New PPP Loans to Provide $284.45 Billion to Small Businesses

The Paycheck Protection Program (PPP), created by the Coronavirus Relief and Economic Security (CARES) Act and administered by the Small Business Administration (SBA), has provided critical economic relief for small businesses and their workers by providing 5.2 million PPP Loans worth $525 billion and supporting more than 51 million workers.

The Small Businesses, Nonprofits, and Venues Receiving Economic Impact Act (PPP Renewal Act), which is contained in Division N/Title III(Continuation of the Paycheck Protection Program and Other Small Business Supports) of the Consolidated Appropriations Act, 2021 (CAA), enacted on December 27, 2020, includes provisions to continue the Paycheck Protection Program (PPP). To ensure that small businesses continue to receive much-needed economic support, the PPP Reauthorization Act reopened the PPP through March 31, 2021, and provided an additional $284.45 billion in funding for eligible small businesses and nonprofits.

First PPP Loans

The first PPP provided $525 billion in loans to more than 5.2 million small businesses. Although the maximum loan amount was $10 million, only 1.6% of loans were over $1 million and the average loan size was $101,000. More than 4.5 million PPP loans worth $147.5 billion were below $150,000. PPP loans under $150,000 accounted for 87.4% of loans, but only 28.2% of the total loan amount.

TAblo 1 - Salary Protection Program Report - August 8, 2020 (Source: SBA)

Data on the first PPP loans show that these loans have provided significant relief to small businesses, especially smaller businesses, struggling with the devastating economic impacts of the COVID pandemic. The extension of the PPP therefore represents a new opportunity for small businesses.

Thus, eligible small businesses that were previously unable to obtain a PPP Loan will be able to apply for a PPP Loan. The PPP Renewal Law has also enabled some small businesses that were more affected by the economic downturn to receive a second round of forgivable PPP loans. Furthermore, the PPP Renewal Law includes provisions to improve the PPP and streamline the forgiveness process for small loans.

Eligibility Requirements for PPP Loans

As with the first PPP, only businesses or organizations in operation on 15 February 2020 will be eligible for PPP loans.

However, the PPP Renewal Law has expanded the organizations that can receive PPP loans to include the following:

• Small non-profit organizations with 300 or fewer employees, including housing cooperatives, 501(c)(6) organizations and tourism bureaus (DMOs)
• News organizations with 500 or fewer employees

On the other hand, publicly traded companies (with the exception of publicly traded news organizations if the business certifies that the loan will support locally focused or emergency-related content) and businesses receiving closed venue operator grants are excluded from the PPP.

Additional Expenses Applicable to PPP Loan Forgiveness

The PPP Renewal Law expanded the definition of salary expenses to include employer-provided group insurance benefits such as life, disability, vision or dental insurance.

Allowable and forgivable non-salary costs have been expanded to include the following expenses:

• Operating expenses: Payments for business software or cloud computing services that facilitate business operations; the delivery of products or services; the processing, payment or tracking of salary expenses; human resources, sales and invoicing functions; or the accounting or tracking of supplies, inventory, records and expenditures
• Property damage expenses: Expenses in 2020 related to property damage resulting from social unrest that is not covered by insurance or otherwise
• Supplier costs: Payments to suppliers for contracts, purchase orders or orders that are necessary for business operations and were in place before the PPP loan was obtained
• Expenditures to protect workers: Between March 1, 2020 and the end of the national emergency declaration due to COVID-19, businesses' expenditures on personal protective equipment and investments in compliance to comply with COVID-19-related health and safety guidelines

All existing or new borrowers whose loans are not already forgiven are eligible for these expanded forgivable expenses.

Period Covered for PPP Loans

Under the CARES Act, the qualifying period for PPP loans was set at 8 weeks after the loan was received. The PPP Flexibility Act subsequently increased the covered period from 8 to 24 weeks. