Under the latest round of Paycheck Protection Program (PPP) loan funding, you may be eligible for a second PPP loan.
Here’s what you need to know. We’ll cover how a First Draw PPP Loan differs from a Second Draw, who’s eligible, how second PPP loans work and how to apply.
How Does a Second Draw PPP Loan Differ from a First Draw?
The PPP was launched as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act enacted on March 27, 2020. Since then, the PPP has been extended and amended several times. The latest CARES Act update and round of PPP funding introduce the option for companies that have already received a previous (First Draw) PPP Loan to apply for a Second Draw PPP Loan.
Under the original version of the PPP program, loans were extended to small businesses to fund payroll and overhead costs in order to keep employees working. Eligibility was available to small businesses with 500 employees or less, with adjusted numbers for certain industries. Loan amounts were limited to 2.5 times payroll costs and capped at $10 million, with terms of 2 years at 1% interest and 6 months deferral for initial payments. Loan forgiveness was extended if all funds were used for payroll and other approved expenses within 8 weeks of loan origination.
With the second round of PPP loans, terms for First Draw PPP Loans remain similar with respect to amounts and interest rates, with some important changes to eligibility and other terms. Eligibility now extends to:
- Sole proprietors, independent contractors or self-employed business persons
- Small business which fit size criteria set by the Small Business Administration (SBA) for either industry size standards or an alternative size standard
- Businesses, 501(c)(3) nonprofit organizations, 501(c)(19) veteran organizations or tribal business concerns (Sec. 31(b)(2)(C) of the Small Business Act) with the greater of 500 employees or the SBA industry size standard if exceeding 500
- Any businesses with a North American Industry Classification System (NAICS) code which begins with 72 (Accommodations and Food Services), has more than one physical location and employs fewer than 500 per location
Changes to updated terms include:
- Funds can now be used to pay for certain additional expenses, including operations costs, worker protection costs, supplier costs and property damage costs from vandalism and looters
- Loans issued before June 5, 2020, mature in 2 years, while those issued after that date mature in 5 years
- Borrowers can apply for loan forgiveness to be deferred until the Small Business Administration (SBA) remits the borrower’s loan forgiveness amount for the lender, or else payments are automatically deferred for 10 months after the end of the covered period (8 weeks or 24 weeks as selected by the borrower)
The second PPP loan update further allows certain borrowers who previously received a First Draw PPP Loan to apply for a Second Draw PPP Loan. These have terms generally similar to First Draw PPP Loans with respect to what expenses funds can be used for, interest rates and loan forgiveness. However, there are some notable differences:
- Eligibility for Second Draw PPP Loans is limited to certain existing borrowers of First Draw PPP Loans who have spent their initial loan, have 300 or fewer employees and have lost 25% in revenue during the pandemic
- Loan limits are reduced to $2 million
- Loan caps are raised for businesses in the Accommodations and Food Services industry
These differences and other specifics of Second Draw PPP Loans are detailed further below.
Who Is Eligible for a Second PPP Loan?
If you’ve already been approved for a First Draw PPP loan, you can apply for a second SBA loan under the PPP program if you meet certain eligibility qualifications:
- You have already received a First Draw PPP loan and have used or will use the full amount only for approved expenses
- You have up to 300 employees
- You can document a decline in gross receipts of at least 25% between corresponding quarters in 2019 and 2020 (for example, comparing your receipts in the second quarter of 2019 with those in the second quarter of 2020)
For calculation purposes, gross receipts, include all revenue in any form received or accrued (depending on your accounting method) from any source, including:
- Sales of products or services
- Interest
- Dividends
- Rents
- Royalties
- Fees
- Commissions
Returns and allowances are subtracted from revenue totals. Forgiven First Draw PPP Loans are not taken into consideration when calculating 2020 gross receipts.
If you’re not sure how to calculate your gross receipts, speak to an accounting professional.
What Can I Use a Second PPP Loan For?
