Navigating Second Draw PPP Loans


On December 27, 2020 the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act) was signed into law, which reopened the Paycheck Protection Program (PPP) both to first-time borrowers and, subject to stricter conditions and limits, to borrowers that previously received a PPP loan (second draw borrowers).[1] Under the Economic Aid Act, the last day to apply for and receive a loan under the reopened PPP is March 31, 2021. The Small Business Administration (SBA) and the Department of the Treasury (Treasury) have recently issued various interim final rules, borrower and lender application forms, and other guidance in connection with the reopened PPP.[2]

Significantly, these new materials include the Interim Final Rule on Second Draw Loans (the Second Draw Rule), issued on January 6, 2021 and published in the Federal Register on January 14, 2021, which sets forth an array of rules governing the reopened PPP for second draw borrowers.[3] Although the terms and conditions of the reopened PPP are generally the same as under previous phases of the program, the Second Draw Rule imposes certain substantial limitations on second draw loans, as discussed below.

Eligibility Requirements

A borrower is eligible for a second draw loan only if it has 300 or fewer employees and experienced a quarterly or annual revenue reduction as described below in 2020 relative to 2019. In addition, to be eligible, the borrower must have received a first draw loan and have used the full amount of such loan on or before the disbursement of the second draw loan.

Revenue Reduction

A second draw borrower must have experienced a revenue reduction of 25% or greater in 2020 relative to 2019. This revenue reduction may be calculated by comparing the borrower’s quarterly gross receipts for any quarter in 2020 with the borrower’s gross receipts for the corresponding quarter of 2019. If a borrower was not in business for certain quarters of 2019, then any quarter of 2020 may be compared to any quarter of 2019 in which the borrower was in business. If the borrower was not in business at all during 2019, but was in operation on February 15, 2020, then it may compare the second, third, or fourth quarter for 2020 to the first quarter of 2020.

Alternatively, a borrower that was in operation for all of 2019 may satisfy the revenue reduction requirement if (i) its annual receipts for 2020 were at least 25 percent less than those for 2019 and (ii) it submits copies of its annual tax forms that substantiate the revenue decline.

For purposes of the revenue reduction calculation, “gross receipts” generally is defined to include all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.[4] For a borrower that is a nonprofit, “gross receipts” has the meaning in section 6033 of the Internal Revenue Code of 1986.[5] Any forgiveness amount of a first draw loan that a borrower received in 2020 is excluded from gross receipts.

Certain Borrowers with Multiple Physical Locations

An entity that is assigned a NAICS code beginning with 72 (i.e., the accommodation and food services sector) is eligible for a second draw loan if it employs no more than 300 employees per physical location and otherwise satisfies the requirements for eligibility.[6]

Excluded Entities

As compared to previous phases of the PPP, several additional categories of borrowers are prohibited from receiving a second draw loan. These categories of prohibited borrowers include, among others:

  • A publicly traded company.
  • A business concern or entity primarily engaged in political activities or lobbying activities.
  • A business concern or entity owned at least 20 percent by a parent that is organized under the laws of, or that has significant operations in, China or Hong Kong.
  • A business concern or entity with a board member who is a resident of China.
  • Any person required to submit a registration statement under section 2 of the Foreign Agents Registration Act of 1938.
  • A person or entity that receives a grant for shuttered venue operators under section 324 of the Economic Aid Act.

Additionally, an entity that has permanently closed is prohibited from receiving a second draw loan. A borrower that has temporarily closed or temporarily suspended its business remains eligible.

Payroll Cost Calculation

The maximum loan amount for a Second Draw PPP Loan is 2.5 months of the borrower’s average monthly payroll costs, capped at $2 million. The relevant time period for calculating a second draw borrower’s payroll costs is either calendar year 2020 or calendar year 2019. Alternatively, second draw borrowers (unless self-employed) may use the precise 1-year period before the date on which the loan is made to calculate payroll costs. For borrowers in the accommodation or food services sector, the maximum loan amount is equal to 3.5 months of payroll costs, subject to the $2 million cap, rather than 2.5. The Second Draw Rule also sets forth specific calculation methodologies for seasonal businesses, new entities that did not exist for the full twelve-month period preceding the second draw loan, farmers and ranchers, and self-employed individuals and partnerships.

Businesses that are part of a single corporate group are limited to $4 million in aggregate proceeds for second draw loans (and $20 million in aggregate proceeds for both first and second draw PPP loans combined).

Loan Application and Documentation Requirements

The documentation required to substantiate payroll cost calculations is generally the same for a second draw loan as for a first draw loan. However, no additional documentation to substantiate payroll costs will be required if (i) the borrower used calendar year 2019 figures to determine its first draw PPP loan amount, (ii) the borrower used calendar year 2019 figures to determine its second draw PPP loan amount (instead of calendar year 2020), and (iii) the lender for the borrower’s second draw PPP loan is the same as the lender that made the borrower’s first draw PPP loan.

