PPP Loans, Episode 2 – Is The Sequel Worth Watching?
Too often, the suites disappoint.
Consider these bombs – Caddyshack II, Jaws – The Revenge, Mall Cop 2, Major League II, and I could go on. But every once in a while a movie sequel hits a home run – Goldfinger, The Good, The Bad and The Ugly, and The Godfather, Part II come to mind. So what will critics (including me) say about the sequel to America’s not-so-small pandemic economy darling, the Paycheck Protection Program? Really, it’s too early to tell, as the SBA has yet to release any rules or guidance to fill the many loopholes left by HR 133, The Consolidated Appropriations Act, 2021. But, as we await guidance Additional SBAs, expected to be released any day now, let’s take a look at what we know so far and see if and how this sequel can help many of our small and medium businesses.
A quick overview
Last week my law partner, Tom Zamadics, wrote an excellent overview of the new paycheck protection program (“P3”) provisions, a day after the bill was signed. This article will delve a little deeper into the nuances of two aspects of PPP, episode two; the ability for a business to receive a second PPP loan; and the availability of additional funds for businesses that have obtained a first-round loan, but have returned the funds – otherwise known as the Phoenix of the PPP program.
Second round of PPP funding
A very important development in HR 133 is the allocation of an additional $ 284 billion (approximately) in funds for PPP loans, including second-draw loans. While the general concepts surrounding these loans remain largely the same, there are a number of changes from the original, some clearly designed to benefit small businesses, including a special benefit for certain types of businesses. .
Amount of the loan
A business may be eligible for a second loan of up to 2.5 times the average monthly salary costs in the one-year period prior to the loan date or calendar year 2019, up to a maximum loan of 2 millions of dollars. Presumably acknowledging the terrible impact of the pandemic on the accommodation and food services industries, these companies can apply for a loan of up to 3.5 times the average monthly payroll, while the maximum loan amount remains at $ 2 million. of dollars. The $ 2 million loan cap is new and appears to address previously expressed concerns, both by Congress and the public, about companies that received initial PPP loans well in excess of $ 2 million.
Other eligibility conditions
The Congress included several new or revised eligibility requirements for “second round” candidates. The income reduction test is an essential new addition to the eligibility requirements for PPP loans. A business must demonstrate that it experienced a reduction of at least 25% in its gross revenue between comparable quarters in 2019 and 2020. There are other timelines for businesses that were not in operation in Q1, Q2 , Q3 and Q4 of 2019. Applications submitted as of January 1, 2021, may use gross revenue for Q4 2020 compared to Q4 2019. It is not known whether this revenue reduction test will replace or simply supplement the certification of subjective necessity of the CARES Act. This question can be answered with advice from the ASB, but the subjective certification seems somewhat meaningless if a small business saw a 25% reduction in its gross sales in the same quarter in 2019 by compared to 2020.
If you are a business owner lucky enough to have experienced stable or increased gross income in 2020 compared to 2019, then don’t assume that your business is not eligible for a graduate PPP loan. The candidate’s ability to select which quarter 2019/2020 they will use to determine whether they meet the requirement to reduce gross income year over year can save the day. What if your business was forced to shut down or experienced a substantial downturn for several weeks or months in 2020, perhaps due to a COVID outbreak among its workforce? Even if your annual gross revenue from year to year is neutral or slightly declining, your business may meet the 25% reduction requirement for a single quarter and may be eligible to apply for a second PPP loan.
Another change in eligibility concerns the maximum number of employees. HR 133 states that the business should not have more than 300 employees, although a business in the accommodation or food service industry with multiple locations should not have more than 300 employees at a single location. This is down from the limit of 500 employees under the CARES Act and subsequent directives.
Finally, remember that you must use or will use the full amount of your first PPP loan in order to be eligible for the second draw.
At the very beginning of the CARES Act, and for several months thereafter, we advised many companies on the risk associated with obtaining and maintaining a PPP loan. After all, unless the business is relatively confident that it would get a full or near full loan forgiveness, this is just a loan; one with a good interest rate, but otherwise horrible repayment terms.
Anyone interested in the PPP loan program is familiar with the large publicly traded companies that at the start of the program received and then returned their PPP loans quickly. What about the multitude of small business owners who, fearful of repayment terms or how the SBA may interpret the certification of subjective necessity, have taken the same step and paid off their loan? I didn’t see any details on how many companies are repaying loans, but I did read that over $ 30 billion in funds had been returned, only a fraction of that was from publicly traded companies.
For many companies, the return of the PPP loan was and remains a sound business decision. For others, the additional rules and guidelines issued by the SBA came too late; they had taken the safe route and returned their PPP loan funds. I expect many of these businesses to be closed and never reopen. Others continue to struggle financially.
For those who are still in business, HR 133 offers a second chance at a PPP loan. Specifically, the law directs the SBA to issue guidelines within 17 days of promulgation, which allows borrowers who have repaid all or part of their PPP loan to reapply for the maximum applicable amount as long as they have not received forgiveness.
Certainly we have to wait and see what the guidance brings, but it is a unique opportunity for many small businesses. Those in this position should continue to monitor SBA guidelines and keep in touch with their lenders and legal advisers.
While many aspects of Episode 2 of the PPP loan program remain a bit unclear, the framework is in place for additional help and financial support, especially for small and medium-sized businesses. Stay tuned for further plot developments.
© 2021 Ward and Smith, PA For more information on the issues described above, please contact .
This article is not intended to give, and should not be relied upon, legal advice in any particular circumstance or factual situation. No action should be taken based on the information in this article without obtaining the advice of a lawyer.
We are your established legal network with offices in Asheville, Greenville, New Bern, Raleigh and Wilmington, NC.