Second Paycheck Protection Program (PPP2) Loan Eligibility For Small Businesses
January 14, 2021
January 14, 2021
As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.
When Congress passed the Economic Aid Act (EAA) on December 27, 2020, it brought some much-needed financial relief to the small business community by green lighting an additional $284 billion in small business loans to the U.S. Small Business Administrationâ€™s (SBA) Paycheck Protection Program. These new Paycheck Protection Program loans are aimed to get funding into the hands in the businesses that need them the mostâ€”and while first-time borrowers continue to be eligible for loans under the PPP program, for the first time, past PPP borrowers can also apply for a second PPP loan to secure the additional funding they need to keep their businesses moving forward through the continued pandemic.
These second PPP loans (also referred to as PPP2 loans) are the lifeline many small businesses need to keep their doors open. But what, exactly, are the eligibility requirements for these second draw loans? Are there any changes to eligibility for first-time PPP borrowers under the EAA program vs. the original PPP? And what steps do small business owners need to take to ensure they get the PPP loan they need to support their companiesâ€”whether theyâ€™re applying for their first round or second round of PPP funds?
As mentioned, PPP2 loans are available for both first-time borrowers and businesses that have already secured a PPP loan. , letâ€™s review the eligibility requirements for first-time borrowers under the Paycheck Protection Program.
Under the new EAA legislation, the eligibility requirements for first-time borrowers (also called first draw loans) have remained the same as they were under the CARES Act and PPP1, including:
Small businesses can apply for a first draw PPP loan of up to 2.5 times their average monthly payroll costs for a maximum loan amount of up to $10 million. (Under the EAA, that number is increased to 3.5 times average monthly payroll for any business with a NAICS code starting with 72â€”the Accommodation and Food Services industry, one of the hardest hit by the pandemic and COVID-related restrictions).
As long as the borrower uses the loan proceeds on approved expenses, the full loan amount would qualify for loan forgiveness. In order to qualify for loan forgiveness, the borrower must meet the following criteria:
Because the SBA wants to ensure that PPP2 funds go to the businesses that need it the most, eligibility requirements for second draw PPP loans are differentâ€”and more stringent.
The differences between eligibility requirements for first-time and second-time borrowers include:
The maximum loan amount businesses can apply for is also different for second draw loans; while first-time borrowers can apply for a loan of up to $10 million, second draw loans are capped at $2 million.
As mentioned, in order to qualify for a second loan through the Paycheck Protection Program, businesses need to be able to show that they experienced at least a 25 percent decrease in revenue in Q1, Q2, Q3, or Q4 2020.
When the EAA first passed, there were a lot of questions in the small business community around how, exactly, to calculate and show that revenue reduction. But, according to the Interim Final Rule, there are two ways to calculate and show revenue reductionâ€”and both rely on â€śgross receipts.â€ť
Gross receipts includes all revenue (either cash or accrual, depending on the companyâ€™s accounting method), including sales of products and/or services, interest, dividends, rents, royalties, fees, and/or commissionsâ€”then reduced by returns and allowances.
Under the new interim rule, businesses can either calculate revenue reduction by comparing gross receipts from any quarter in the 2020 calendar year and comparing those gross receipts to the same quarter in 2019â€”or, if the business doesnâ€™t keep quarterly financials, they can compare their annual gross receipts from 2020 to their annual gross receipts from 2019.
Whether youâ€™re applying for a first draw or second draw PPP loan, loan applications are due to PPP lenders no later than March 31, although the programâ€™s funds may be exhausted before then. If youâ€™re planning on applying for a loan through PPP2, make sure to submit your application to your lender as soon as possible.