To establish that the 25% revenue reduction requirement is satisfied, an applicant for a second draw loan must submit supporting documentation, which may include annual or other relevant tax forms, or if those are not available, quarterly financial statements or bank statements. However, if the principal amount of the second draw loan does not exceed $150,000, such documentation will not be required upon the loan application, but must be submitted on or before an application for loan forgiveness.

Second Draw Borrowers with Unresolved First Draw Loans

If a second draw loan applicant has a first draw loan that is under review by SBA, then the lender, when it submits an application for a guaranty of the second draw loan, will be notified by the SBA that it will not receive an SBA loan number until the first draw loan issue is resolved. The Second Draw Rule states that SBA will resolve issues related to unresolved borrowers “expeditiously.” According to the SBA and Treasury, the procedure is therefore intended to prevent additional loans from being made to unresolved borrowers, but without disqualifying an eligible unresolved borrower from receiving a second draw loan if such issues are resolved in the borrower’s favor.

Certain Other Issues

Eligibility of debtor in bankruptcy

It is unclear whether a debtor in bankruptcy is eligible to obtain a loan under the reopened PPP. The Economic Aid Act amended the U.S. Bankruptcy Code to provide that a court may authorize a debtor in possession or qualifying trustee to obtain a PPP loan, and such loan will be treated as a debt to the extent not forgiven in accordance with the terms of the PPP.[7] Nevertheless, a subsequent SBA and Treasury interim final rule, issued on January 6, 2021 and published in the Federal Register on January 14, 2021, states that if a PPP loan applicant or its owner is the debtor in a bankruptcy proceeding, either at the time the loan applicant submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan.[8] Additionally, the most recent borrower application forms for first draw and second draw loans, issued on January 8, 2021, ask whether the PPP loan applicant is involved in any bankruptcy and state that, if so, the loan will not be approved.

Until this conflict between the legislation and the regulation is resolved, the eligibility of a debtor to borrow under the reopened PPP will remain an open question.  

Economic necessity certification

Similar to first draw loans under the current and previous phases of the PPP, a second draw loan applicant is required to certify that ‘‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Existing guidance provides a safe harbor whereby any PPP borrower, together with its affiliates, that received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. It appears that this safe harbor may be available with respect to second draw loans, although the Second Draw Rule does not explicitly state so.

Loan forgiveness

Second draw PPP loans are eligible for loan forgiveness on generally the same terms and conditions as first draw PPP loans.

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It remains to be seen whether the reopened PPP will prove as popular and controversial as previous phases of the program. It is, however, already clear that extensive information regarding the names and locations of borrowers, loan amounts, and similar information will be publicly disclosed, as occurred under previous phases of the PPP. The new and untested components of the reopened PPP chiefly relate to the limits on second draw loans, as described above. We expect, in keeping with previous phases of the PPP, that further clarifications and modifications will be issued and, potentially, extensions will be made of the reopened PPP beyond its current March 31, 2021 end date. 

[1] We provided a high-level overview of the Economic Aid Act here.

[2] As of this writing, certain related materials that the SBA and Treasury have stated will be issued remain forthcoming, including an updated version of the PPP Frequently Asked Questions reflecting the reopening of the PPP.

[3] Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans, 86 Fed. Reg. 3712 (January 14, 2021) (available here).

[4] The Second Draw Rule further clarifies that: “Generally, receipts are considered ‘total income’ (or in the case of a sole proprietorship, independent contractor, or self-employed individual ‘gross income’) plus ‘cost of goods sold,’ and excludes net capital gains or losses as these terms are defined and reported on IRS tax return forms. Gross receipts do not include the following: Taxes collected for and remitted to a taxing authority if included in gross or total income (such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees); proceeds from transactions between a concern and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker. All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs such as payroll taxes, may not be excluded from gross receipts.”

[5] For this purpose, “gross receipts” means the gross amount received by the organization during its annual accounting period from all sources without reduction for any costs or expenses including, for example, cost of goods or assets sold, cost of operations, or expenses of earning, raising, or collecting such amounts. Thus “gross receipts” includes, among other things, the gross amount received as contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting such amounts.

[6] Additionally, certain types of news organizations may qualify under the same standard of no more than 300 employees per physical location.

[7] Prior to this provision in the Economic Aid Act specifically addressing PPP loan applicants in bankruptcy, the Eleven Circuit upheld the SBA’s authority to prohibit debtors in bankruptcy from applying for and receiving a PPP loan. See In re Gateway Radiology Consultants, P.A., No. 20-13462 (11th Cir. Dec. 22, 2020). Similarly, the Fifth Circuit held that a bankruptcy court exceeded its authority when it required the SBA Administrator to allow a PPP loan for a debtor in bankruptcy. See In re Hidalgo County Emergency Service Foundation, 962 F.3d 838 (5th Cir. 2020).

[8] Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by Economic Aid Act, 86 Fed. Reg. 3692, 3698 (January 14, 2021) (“If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan. If the applicant or the owner of the applicant becomes the debtor in a bankruptcy proceeding after submitting a PPP application but before the loan is disbursed, it is the applicant’s obligation to notify the lender and request cancellation of the application. Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes.”).