Act
- Entities that have received or will receive a grant under the Shuttered Venue Operator Grant program
When Do Applications Open?
Applications are open now! Almost all lenders are currently accepting PPP applications. As discussed earlier, funds are limited. If you think you are eligible, you should start the application process immediately.
PPP Round 2 Loan Allocations
To ensure PPP loans are distributed to the businesses that really need capital, PPP funds have been set aside for specific institutions (these may be adjusted in the future):
- $15 billion has been set aside for both first- and second-draw PPP loans to be issued by community financial institutions, including CDFIs and MDIs
- $15 billion has been set aside for both first- and second-draw PPP loans to be issued by certain small depository institutions
- $25 million has been set aside for both first- and second-draw PPP loans to be issued by the Minority Business Development Centers program under the Minority Business Development Agency (MBDA)
- $57 million has been set aside for a microloan program
- $15 billion in grants has been set aside for live venues
- $20 billion is allocated to the Targeted EIDL Advance program
- $15 billion is allocated to smaller, first-time borrowers with ten or fewer employees or those who are in low-income areas and borrowing less than $250,000
- $25 billion is allocated to second-draw borrowers with ten or fewer employees or those who are in low-income areas and are borrowing less than $250,000
PPP Loan Terms
Under PPP regulation, lenders may not:
- Charge a yearly fee
- Charge a guaranteed fee
- Charge a prepayment penalty
- Request collateral or a personal guarantee
Businesses that receive PPP loans may also receive loans from other lenders or programs and may be able to obtain credit from other institutions.
PPP Loan Maturity and Deferral Period
The maturity of a PPP loan is five years. The deferral period lasts until the loan forgiveness amount is determined. Therefore, until you know how much of your loan will be forgiven, you don’t need to start making payments. Borrowers who fail to apply for loan forgiveness must start making loan payments within ten months of the last day of the covered period.
PPP Round 2 Loan Maximums and Limitations
There are limits to what borrowers can receive; these limits vary depending on the business’s specifics and whether a borrower has already received a PPP loan.
· First-Draw PPP Loan Limitations
The maximum amount that a business that has not yet received a PPP loan can borrow is the lesser of:
- 2.5 times the average monthly payroll costs and healthcare costs
- $10 million
There may be exceptions to these limits for restaurants and other hospitality businesses.
· Second-Draw PPP Loan Limitations
Any business applying for a second-draw loan will be subject to more stringent limitations. The maximum second PPP loan amount is the lesser of:
- 2.5 times the average monthly payroll costs and healthcare costs in 2019 or 2020 (whichever is greater)
- 3.5 times the average monthly payroll costs and healthcare costs in 2019 or 2020 (whichever is greater) for any business that is classified under Code 72 by the North American Industry Classification System (NAICS). (This is a list of hospitality and entertainment businesses like restaurants, hotels, and casinos.)
- $2 million
· For Seasonal Businesses
To qualify as a seasonal business, you must satisfy one of the following criteria:
- You do not operate for more than seven months in any calendar year
- During the previous calendar year, your gross receipts for six months were no more than 33.33% of your gross receipts from the remaining six months (e.g. if you earn $100,000 from January through June, you earn no more than $33,333.00 from July through December)
Seasonal businesses are eligible for loans equal to 2.5 times their average monthly payroll cost. However, the average monthly payroll cost can be calculated using any 12-week period between February 15, 2019, and February 15, 2020.
· For New Businesses
A new business is defined as existing for no more than a year before February 15, 2020. New businesses are eligible for loans that are 2.5 times their average monthly payroll. However, their average monthly payroll will be calculated using their entire period of operation where payroll was run. Sum up the monthly payroll costs and divide by the months where payroll was run to find the average.
· For Sole Proprietors, Partnerships, and Independent Contractors without Payroll
Sole proprietors and independent contractors were eligible for loans equal to 2.5 times their average monthly net income from 2019. The monthly net income was found by dividing the net income as reported on line 31 of a 2019 Schedule C by 12.
Partnerships were eligible for 2.5 times their average monthly distributions. Their average monthly distributions were calculated by taking their distributions from their 2019 Schedule K-1, multiplying it by 0.9235, then dividing by 12.