Best Practices Regarding 2nd Draw PPP Loans

With the Omnibus Appropriations and Emergency Coronavirus Relief Act now signed into law, many non-profits who successfully applied for and received loans from the first round of the Paycheck Protection Program (PPP) will likely be interested in participating in the second round. Before you consider applying for these funds, it is important that you understand the eligibility rules and stipulations regarding loan draw downs and forgiveness.

Is Your Organization Eligible For A Second Loan?

Non-profits will need to fall under the following size thresholds:

-No more than 300 employees
-The revenue threshold must be less than what is specified in section 121.201 of Title 13, Code of Federal Regulations (sometimes as low as $1,000,000 but often quite a bit more) or a size that falls under the alternative size standard established under Section 632(a)(5), which is not more than $15,000,000 or average net income for federal tax purposes of not more than $5,000,000 excluding carry-over losses.
-An organization cannot be classified in the typically ineligible-for-an-SBA-loan category noted here. Please note though that if your organization has fallen into the “typically ineligible” categories, but you were able to receive a first PPP loan, you may be eligible for a second draw loan.
-To qualify for a second loan, you must be able to document at least a 25% reduction in gross revenues between the same quarters in 2020 and 2019.

What Accounting Method Should You Use to Determine Gross Receipts?

The statute does not provide specific guidance on the accounting methods to be used to determine gross receipts. One option is that a borrower uses the same accounting method as it does for its tax returns: either tax accrual basis or tax cash basis accounting. Since the Small Business Administration (SBA) allows a borrower to use both cash basis and accrual basis accounting, a second option may be to use any reasonable accounting method that shows the required reductions in gross receipts.

What Are The Loan Amount Formulas For The 2nd Draw Down?

The second draw loan formula is nearly the same to most borrowers’ original PPP loans. That formula is a second draw loan equaling either 2.5 times the average monthly payroll during the 1-year period before the date on which the loan is made or 2.5 times the average monthly payroll during calendar year 2019. However, the second draw loan formula limits the loan amount to no more than $2,000,000. It is important to note that the original PPP loan amount formula limited the loan amount to no more than $10,000,000.

How Should Seasonal Employers Handle 2nd Draw Downs?

For a seasonal employer, the second draw loan formula first calculates the average monthly payroll paid or incurred for a 12-week period beginning on February 15, 2019 or March 1, 2019, and ending June 30, 2019, or a consecutive 12-week period between May 1, 2019 and September 15, 2019. The formula then multiplies this average monthly amount 2.5, compares the amount to $2,000,000, and sets the second draw loan amount to the lesser of the amount or $2,000,000.

How Should New Employers Handle 2nd Draw Downs?

For new organizations that did not exist in the 1-year period before February 15, 2020, the formula calculates the average monthly payroll costs for the months in 2020 the entity operated, multiplies that average monthly amount by 2.5 to reach a tentative loan amount, and limits the loan to no more than $2,000,000.

What Are The Aggregate PPP Loan Limits?

An organization receiving multiple second draw loans because it operates multiple locations can receive no more than $2,000,000 in total.
Organizations receiving a PPP loan may not receive another SBA loan that pushes their aggregate borrowing over $10 million.
Within any 90-day interval or time, an organization and its affiliates may not receive more than $10,000,000 of guaranteed loans.

Will My 2nd Draw Loan Be Publicly Disclosed?

Yes, it may be. If you would prefer that your organization’s status of losing 25% in revenue not be disclosed, this is something to take into consideration before applying.

How Does Loan Forgiveness for the Second Draw Down Work?

The process will work in a similar fashion to first draw loan forgiveness. Your organization will be eligible for forgiveness equal to the sum of payroll costs, mortgage interest, rent, utility payments, operations expenditures, property damage costs, supplier costs, and worker protection expenditures incurred before January 1, 2021.

We expect more updates will be forthcoming regarding the application process. Please check our blog for updates periodically, and do not hesitate to contact us in the meantime with any questions.