PPP - Second Draw
Banks will begin accepting applications this week for the second draw of PPP loans for eligible businesses. In many ways, this second round of funding will be very similar to the first. Loans will be provided in the amount of 2.5 times the average payroll calculated in the same method as the first round. Meaning your second draw loan amount should be very similar to the first. (Certain industries can obtain a higher amount. This higher calculation does not apply to healthcare-related industries.) You have up to 24 weeks to use this funding. Funds can be used to cover payroll, rent, utilities, but added to this list is now supplier costs, covered property damage, and PPE. Of the funds you receive, 60% must be used for payroll, just as before.
The second round of PPP funding will be considered non-taxable income both on the granting of the loan and its forgiveness, making this an incredibly attractive program for those who are eligible.
There are a couple of key differences between this round of funding and the last:
You must attest that you have already used or will use all of your PPP round one funds prior to the date that round two funds are received.
In order to qualify for funding, you must show either a 25% annual revenue reduction from 2019 to 2020 or show a 25% revenue reduction in any quarter from 2019 to the same quarter in 2020. For most clients, this reduction would have occurred in Q2 2020 as compared with Q2 2019.*
You must attest that “current economic uncertainty makes this loan request necessary.” Although this is not a different language than used in the first round of funding, circumstances have definitely changed. In the first round of funding, the SBA provided a safe harbor assumption that all loans under $2,000,000 automatically met the necessity requirement. To date, the SBA has issued no specific guidance regarding this question as it relates to 2nd Draw applications. There is division among commentators as to whether businesses that are presently operating at close to normal levels and not aware of any real threat of an impending shut-down can certify that a 2nd Draw loan is necessary, even if applicants can meet all the statutory qualification requirements. Some commentators expect the SBA to issue a similar safe harbor provision to what was released for 1st Draw loans. Other commentators think there are significant differences in the current economic environment for many businesses from what was occurring last spring, and as such, the SBA may not be as willing to take as liberal an interpretation of economic uncertainty and necessity.
If you are comfortable answering yes to the necessity question, there would be no reason to delay submitting a loan application. If you are comfortable submitting a loan application but are concerned with how the SBA will ultimately interpret this question, one option would be to move forward with submitting your loan application but hold off spending the loan proceeds and wait for clarification. If a strict interpretation of loan necessity is released, the loan proceeds could be repaid.
*If you were not in business for all of 2019, there are still ways for you to be eligible for funding. Please call your advisor for more details on this requirement.