$284B is available in new rounds of PPP loans – here’s a look at how 2nd round works

Editor’s note: Jeremy L. Freifeld practices in the areas of corporate law, corporate finance, mergers and acquisitions and securities law at Hutchison PLLC.

On December 27, 2020, the Economic Aid to Hard-Hit Small Business, Nonprofits and Venues Act (the “Act”) became law. The Act included $284 billion of additional funding under the Paycheck Protection Program (the “PPP”). The U.S. Small Business Administration and the Department of Treasury subsequently released interim final rules under the Act (here and here).

Notably, there is now a First Draw PPP Loan Program (the “PPP1”) and a Second Draw PPP Loan Program (the “PPP2”). Both are available until March 31, 2021. For purposes of this update, all PPP loans issued in 2020 are included in references to PPP1 loans.

Jeremy Freifeld (Hutchison PLLC photo)

The PPP2 is intended for smaller and harder-hit businesses and allows borrowers who already received a PPP1 loan (either under the original instance or the new instance created by the Act) to receive a second loan. As a result of this narrower focus, the PPP2 is subject to additional requirements than the PPP1. Generally, in order to qualify, a prospective borrower must have:

• 300 or fewer employees;
• Experienced a revenue reduction in a 2020 calendar quarter of at least 25% relative to the same calendar quarter in 2019.
  • The borrower calculates such revenue reduction by comparing quarterly gross receipts in the 2020 quarter against gross receipts for the corresponding quarter in 2019.
    • Gross receipts generally consist of gross income plus cost of goods sold, but excludes any PPP loan amounts that are forgiven.
    • Borrowers should include the gross receipts of any affiliates, including any affiliates acquired during 2020 (in which case gross receipts should include the entire measurement period; not just the period after which affiliation arose).
  • Used or will use the full amount of its PPP1 loan on eligible expenses on or before PPP2 loans are disbursed.

In most instances, PPP2 loan amounts are capped at the lesser of (a) 2.5x monthly payroll costs and (b) $2 million. It should also be noted that the affiliation rules continue to apply and certain entities, regardless of whether they otherwise meet the above criteria, are ineligible (including, certain lobbying businesses, entities organized in or with certain ties to the People’s Republic of China and publicly traded companies).

As a result of the Act, both PPP1 and PPP2 loans now have greater flexibility in certain areas, including:

• In calculating the maximum loan amount, the borrower may calculate average monthly payroll costs based on calendar year 2019 or 2020;
• Eligible expenses have been expanded to include, among other things, worker protection expenditures, supplier costs, cloud computing and other software services that facilitate business operations;
• The definition of payroll costs that are eligible for forgiveness has been expanded to include payments for the provision of employee benefits consisting of group health care or group life, disability, vision or dental insurance; and
• The period for expending the loan proceeds on eligible expenses for forgiveness can be between 8 and 24 weeks (as selected by the borrower).

If you have questions, please feel free to contact Jeremy Freifeld (jfreifeld@hutchlaw.com) or Dan Fuchs (dfuchs@hutchlaw.com).