On January 6, 2021 and January 8, 2021, respectively, the Small Business Administration (the “SBA”) published (a) the implementation of interim rules updating and defining the rules and requirements for first and second loans. Paycheck Protection Program (“PPP”) tour and (b) the PPP loan application form to be used to process these loans. Under the revised PPP, certain borrowers will be eligible to receive either a first PPP loan (“PPP First Draw Loan”) or a second PPP loan (“PPP Second Draw Loan”), as the case may be. Below is a summary of important PPP updates. In addition, please refer to our bulletin, published on December 30, 2020, for more information on the updated terms and conditions relating to PPP First Draw Loans and PPP Second Draw Loans.

Which borrowers are eligible for a PPP First Draw loan?

Under the SBA interim rules, a borrower who has not previously participated in the PPP can seek a PPP First Draw loan. The criteria for obtaining a PPP First Draw Loan remain consistent with the criteria previously issued by the SBA in 2020.

We note that the eligibility criteria for obtaining a PPP First Draw Loan are broader than the criteria for PPP Second Draw Loans. As shown below, the eligibility criteria for PPP Second Draw Loans are more closely tailored to limit eligibility for PPP Second Draw Loans to small businesses that have experienced a significant drop in income.

Which borrowers are eligible for a PPP Second Draw loan?

To be eligible for a PPP Second Draw loan, borrowers must (a) have 300 or fewer employees and (b) be able to demonstrate a 25% reduction in gross revenue (described below) .

In calculating its employee base, a borrower should count all domestic and foreign employees, including full-time, part-time and temporary employees (i.e. those who receive a W-2) . In addition, a borrower must include in this calculation the employees of any entity deemed to be a subsidiary of the borrower in accordance with the SBA’s membership rules.

If a borrower currently has an outstanding PPP first draw loan, can a borrower get a PPP second draw loan?

Yes. A borrower will be eligible to receive a PPP second draw loan if (a) the borrower has received a PPP first draw loan and (b) has used or will use the full amount of the PPP first draw loan on or before the date planned. date the PPP Second Draw loan is disbursed to the borrower. Please note that the “Total Amount” of the PPP First Draw Loan would include any increases under an existing PPP First Draw Loan.

If a borrower has already submitted their first-draw PPP loan forgiveness request, will the fact that their loan forgiveness request is under review delay or affect a borrower’s eligibility? to get a second-draw PPP loan?

Perhaps. If a PPP First Draw Loan forgiveness request is under review / audit by the SBA and the SBA is reviewing a borrower’s eligibility for a PPP First Draw Loan, the SBA will notify the relevant PPP lender that it will not approve a second PPP drawdown loan until the underlying issue is resolved. The SBA notes that it will seek to resolve these issues quickly.

How would a prospective borrower calculate and show the required 25% income reduction?

At the option of the requesting borrower, a requesting borrower can use one of the following comparative periods:

• Quarterly – A borrower can compare any quarter in 2020 to the same quarterly period in 2019 to demonstrate a reduction of at least 25% of the borrower’s gross receipts during the applicable quarterly period. For example, a borrower would use a comparison of the second quarter of 2020 to the second quarter of 2019 if that comparison showed a reduction of 25% or more in gross receipts.

• Annually – A borrower who was in business in all four quarters of 2019 can compare 2020 on an annual basis to 2019 on an annual basis if that comparison shows a reduction of at least 25% in their gross receipts on an annual basis. Note that, to take advantage of this option, the borrower would be required to submit copies of his 2020 and 2019 annual tax returns justifying the drop in income.

How are “gross receipts” calculated?

The SBA has clarified that “gross revenue” will be defined in a manner consistent with 13 CFR 121.104. In general, under this provision, gross receipts are defined to mean “total income”, which would include “all income in any form received or accrued from any source, including sales of products. or services, interest, dividends, rents, royalties, fees or commissions, less returns and indemnities. Gross receipts would not include “net gains or losses, taxes collected and remitted to a tax authority if they are included in gross or total income, such as sales or other taxes collected from customers. and excluding taxes levied on the company or its employees; [and] income from transactions between a company and its national or foreign subsidiaries.

We note that any loan forgiveness obtained on a PPP First Draw loan would not be included in gross revenue.

What are the loan terms for PPP Second Draw loans?

How is the PPP Second Draw loan amount determined?

In general, borrowers are eligible to receive an amount equal to 2.5 times the borrower’s average monthly payroll for US-based employees only, capped at $ 2 million. However, borrowers who are assigned a North American Industry Classification System (NAICS) code 72 (accommodation and food services) are eligible to receive an amount equal to 3.5 times the average monthly payroll. borrower, capped at $ 2 million.

We note that a borrower who is part of a single corporate group that receives more than one PPP second draw loan will be limited to $ 4 million in total.

How does a lender / borrower calculate the “average monthly payroll” of a candidate borrower for first-draw PPP loans and second-draw PPP loans?

Is an applicant borrower still required to certify the economic necessity of the PPP Second Draw loan?

Yes. Borrowers of PPP First Draw Loans and PPP Second Draw Loans will need to re-certify that “[c]The current economic uncertainty makes this loan application necessary to support the applicant’s ongoing operations. In accordance with the guidelines previously issued by the SBA, borrowers should carefully review this certification and adequately document the specific circumstances of the borrower and the good faith determination that at the time of submitting the PPP loan application, the loan PPP is economically necessary, including taking into account the current level of business activity and the availability of other sources of additional cash, as appropriate.

How will the loan cancellation be handled for PPP Second Draw loans? Has the SBA made any significant changes to the loan cancellation process for PPP Second Draw Loans?

PPP Second Draw Loans will be subject to the same loan forgiveness conditions as PPP First Draw Loans except that PPP Second Draw Loan borrowers with a total borrowed amount of less than $ 150,000 will be subject to more flexible loan remission. For second-draw PPP loans of $ 150,000 or less, a borrower will be eligible for a loan forgiveness if they sign and submit a one-page attestation to their PPP lender (a) describing the number of employees that the borrower The borrower has been able to retain thanks to the PPP loan, the estimated amount spent on eligible labor costs and the total value of the PPP loan, and (b) certifying that he has accurately provided the required certifications and has complied with the PPP requirements applicable. The certification form is expected to be available by January 20, 2021.

We note that the SBA has indicated that it intends to issue interim rules summarizing the loan cancellation requirements and process for PPP First Draw Loans and PPP Second Draw Loans in the near term.

Are lenders bound by the same PPP rules and requirements when granting second-draw PPP loans?

Yes. The interim rules issued by the SBA make it clear that lenders are subject to the same requirements when making second-draw PPP loans as when making first-draw PPP loans. The SBA says this treatment “will allow a lender … to use existing program guidelines and standard operating procedures to the greatest extent possible.”