On March 27, 2020, then President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) in response to the global pandemic. To bolster small businesses ravaged by COVID-19, the CARES Act authorized the Small Business Administration (“SBA”) to guarantee small business loans through the Paycheck Protection Program (“PPP”). Under the PPP, eligible borrowers are entitled to full forgiveness of a borrowed amount provided that borrowers use the borrowed amount for payroll and covered expenses.
The President extended the PPP by signing into law the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Ventures Act (the “Economic Aid Act”). On January 11, 2021, the SBA reopened the PPP to new borrowers and “Second Draw” borrowers or those borrowers who had already received a PPP loan. The requirements for “Second Draw” PPP borrowers are stricter than the loose requirements of the original PPP or “First Draw.”
Who is Eligible?
A borrower may be eligible for a “Second Draw” PPP loan if:
The borrower is a business concern, independent contractor, or eligible self-employed individual, sole proprietor, non-profit organization eligible for a first draw, veterans organization, Tribal business concern, housing cooperative, small agricultural cooperative, eligible 501(c)(6) organization or destination marketing organization or an eligible nonprofit news organization;
The borrower has three hundred (300) or less employees;
The borrower has experienced at least one fiscal quarter in 2020 in which gross receipts (i.e. total amounts received by an organization regardless of its source but not adjusted for costs and expenses) were at least twenty-five (25) percent less than the corresponding quarter in 2019; and
The borrower has received a “First Draw” PPP loan and has already use or will use its “First Draw” PPP loan only on authorized uses under the PPP.
Loan Terms
Generally, the “Second Draw” PPP loan has almost identical terms to the “First Draw” PPP loan.
The “Second Draw” PPP loan terms are:
The loan is unsecured;
The loan has a five (5) year maturity;
The loan has one (1) percent simple interest;
The loan has deferred payments and
A borrower may apply for full forgiveness of the loan.
Calculating Payroll Costs
Under the “Second Draw” PPP loan, a borrower is entitled to 2.5 times the average total monthly payment for payroll costs incurred or paid by the borrower during 2019 or 2020 twelve (12) month calendar year. The borrower elects the period from which to base the average total monthly payment. Those organizations with NAICS code beginning with 72 are entitled to use a 3.5 times multiplier.
Use of Funds
If approved, a borrower must use the funds to pay payroll costs (including some benefits), mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.
Loan Forgiveness
Generally, “Second Draw” PPP loans are subject to the same forgiveness criteria as “First Draw” PPP loans except for loans one hundred fifty thousand ($150,000.00) dollars or less where the borrower seeking forgiveness must submit documentation evidencing the revenue reduction unless the borrower has already provided such documentation with their application.
A borrower will be entitled to full loan forgiveness if during the eight (8) to twenty-four (24) month covered period following disbursement:
The borrower maintains employee and compensation levels as required by the “First Draw” PPP loan;
The borrower spends the loan proceeds on payroll costs and other eligible expenses and
The borrower spends at least sixty (60) percent of the loan proceeds on payroll costs.
Karpus Law is a boutique, full-service law firm that provides legal consultation to small and medium sized businesses throughout New Jersey. If you would like to contact an attorney, please call our office at (973) 645-9453 or E-mail Info@karpuslawfirm.com.
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