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Sean Bryan Authors Article on Second-Draw PPP Loans and Details

Sean Bryan's column—entitled "New Rules for New PPP Loans"—addresses new Interim Final Rules (IFR) and guidance issued by the U.S. Small Business Administration (SBA) and Treasury.

The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (“Economic Aid Act”) enacted in late December as part of the Consolidated Appropriations Act, 2021 authorized the extension of the Paycheck Protection Program, both for new PPP loans and a second round of PPP loans to eligible borrowers, and appropriated an additional $284.45 billion (for a total of $806.45 billion) for this purpose.  Treasury and the Small Business Administration quickly issued two new Interim Final Rules, one that consolidated and restated 19 prior Interim Final Rules on PPP loans as well as establishing rules for the extension of the original PPP loan program through March 31, 2021, and one that established rules for the second round of PPP loans (“Second Draw Loans”).  On the same day, the SBA issued guidance on Accessing Capital for Minority, Underserved, Veteran and Woman-Owned Business Concerns.  The SBA is expected to begin accepting applications for new PPP loans on January 11, 2021, and for Second Draw Loans on January 13, 2021, and applications were posted on the Treasury website on January 8, 2021:  https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses

Guidance on Accessing Capital for Minority, Underserved, Veteran and Woman-Owned Business Concerns.  This short publication summarized the distribution of the first round of PPP loans – 27% of funds went to low- and moderate-income communities and 70% of PPP loans went to business with fewer than 10 employees.  To address potential barriers to access to capital, the Economic Aid Act specifically set aside funds for smaller borrowers and for community and smaller lenders.  The SBA determined to ensure increased access to PPP loans for minority, underserved, veteran and woman-owned businesses by:
  • During at least the first two days after the PPP loan portal opens, accept only applications from community financing institutions.
  • Set aside dedicated hours to process and assist small PPP lenders. 
  
Guidance on PPP Loans.  The Economic Aid Act extended the authority to make PPP loans through March 31, 2021, which applies only to businesses that did not already obtain a PPP loan in 2020.  The Act also made some changes in the terms of PPP loans.  This Interim Final Rule consolidates all the prior rules in one document, but also makes necessary modifications based on legislation after the CARES Act was enacted.   

Changes include:
  • Permitting new borrowers to use either 2019 or 2020as the base year for purposes of calculating the maximum PPP loan amount.  Because 2020 would be the default base year for borrowers in 2021, but was likely significantly different from 2019 for borrowers, Treasury decided to permit the use of either year to ensure loans on terms commensurate with existing PPP loan borrowers.  This applies to farmers and ranchers as well.
  • Guidance was provided for seasonal employers, news organizations, housing cooperatives and 506(c)(6) organizations(e.g., chambers of commerce) in conformance with provisions of the Economic Aid Act.
  • Businesses permanently closed are ineligible for PPP loans, but businesses that are temporarily closed or suspended with the intent to reopen remain eligible.
  • The Economic Aid Act and this Rule felt the need to reiterate that businesses “not in operation” on February 15, 2020 are ineligible for PPP loans.  This was part of the CARES Act but with somewhat less precise language.  Consequently, a new rule was made requiring that a payroll statement or similar document from the pay period that covered February 15, 2020 must be provided with the PPP loan application to establish that the borrower was in operation on that date.
  • Clarifying that while a 500-employee limit remains the general rule, a 300-employee limit applies to housing cooperatives, section 506(c)(6) organizations and destination marketing organizations.
  • Reiterates the new provision of the Economic Aid Act that interest on new PPP loans is non-compounding, non-adjustable.
  • Implements a request of many PPP borrowers to permit the “covered period” to be between 8 weeks and 24 weeks, at the election of the borrower.  As a result, the “alternative covered period” was eliminated.  But both of these changes only apply to new PPP loans.  
Second Draw PPP Loans.  The Economic Aid Act authorized a second round of PPP loans to a subset of prior PPP loan borrowers, also through March 31, 2021.  The terms applicable to initial PPP loans are generally applicable to Second Draw Loans, but there are some differences.

  • The maximum loan amount is $2 million.  Interest remains at 1% and a 5-year maturity.
  • The relevant period for calculating payroll costs is either 2019 or the 12-month period prior to when the loan is made, but the Rule permits the use of 2020 in lieu of the 12-month requirement.  Also, restaurants and other hospitality businesses may use 3.5 months of payrollrather than 2.5 months in calculating the maximum loan amount.
  • Businesses are eligible only if they have 300 or fewer employees.  This lower limit also applies to the per-location test for restaurant and hospitality businesses and to news organizations.
  • Businesses must have a revenue reduction in 2020 of at least 25%, as compared to 2019.  The primary test is a comparison of gross receipts on a quarterly basis, but a borrower in existence for the entirety of 2020 may use 2019 and 2020 tax returns rather than quarterly financials to demonstrate the revenue reduction.  The Economic Aid Act does not define “gross receipts”, so the Rule applies an existing SBA definition, but provides that any forgiveness in 2021 of a PPP loan received in 2020 is not included in gross receipts.
  • For purposes of determining gross receipts, if a borrower acquired an affiliate or was acquired as an affiliate in 2020, “gross receipts” is to include the receipts of both businesses, and for the entire measurement period, not just the period after the affiliation arose.
  • A business that received a PPP loan in 2020 must have used all of the proceeds before the disbursement of the Second Draw Loan proceeds. 
  • A business that was not eligible to receive a 2020 PPP loan but received one anyway is not eligible for a Second Draw Loan.  Other ineligible businesses include those primarily engaged in political or lobbying activities, those with specified ties to China or Hong Kong, and shuttered venues that receive a grant under a separate provision of the Economic Aid Act.  
If a borrower has a 2020 PPP loan that is under review by the SBA or the SBA believes the borrower was ineligible for a PPP loan, then the lender will not receive a SBA loan number until the issue is resolved.  Lenders likely will not know this until after the Second Draw Loan is disbursed, and this status does not prevent a borrower from receiving a Second Draw Loan, but it may increase lender due diligence for Second Draw Loan applications.

Overview of First Draw PPP Loans:  https://home.treasury.gov/system/files/136/Top-line-Overview-of-First-Draw-PPP.pdf

Overview of Second Draw PPP Loans:  https://home.treasury.gov/system/files/136/Top-line-Overview-of-Second-Draw-PPP.pdf

Guidance on Accessing Capital:  https://home.treasury.gov/system/files/136/Guidance-on-Accessing-Capital-for-Minority-Underserved-Veteran-and-Women-Owned-Business-Concerns%20.pdf

Interim Final Rule on PPP Loans:  https://home.treasury.gov/system/files/136/PPP-IFR-Paycheck-Protection-Program-as-Amended-by-Economic-Aid-Act.pdf

Interim Final Rule on Second Draw PPP Loans:  https://home.treasury.gov/system/files/136/PPP-IFR-Second-Draw-Loans.pdf

 


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