What Small Business Owners Need to Know About the New P3 Loan Round

The second round of the SBA’s Paycheck Protection (PPP) program opened on Monday, January 11, 2021. For the first week of PPP2, the program is only available to small businesses applying to community financial institutions. (CFI). These lenders provide financing to small businesses in underserved communities, including minority-owned businesses that struggled to secure financing during the first round of PPP loans. CFIs include community development finance institutions (CDFIs), minority depositories, certified development companies, and microcredit intermediaries.

The SBA and the US Treasury Department, which oversee the PPP, plan to open the program to all small businesses soon, and while the exact date is still unconfirmed, it will likely be during the week starting on the 18th. January. The second round of PPP loans, as part of a global COVID economic recovery plan, The law on economic aid, adopted in late December, provides for a $ 284 billion cash pool to help struggling businesses survive during the pandemic. Eligible businesses include businesses that have already received a PPP loan in the first loan cycle, as well as those applying for the first time.

PPP2 includes changes to support small businesses rather than larger ones, including companies that have access to capital markets. For example, in the first round of the PPP, Shake Shack was among the companies that applied for and received a $ 10,000,000 PPP loan that the hamburger chain later returned. Interestingly, according to Crain’s, Shake Shack now plans to open 60 new restaurants across the country this year at a time when independent restaurants are still struggling to survive. Fortunately, for small restaurants, there are new provisions in PPP legislation to help hard-hit restaurants and hotels.

The process can be intimidating, especially for business owners who are trying to survive one day at a time. Often they have questions. Some of the most common questions business owners want answered about P3s right now are:

How long will it take for PPP2 to be operational?

When the Economic Aid Act was passed on December 27, 2020, the legislation gave the SBA 10 days to provide advice on the content and implementation of the bill. With applications for CDFI lenders opening up this week, it shouldn’t be much longer before the program is open to the vast majority of lenders and borrowers.

The SBA has started a smooth rollout with smaller lenders, and the program is expected to be fully launched soon once the SBA confirms the procedural and operational changes. To prepare for the opening of this second paycheck protection program, companies should pre-apply now with a provisional PPP request. Once the pre-application process is complete, applicants will be able to submit their funding application as soon as the SBA and the Treasury Department open the program.

How do you measure a 25% drop in income or gross income?

Businesses can qualify for a second PPP loan by showing a 25% drop in revenue. According to the last Interim Final Rule (IFR) on PPP Second Drawdown Loans, revenue is captured using gross revenue. The IFR generally defines gross revenue to include all income in any form received or accrued (in accordance with the entity’s accounting policy) from any source, including sales of products or services, interest, dividends, rents, royalties, fees or commissions, less returns and indemnities.

A borrower can calculate the reduction in income with gross receipts by taking any quarter of 2020 and comparing it to the corresponding quarter from 2019.

Do I have to request a PPP loan forgiveness before taking out a second PPP loan?

No. If a business received a PPP loan in the first round of financing, it is not necessary to request a PPP rebate before applying for a second PPP loan. However, the law states that the company must have used all of the funds from the first PPP loan or intend to use those funds before they can apply for a second loan. Further guidance from the SBA on the intention to use funds may arrive soon.

If my company took the maximum payroll 2.5x in the first round, am I still eligible for a second PPP loan?

Yes. Since the new Economic Aid Law focuses on supporting hard-hit businesses, businesses can still qualify for a second PPP loan (called a 2nd draw loan). Eligibility for a second PPP loan is based on proof of a decrease in business income greater than or equal to 25% of gross business income.

If I am a hotel or a restaurant, am I automatically entitled to a payroll of 3.5 times?

Yes. The Economic Aid Act provided that all businesses with a NAICS code starting with 72 qualify for a loan amount of up to 3.5 times the payroll. First-run businesses with NAICS codes starting with 72 will be eligible if they have no more than 500 employees in total. Second-run businesses with NAICS codes starting with 72 are eligible if they do not employ more than 300 people per location and meet the revenue reduction requirements. Restaurant and hotel locations with a common parent company that operate as separate legal business entities can apply separately.

Can I use PPP2 funding to pay for rent, utilities, and other expenses?

There is more flexibility in how PPP funding can be used. For a loan to be fully forgiven, at least 60% of the money must be spent on payroll expenses. The remaining 40% or less can be used to cover a wider range of business expenses than was allowed in the first round of PPP loans. Beyond mortgage or rent payments and utilities, PPP money can now cover the costs of personal protective equipment and other expenses incurred to meet government-imposed COVID restrictions, as well as property damage, cloud computing and vendor costs.

PPP2 is a lifeline for businesses that might otherwise go bankrupt in these difficult times. Eligible applicants who have not received a PPP loan by August 8, 2020, now have the option to apply for a PPP First Draw loan by March 31, 2021. Eligibility for these loans has been revised to include other types of entities and eligible expenses covered have been expanded. In some cases, some borrowers may request an increase in the initial amount of their PPP loan.

A business is generally eligible for a PPP Second Draw Loan if the borrower:

  1. has received a PPP first draw loan and has used (or will use) the full loan amount only for eligible expenses prior to the disbursement of the PPP second draw loan,
  2. Has no more than 300 employees and
  3. Can demonstrate a reduction of at least 25% in gross revenue between comparable quarters in 2019 and 2020.

Savvy businesses should take advantage of this opportunity and, if necessary, work with your CPA or accountant to help submit a specific application to expedite funding.

About Wanda Reilly

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