Current PPP Borrowers: How Do I Apply for a Second Draw PPP Loan?


On January 6, 2021, the Small Business Administration (SBA) published an Interim Final Rule (IFR) announcing the implementation of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Ventures Act’s (Economic Aid Act) temporary loan program, the Paycheck Protection Program (PPP) Second Draw Loans. Key provisions of the PPP Second Draw Loan program are summarized below.

Eligibility for Second Draw PPP Loans

Eligible Borrowers

Eligible borrowers include businesses, nonprofit organizations that are eligible for First Draw PPP Loans under the Economic Aid Act, housing cooperatives, veterans’ organizations, tribal businesses, certain self-employed individuals, sole proprietors, independent contractors, small agricultural cooperatives, certain 501(c)(6) organizations, destination marketing organizations, and certain nonprofit news organizations.

The following entities are ineligible for a Second Draw PPP Loan:

General Requirements for Second Draw PPP Loan Eligibility

In order to receive a Second Draw PPP Loan eligible borrowers must:

Although the Economic Aid Act did not define gross receipts for determining a borrower’s revenue reduction, the IFR provides that gross receipts 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.” Importantly, however, forgiveness amounts awarded for borrowers’ initial PPP loans are not included in 2020 gross receipts.

To facilitate the comparison calculations for small borrowers that may not have quarterly revenue information readily available, the IFR provides that a borrower that was in operation for all four quarters of 2019 is deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of 25% or greater in 2020 compared to 2019 and the borrower submits copies of its annual tax forms substantiating the revenue decline.

A borrower with affiliates will calculate its gross receipts by adding the gross receipts of the borrower and the gross receipts of each affiliate. If a borrower has acquired an affiliate or been acquired as an affiliate during 2020, this aggregation applies for the entire period of measurement, not just the period after the affiliation arose. Gross receipts of a former affiliate do not need to be included.

Eligibility Rules for Affiliates

Eligibility for Second Draw PPP Loans is governed by the same SBA affiliation rules that govern First Draw PPP Loans under the Economic Aid Act. However, the IFR clarifies that affiliation rules are waived with respect to Second Draw eligibility for:

Terms and Conditions for Second Draw PPP Loans

Second Draw PPP Loans are generally subject to similar terms and conditions as First Draw PPP Loans under the Economic Aid Act. The table below provides a summary of these terms and conditions.

Term

Summary

Term

·  5 years

Interest Rate

·  100 basis points, calculated on a non-compounding, non-adjustable basis

Payment Start Date

Same payment start dates as First Draw PPP borrowers:

·  Principal and interest must be paid starting 10 months after the end of the loan forgiveness period unless the borrower submits a loan forgiveness application to the lender within this period.

·  If loan forgiveness is denied, payments of principal and interest begin the date that the lender notifies the borrower of such denial.

Maximum Loan Amount*

·   In general, the lesser of $2 million or the product obtained by multiplying the average total monthly payment for payroll costs incurred or paid during 2019 or 2020 (at the election of the borrower) by 2.5.

·   For businesses with an NAICS code beginning with 72 (including hotels and restaurants), the lesser of $2 million or the product obtained by multiplying the average total monthly payment for payroll costs incurred or paid during 2019 or 2020 (at the election of the borrower) by 3.5.

·   Businesses that are part of a single corporate group shall in no event receive more than $4 million of Second Draw PPP Loans in the aggregate.

Fees

·  The SBA will pay lenders’ fees based on the balance of the financing outstanding at the time of the disbursement of the loan as outlined in the IFR.

Certifications

·   A Second Draw PPP borrower must make the same certifications as First Draw PPP borrowers, in addition to the following certifications:

o  It has not and will not receive another Second Draw PPP Loan (instead of certifying that it will not receive another loan under the PPP).

o  It has realized a reduction in gross receipts in excess of 25% relative to the relevant time period and has or will provide documentation substantiating that decline, as appropriate.

o  It received a First Draw PPP Loan, and before the Second Draw PPP Loan is disbursed will have used the full loan amount (including any increase) only for eligible expenses.

o  It is not a registrant under the Foreign Agents Registration Act.

o  It is not an entity primarily involved in political and lobbying activities engaging in areas such as public policy or national strategy.

o  It is not an entity affiliated with entities in the People’s Republic of China.

Guaranty

·  100% guaranteed by the SBA

·  No personal guarantees required

Collateral

·  None required

Key Differences between First Draw and Second Draw PPP Loans

Generally, the Second Draw PPP Loans are subject to more restrictions than are First Draw PPP Loans under the Economic Aid Act. The key differences between the First Draw and Second Draw PPP Loans include:

Loan Application Process and Documentation

The applicant must submit to the lender SBA Form 2438-SD (the PPP Second Draw Borrower Application) or the lender’s equivalent form, including the required certifications and documentation described in the IFR. At the time an applicant submits an application form, the applicant must also submit documentation required by the IFR, unless that documentation was previously submitted to the lender for the borrower’s initial PPP Loan. Applicants should consult FAQ (g) of the IFR for a more detailed overview of the documentation requirements that accompany applications.

Loan Forgiveness for Second Draw Borrowers 

Second Draw PPP Loans are eligible for loan forgiveness on the same terms and conditions as First Draw PPP Loans under the Economic Aid Act, except that Second Draw borrowers with a principal loan amount of $150,000 or less are required to provide documentation of revenue reduction if such documentation was not provided at the time of the loan application. The expanded eligibility for payroll and non-payroll expenses described in the Economic Aid Act, which are discussed here, also apply to Second Draw PPP Loans. Additionally, the new covered period rules outlined in the Economic Aid Act apply to Second Draw borrowers; therefore, Second Draw borrowers may choose any covered period between 8 and 24 weeks from the date of disbursement of the Second Draw PPP Loan. Additional guidance on loan forgiveness will be provided when the SBA issues a subsequent IFR on all aspects of the loan forgiveness process and loan review process later this month.


* All Second Draw PPP Loans are capped at $2 million per borrower. However, as detailed in the IFR, the SBA has provided specific loan amount calculations for various types of business entities, including the three listed in the above table.


© 2024 Bracewell LLP
National Law Review, Volumess XI, Number 14