Second-Draw PPP Loans: What Advisors Should Know

Differences Between First- and Second-Draw PPP Loans

While second-draw PPP loans generally have the same terms and conditions as first-draw loans, there are some key differences aside from the initial eligibility requirements. First, a business can continue to receive up to 2.5 times its average monthly payroll costs (3.5 times for hospitality businesses), but all second-draw PPP loans are capped at a firm $2 million (rather than $10 million for first-draw loans). 

Second-draw borrowers are required to prove the required revenue reduction — while first-draw borrowers were generally required only to make a good-faith certification. Borrowers who request less than $150,000 in second-draw proceeds don't have to verify a revenue reduction up front, but will be required to provide documentation if they apply for forgiveness.

The list of permitted uses has also been expanded under the new law. Proceeds can, of course, continue to be used to cover payroll costs and operating expenses. They can also be used to pay for personal protective equipment and modifications to the business that are necessary to adapt the business to meet new health and safety standards. These capital expenditures might include physical barriers, ventilation systems, expansion of outdoor spaces, and health screening facilities.

PPP funds can also be forgiven if they're used to repair damage caused by protests and other disturbances in 2020, as long as the damage wasn't covered by insurance. Proceeds can now be used to cover supplier costs, which include expenses related to contracts and other purchase orders for supplies that were in effect before the business took out the second-draw loan.

Payments for operations expenses like cloud computing services, business software, accounting or HR needs also qualify.

The new rules give business owners flexibility to choose the length of their "covered period," which is the period over which at least 60% of loan proceeds must be spent on qualifying expenses. That period begins on the date proceeds are disbursed and ends at least eight weeks later, but no more than 24 weeks later. 

Some business owners may be eligible for larger loans under the new rules. The SBA will allow those businesses to request an increase in their loans if eligible, either by returning all or a portion of the loan or requesting an increase if the business hasn't yet accepted the loan proceeds. Those requests must be made electronically to the SBA no later than March 31 under current rules.

Conclusion

The new PPP loan rules are detailed and complex. It's also expected that, as with the first round of loans, the SBA will continue to release guidance on a rolling basis. Small-business clients should be advised of these and other changes so that they can take full advantage of the new rules.

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