Under the second round of PPP funding, you can use both First Draw and Second Draw loans for:
- Payroll costs, including benefits
- Mortgage interest, rent, utilities and worker protection costs stemming from COVID-19
- Uninsured property damage costs caused by vandalism or looting during civil unrest in 2020
- Certain supplier costs and expenses for operations
To qualify for loan forgiveness, you must spend at least 60% of your funds on payroll within your covered period of 8 or 24 weeks.
What Are the Terms of a Second PPP Loan?
Second Draw PPP Loans have terms generally similar to First Draw PPP Loans, and you can expect your Second Draw terms to look a lot like your original loan. The biggest difference lies in loan amounts and industry caps.
Terms of Second Draw PPP Loans include:
- Loan amounts are capped at $2 million
- For companies in industries classified under NAICS code categories which begin with 72 (Accommodations and Food Services), loan limits have been increased from 2.5 times average monthly payroll costs to 3.5 times
- For seasonal businesses that earn two-thirds or more of your revenue over a 6-month period, you can use any 12-week period between Feb. 15, 2019, to Feb. 15, 2020, as a basis for calculating average monthly payroll costs
- Interest rate is 1%
- Maturity of 2 years for loans issued prior to June 5, 2020, and 5 years for loans issued after that date
- No collateral or personal guarantees are required
- Neither the government nor lenders shall charge small businesses any fees
All Second Draw PPP Loans have the same terms regardless of who the lender is or who the borrower is. Some terms vary by industry or other factors, so check with your lender for full details.
Can You Get a Second PPP Loan with Loan Forgiveness?
Second Draw PPP Loans offer loan forgiveness options:
- Loan payments may be deferred for borrowers who apply for loan forgiveness until the SBA remits the borrower’s loan forgiveness amount to the lender
- For borrowers who do not apply for loan forgiveness, payments are deferred 10 months after the end of the covered period for the borrower’s loan forgiveness (either 8 weeks or 24 weeks)
You can apply for the option you prefer.
To qualify for loan forgiveness:
- You must maintain your current payroll levels
- You are required to spend 60% or more of your funds on payroll within your selected coverage window
- You must spend all funds on either payroll or other eligible expenses
You must be able to document payroll spending with verification such as payroll and tax records. Documentation is simplified for borrowers who receive $150,000 or less. Lenders in this bracket are only required to provide a 1-page certification form describing how many employees were retained because of PPP funding, how much was spent on payroll and how much the loan totaled. More documentation may be required in some cases to document revenue loss or meet statutory or regulatory requirements.
How Long Do I Have to Apply for a Second Draw PPP Loan?
Under PPP second round stipulations, Second Draw PPP Loans became available through a limited range of lenders on Jan. 13, 2021, and through all lenders on Jan. 19. They will remain available through March 31, 2021.
How Do I Apply for a Second PPP Loan?
You can locate a PPP lender online through SBA’s Lender Match tool. If you want to start preparing your application and gathering the required information, you can download a form for a PPP Second Draw Loan application. To complete your application, you will need documentation demonstrating your eligibility and verifying your payroll amount qualifications, such as tax filings and payroll records.
What Can I Do If I’m Not Eligible for a Second PPP Loan?
If you aren’t eligible for a Second Draw PPP Loan because you didn’t receive a First Draw PPP Loan, you may still be eligible for a First Draw Loan. Under some circumstances, you can request an adjustment to a First Draw PPP Loan amount if you didn’t accept the full amount. Current legislation authorizes new First Draw PPP Loan applications through March 31, 2020. First Draw PPP Loans have terms similar to Second Draw Loans, but with a limit of 2.5 times your payroll costs and a cap of $10 million.
Even if you aren’t eligible for a PPP Loan, other types of SBA loans and small business financing may be available to you. For example, you can apply for a merchant cash advance, based on your future revenue projections. If you’re wondering what forms of financing may be available to you, take a couple of minutes to fill out our online application and we’ll let you know which options you may qualify for.
