The second PPP loan is here to help U.S. small businesses access government-backed loans.
What is a PPP Loan?
The Paycheck Protection Program (PPP) is an incentive program designed to help small businesses cover expenses such as payroll, rent, utilities, and worker protection costs. This program initially rolled out in March 2020, and it is now allowing eligible borrowers who have already received a PPP loan to apply for a second one in 2021. Second draw PPP loans have many of the same terms as first draw PPP loans, including:
- Interest rates of 1%
- No collateral requirements
- Five-year maturity
- No personal guarantee requirements
However, while PPP loan’s basics have remained the same, business owners should be aware of some new guidance and requirements for 2021.
New Guidance Issued on PPP Loans for Small Businesses in 2021
Even businesses that received a PPP loan in 2020 may continue to need assistance after being impacted by the COVID-19 pandemic. With this in mind, a significant amount of funding for additional PPP loans was included in the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act signed into law in December 2020. Second draw PPP loans cover more expenses than last year’s loans. Among the new eligible expenses are:
- Personal protection equipment
- Essential supplier costs
- Cloud computing and other operational expenses
Another change to rules for 2021 is the fact that small businesses can now choose how much time they need to be covered for, with options ranging from eight weeks to 24 weeks. Loan forgiveness is more lenient for second PPP loans, with current rules now forgiving loans of up to $150,000. PPP loans will fully or partially cover additional expenses such as:
- Property damage
- Worker protection
- Supplier costs
The last significant change for the second draw is greater flexibility for tax deductions. While borrowers were initially unable to deduct expenses paid for with PPP funds, borrowers in their second round of PPP loans will now be able to deduct eligible expenses even if they are paying with funds from their loan.
Eligibility Requirements for Second PPP Loan
There are four main requirements for second draw PPP loans. To receive this funding, a business must:
- Have no more than 300 employees
- Demonstrate a minimum 25% reduction in gross receipts when compared to the same time frame in 2019 or 2020
- Have already received a first draw
- Have exclusively used PPP funding for authorized purposes
Can You Get a Second PPP Loan?
If you meet the eligibility requirements and your business has been operational since before February 15, 2020, you should be able to apply for a second PPP loan with no difficulty. However, borrowers need to note the employment cap, which differs significantly from first draw loan requirements: Small businesses that want to apply for a second PPP loan must have no more than 300 employees. In comparison, businesses that applied for their first loan in 2020 could have up to 500 employees. In other words, businesses with 300–500 employees would have been eligible for a first draw loan but will not be eligible for a second.
It is also important to note that if you are applying for a second draw PPP loan, you must have used all the funds from your first one by the time you receive your second. Businesses that have permanently closed due to the pandemic are not eligible to receive a second one. Other businesses not eligible under the new rules include:
- Businesses based out of the People’s Republic of China
- Lobbying firms
- Publicly traded companies
- Live entertainment venues already receiving aid under the Economic Aid Act
How Much Can You Borrow Through the PPP?
In general, a small business can take out a second draw PPP loan at 2.5 times the average monthly payroll costs in 2019 or 2020, with a cap at $2 million. However, this differs slightly for food services and certain businesses in the accommodation sector, such as hotels. In these cases, the maximum loan amount is 3.5 times the average monthly payroll costs in 2019 or 2020, again up to $2 million. This higher loan eligibility also applies to seasonal businesses and businesses that have been open for less than a year.
It is worth noting that borrowers who did not take the full amount of their first loan offer may still be eligible to receive the money they did not take. Businesses that have applied for loan forgiveness already will not be able to do this, but those that have not yet applied for forgiveness may request that the additional money be added to their second draw loan.
Small Businesses With Multiple Locations
Businesses with multiple locations may apply for a second draw PPP loan individually, as long as each location meets the eligibility requirements and has no more than 300 employees. Businesses applying for individual loans for separate storefronts cannot borrow more than $4 million in total.
When to Apply for the Second Draw PPP Loan?
Applications for second draw PPP loans must be submitted between January 13, 2021, and March 31, 2021. It is best to submit your application as soon as possible to ensure that you meet this deadline.
What Are the Documents Required to Apply?
Conveniently, businesses applying for $150,000 or less will not have to submit any new documentation as long as they apply through the same lender as they did for their first draw. However, if a business needs to borrow a higher sum, it will need to provide documentation of its reduction in gross receipts using one of the following methods:
- Tax returns from 2019 and 2020
- Quarterly financial statements
- Quarterly bank statements
How Can You Apply?
It is not necessary to apply for a second PPP loan through your bank. Instead, you can work with any participating lender. It is best to find lenders who will work with small businesses.
