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 Administration’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 most—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 companies—whether they’re applying for their first round or second round of PPP funds?
First draw loan eligibility requirements
As mentioned, PPP2 loans are available for both first-time borrowers and businesses that have already secured a PPP loan. , let’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:
- The business was in operation on February 15, 2020
- The business is still open, operational, and is not currently engaged in bankruptcy proceedings.
- The borrower is a mall business, eligible nonprofit organization, Veterans organization, Tribal organization, sole proprietorship, self-employed individual, or independent contractor
- The business has fewer than 500 employees (or fits the SBA’s small business size standard in the business’ industry)
- All business owners with a 20 percent or higher stake US citizens or permanent residents
- All business owners have no criminal record over the past seven years
- The business and owners are not delinquent on any SBA or federal loan with no history of defaulting on such loans over the past seven-year period
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 72—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:
- The loan proceeds were used to cover approved expenses. In order to qualify for forgiveness, PPP loans must be spent on approved payroll costs (including employee wages and sick leave) and nonpayroll costs—which, in addition to the original eligible expenses like utilities, mortgage interest, and lease payments, were expanded under the EAA to include worker protection expenditures (like PPE), operations expenditures, and property damage to the business’ physical location as a result of a public disturbance.
- The loan proceeds were used to pay expenses during the covered period. Only expenses that a business concern incurs during the covered period will qualify for loan forgiveness. While the PPP1 allowed businesses to choose between an eight-week and 24-week covered period, businesses now have the flexibility to choose their own covered period—as long as it falls between eight and 24 weeks.
- At least 60 percent of loan funds were used for payroll costs. In order to qualify for full PPP loan forgiveness, businesses must spend at least 60 percent of their loan on payroll costs.
Second draw loan eligibility requirements
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 different—and more stringent.
The differences between eligibility requirements for first-time and second-time borrowers include:
- Number of employees. In order to qualify for a second draw loan, borrowers must have no more than 300 employees (or, for businesses with an NAICS code 72, 300 or fewer employees per location).
- First draw loan proceeds. The business must have exhausted (or will exhaust) the funds from their first PPP loan.
- Revenue reduction. Businesses applying for a second PPP loan must be able to show a 25 percent year-over-year decrease in revenue in at least one quarter of 2020.
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.
How to calculate revenue reduction for a PPP2 loan
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 reduction—and both rely on “gross receipts.”
Gross receipts includes all revenue (either cash or accrual, depending on the company’s accounting method), including sales of products and/or services, interest, dividends, rents, royalties, fees, and/or commissions—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 2019—or, if the business doesn’t keep quarterly financials, they can compare their annual gross receipts from 2020 to their annual gross receipts from 2019.
Submit your PPP application by March 31
Whether you’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 program’s funds may be exhausted before then. If you’re planning on applying for a loan through PPP2, make sure to submit your application to your lender as soon as possible.