SBA Improves PPP Lending with Changes That Benefit Small Business Owners

The newly issued guidelines on Paycheck Protection Program (PPP) lending overseen by the SBA and the U.S. Treasury Department will better target truly small businesses, particularly those owned by minorities and companies located in low income areas.

The law, now referred to as the Economic Aid Act, makes it possible for hard-hit businesses to get second loans from the program. It also places restrictions on the types of companies that can obtain PPP loans. For instance, new limitations have been put into place to reduce the incidences of public companies taking money designed for small businesses that don’t have access to capital markets in the way that larger corporations do.

Under the latest guidelines released late on Wednesday, Jan. 6, there are now two different kinds of loans that small businesses can take through the PPP: “1st Draw” loans and “2nd Draw” loans (meant for those businesses that already received a loan in the first round which ended on August 8, 2020). On Friday, Jan. 8, the government released the official forms that will be used to apply for both first draw and second draw loans.

Eligibility rules are a bit different for each loan type, understandably. For second draw loans, eligible companies may have no more than 300 employees, and no business or corporate group can more than $4 million in second draw loans. Second draw applicants must also certify that they have used their previous first draw loan for approved expenses and that they will use all the funds by the time they receive their second draw, although they do not need to have already received forgiveness before taking a second draw loan. For first draw loans, corporate groups (meaning all companies that are owned by the same parent company or have the same management) can receive no more than $20 million combined across all first draw loans under the new rules.

In general, the rules of the program from the first round of the program (which ended on Aug. 8) largely remain in effect, which is good news for borrowers who will be trying to understand whether they can qualify or not. Importantly, the provision making all PPP loans potentially forgivable, if borrowers use the money for approved purposes, will remain in place.

Business owners that previously received PPP funding (“1st Draw” loans) now are able to obtain another infusion of capital (“2nd Draw” loans). The SBA’s new guidelines attempt to clarify details that were not totally clear before. For instance, to be eligible to receive a second draw loan, a company must show that it has experienced a 25% reduction in gross receipts. The SBA has now clarified the definition of gross receipts and has also explained that business owners who saw a full 25% drop in revenues between 2019 and 2020 will be able to report this instead of having to show a quarterly drop.

Another important change to know about is designed to help the struggling businesses in Accommodation and Food Services industries (NAICS Code 72). For second draw PPP loans, restaurants, hotels, and others in the accommodation industry can get funding for 3.5 times their payroll, as opposed to 2.5 times the payroll for companies in other industries.

The second round of the PPP (so-called PPP2) comes at a critical moment for struggling restaurants. While many of them saw their revenues go up in September and October once COVID restrictions were eased, the second wave of the coronavirus in November led to tighter restrictions in December, which is usually a month when restaurants do very well. Restaurateurs are holding out for an infusion of cash that will ensure survival until a time when the vaccines help the country get somewhat back to normal and people have the confidence to go out to eat again.

The SBA has wisely put in place new rules designed to prevent fraud. Applicants for second draw PPP funding now must submit one or more of the following documents as proof of a 25% or more revenue reduction in 2020:

• 2019 tax returns (since 2020 returns have not been filed)
• Quarterly income statements
• Bank statements

For borrowers requesting less than $150,000, these documents don't have to be submitted to their lender until they are applying for loan forgiveness.

Business owners should also expect to provide the following for both first and second draw loan applications they submit:

• Payroll summary report
• Payroll tax filings – IRS 940 (or 990), IRS 941 for applicable quarters
• Identity documents: driver’s license or passport for principals

Documentation requirements may change as further program guidance is provided by the SBA,

The SBA Administrator has released a statement affirming the agency’s commitment to small and underserved businesses and has announced that the SBA will start opening the loan portal to only small lenders for at least the first two days of program reopening. The SBA has indicated that this is a measure to ensure truly small businesses get an opportunity to receive money from the program right away.

Set asides providing $15 billion for lenders with less than $1 billion in assets and another $15 billion for lending institutions with less than $10 billion of assets should provide incentives for banks and other lenders to make small loans. We saw during the initial stages of PPP in the spring that big banks preferred to work with larger companies with whom they had existing banking relationships. The new law tries to address that flaw in the initial legislation, which was passed very quickly to help desperate small business owners. The government is also raising the fees that lenders can charge for approving PPP loans of $50,000 or less, which provides incentive to make small loans that often have helped minority business owners and firms in under-served areas.

One other important change should provide encouragement for small businesses to apply for the loans: the new EA Act allows businesses to deduct expenses for which the PPP loan was used. This will help lower tax burdens.

Further guidance is still expected from the SBA to clarify some outstanding questions that lenders and accounting professionals have been raising following the release of these regulations. The SBA has released new forms (including the SBA 2483-SD) on its website, and the online portal for loans to be processed by the SBA is expected to open for all lenders soon after the initial period for community financial institutions -- perhaps as early as Wednesday Jan. 13. The SBA has also released helpful overviews on its website for anyone who wishes to learn more about the program:

• Top-line Overview of PPP First Draw Loans
• Top-line Overview of PPP Second Draw Loans

Now, the whole financial industry must make the preparations to get this program started again. The first round of PPP lending was a success. More than 5 million loans were approved totaling $525 billion (an average loan size of $100,729) by 5,460 lenders. The second draw can have similar impact, especially now at a time when coronavirus numbers are spiking.

It is of the utmost importance that borrowers prepare their applications now before the program opens. When the program opens, the funds could be used up in near-record time. Many companies across the United States are barely hanging on. If they do not receive funding soon, it is likely that thousands, if not millions, of companies will go bankrupt, which will have a devastating effect on the overall economy.