PPP Second Draw Loans

by Aman Badyal, Andrew D. McCarthy

In December 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the CAA).

In total, the CAA provides $900 billion in COVID relief, including $284 billion for additional Paycheck Protection Program (PPP) loans for new borrowers and “second draw” loans for existing borrowers.

The eligibility requirements for a “second draw” PPP loan (PPP2 Loan) are as follows:

1) The borrower must spend the full amount of the first PPP loan before receiving the PPP2 Loan.

2) The borrower must employ no more than 300 employees per physical location.

3) The borrower must demonstrate a 25% or more reduction in gross receipts in a quarter during calendar year 2020 compared to the same 2019 quarter.

The size of a PPP2 Loan can be up to 2.5 times the average monthly payroll costs during the 1-year period before the loan or during the 2019 calendar year. A borrower in the hospitality or food services industry (with an NAICS code beginning with 72) is eligible for a loan of up to 3.5 times average monthly payroll costs. The amount of each PPP2 Loan is subject to an overall cap of $2 million.

The Small Business Administration has not provided guidance as to how to calculate whether the business suffered a 25% or more reduction in gross receipts.

The SBA is expected to publish a new application form and guidance for PPP2 Loans.

Because the PPP2 Loan program should use much of the existing PPP framework, financial professionals believe the rollout of this new round of loans should go more smoothly compared to the initial PPP rollout last year.