New First Draw PPP Loans now open

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New First Draw PPP Loans now open

New First Draw PPP Loans now open

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January 12, 2021

As the U.S. Small Business Administration (SBA) announced in a press release on Friday, the Paycheck Protection Program (PPP) reopened for so-called “First Draw PPP Loans” on Monday, January 11, and will reopen for “Second Draw PPP Loans” on Wednesday, January 13. Initially, only community financial institutions will be able to make PPP Loans and the PPP will open to all participating lenders shortly thereafter and will stay open through March 31, 2021. The SBA and Treasury also issued guidance last week for the replenished Paycheck Protection Program. This guidance came in the form of two interim final rules (IFR):

IFR “Business Loan Program Temporary Changes; Paycheck Protection Program as Amended” which consolidates the existing rules applicable to all PPP loans and incorporates changes made by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, P.L. 116-260 (Consolidated IFR)
IFR “Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans” lays out the guidelines for Second Draw PPP Loans. (Second Draw IFR)

Below is a summary of the most important updates and changes:

Eligibility

First Draw PPP Loans have slightly expanded eligibility requirements as follows:

Certain PPP borrowers can ask for an increase of their existing First Draw PPP Loan to (i) include amounts a seasonal employer is now entitled to under the new rules, (ii) include partner compensation in a partnership and (iii) request any amounts returned in whole or in part or an amount not accepted.
Housing cooperatives, section 501(c)(6) organizations, and destination marketing organizations are now eligible for PPP Loans if they have no more than 300 employees.

Second-Draw PPP Loans have a separate set of eligibility requirements in that the PPP borrower must have

300 or fewer employees;
Used or will use the full amount of their first PPP loan on or before the expected date for the second PPP loan to be disbursed to the borrower. The IFR also clarifies that the borrower must have spent the full amount of the first PPP loan on eligible expenses;
Experienced a revenue reduction of 25 percent or more in all or part of 2020 compared with all or part of 2019. This is calculated by comparing (i) gross receipts in any 2020 quarter with a comparable 2019 quarter or (ii) for a borrower that was in operation for all four quarters of 2019, annual receipts in 2020 compared with 2019.
The Consolidated IFR includes the following in “gross receipts”: sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances

The Second-Draw PPP Loans have expanded ineligibility criteria to exclude, among others, any borrower:

for which an entity created in or organized under the laws of the People’s Republic of China (China) or the Special Administrative Region of Hong Kong (HK), or that has significant operations in China or HK, owns or holds, directly or indirectly, not less than 20 percent of the economic interest of the business concern or entity
that retains, as a member of the board of directors of the business concern, a person who is a resident of the People’s Republic of China
a person or entity that receives a grant for shuttered venue operators pursuant to section 324 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act

Loan amount

For First Draw PPP Loans and most Second Draw PPP Loans, the loan amount stays at 2.5 times average monthly payroll costs.

Note however that for Second Draw PPP Loans, PPP borrowers with NAICS code beginning with 72, can claim up to 3.5 times (not 2.5) average monthly payroll costs. The maximum loan amount for Second Draw PPP Loans is US$2 million; US$4 million aggregate maximum for borrowers considered a single corporate group.

As in the past, seasonal employers have a separate reference period to determine average monthly payroll and can look to any 12-week period selected by the seasonal employer beginning February 15, 2019, and ending February 15, 2020. The Consolidated IFR defines a borrower as a seasonal employer if it does not operate for more than seven months in any calendar year or, during the preceding calendar year, it had gross receipts for any six months of that year that were not more than 33.33 percent of the gross receipts for the other six months of that year.

Use of proceeds / forgiveness

The new guidance makes it clear that borrowers can set their covered period to be any length between eight and 24 weeks.

Both First Draw PPP Loans and Second Draw PPP Loans now cover additional expenses eligible for loan forgiveness, including operations expenditures, property damage costs, supplier costs, and worker protection expenditures. The requirement that 60 percent of loan proceeds be spent on payroll costs remains unchanged.