The U.S. Small Business Administration (SBA) and Treasury issued guidance on Wednesday, January 6th for the new round of Paycheck Protection Program (PPP) loans available to small business owners impacted by the coronavirus pandemic.
There are significant differences in this next round of funding, outlined in the interim final rules. Below are key points to keep in mind when determining if a 1st or 2nd PPP loan is right for your business.
Overview of round of PPP interim final rules
Two interim final rules (IFRs) were highlighted:
- Consolidates the rules for PPP forgivable loans for first-time borrowers and outlines changes made by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act.
- Lays out the guidelines for new PPP loans to businesses that previously received a PPP loan.
- PPP funding is available to businesses that previously received a PPP loan.
- Businesses are eligible for a second PPP loan of up to $2 million, provided they have 300 or fewer employees, have used or will use the full amount of their first PPP loan, and can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019. For a new business started this year, the drop in revenue must be 30%.
Who qualifies for the Second Round of PPP
Following are the qualifications that must be met to participate in the Paycheck Protection Program:
- Businesses with 300 or fewer employees that are eligible for other SBA 7(a) loans.
- Sole proprietors, independent contractors, and eligible self-employed individuals.
- Not-for-profits, including churches.
- Accommodation and food services operations (those with North American Industry Classification System (NAICS) codes starting with 72) with fewer than 300 employees per physical location.
The legislation allows borrowers that returned all or part of a previous PPP loan to reapply for the maximum amount available to them.
Closed businesses excluded for the PPP Program
This new legislation prohibits an entity that has permanently closed from receiving a second PPP Loan because the Small Business Act describes existing businesses only. The Administrator, in consultation with the Secretary, has determined this provision is also necessary to maintain program integrity, prevent abuse, and preserve PPP Loan funds for businesses still in operation.
Terms, conditions, and requirements for new round of PPP
New round of PPP Loans are generally subject to the same conditions and requirements as the previous program. These include, but are not limited to the following terms:
- No collateral will be required.
- No personal guarantees will be required.
- The interest rate will be 100 basis points or one percent, calculated on a noncompounding, non-adjustable basis.
- The maturity is five years.
- All loans will be processed by all lenders under delegated authority and lenders will be permitted to rely on certifications of the borrower to determine the borrower’s eligibility and use of loan proceeds.
Use of PPP Proceeds
Costs eligible for loan forgiveness in this round of the PPP, as with the last round, include payroll, rent, covered mortgage interest, and utilities. The new round makes the following potentially forgivable:
- Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.
- Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.
- Covered operating costs such as software and cloud computing services and accounting needs.
- To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a covered period of either eight or 24 weeks.
PPP loan amounts
Here are details about the fund amount available to qualified businesses:
- The maximum loan amount has been cut from $10 million in the first program to $2 million maximum.
- PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs in the year prior to the loan or the calendar year. (or 3.5 for restaurant and hospitality businesses with NAISC code 72)
The new COVID-19 relief bill guidelines include:
- Creates a simplified forgiveness application process for loans of $150,000 or less.
- A borrower will receive forgiveness if they sign and submit a certification that is not more than one page in length, includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount.
- The SBA must create the simplified application form within 24 days of the bill’s enactment and may not require additional materials unless necessary to show revenue loss requirements or satisfy relevant statutory or regulatory requirements.
- Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
- Repeals the requirement that PPP borrowers deduct the amount of any Economic Injury Disaster Loan advance from their PPP forgiveness amount.
- Includes support for first- and second-time PPP borrowers with 10 or fewer employees, first-time PPP borrowers that have recently been made eligible, and for loans made by community lenders.
Payroll cost calculations
In general, the Economic Aid Act provides that the maximum loan amount for a second PPP Loan is equal to the lesser of two and half months of the borrower’s average monthly payroll costs or $2 million.
The new Economic Aid Act adjusted the methodology for calculating a borrower’s payroll costs and provides that the relevant time period for calculating a borrower’s payroll costs for a second PPP Loan is either the twelve-month period prior to when the loan is made or calendar year 2019.
The rules state that “calendar year 2020” refers to “the twelve-month period prior to when the loan is made.” Calculating payroll costs based on calendar year 2020 rather than the twelve months preceding the date the loan is made will simplify the calculations and
documentation requirements for borrowers because payroll records are more commonly created and retained on a calendar-year basis.
Allowing borrowers to calculate payroll costs based on calendar year 2020 is also not expected to result in a significant difference in payroll costs compared to the twelve months preceding the date the loan is made because all second PPP Loans will be made in the first quarter of 2021.
However, PPP Loan borrowers who are not self-employed (including sole proprietorships and independent contractors) are also permitted to use the precise 1-year period before the date on which the loan is made to calculate payroll costs if they choose not to use 2019 or 2020 to calculate payroll costs.
Required documentation to apply for a PPP loan
The documentation required to substantiate an applicant’s payroll cost calculations is generally the same as documentation required for the first PPP Loan. However, no additional documentation to substantiate payroll costs will be required if the applicant used calendar year 2019 figures to determine its first PPP Loan amount.
Documentation may also include the following:
- Relevant tax forms, including annual tax forms
- If relevant tax forms are not available, quarterly financial statements or bank statements
- For loans with a principal amount of $150,000 or less, such documentation is not required at the time the borrower submits its application for a loan, but must be submitted on or before the date the borrower applies for loan forgiveness
- If a borrower does not submit an application for loan forgiveness, such documentation must be provided upon SBA’s request
Note that different documentation requirements may differ based on your lender.
The new round of the Paycheck Protection Program, administered by the SBA, makes continued financial support available to eligible small businesses to help keep employees and stay open safely during the COVID-19 pandemic.
SmartBiz Loans is here to help you apply for this new round of PPP funding. The banks in the SmartBiz network are processing applications and ready to help you get the funding you need in 2021.
Determine if a PPP loan is right for you or start a streamlined application on the SmartBiz Loans website.
What You Need to Know
The availability of PPP loans remains subject to SBA guidance and other factors, including the amount of funding available to banks and the quantity of eligible applicants considered on a first-come, first-served basis. The information provided above is for educational purposes only. Please consult the SBA’s website for actual rules and the most current guidance.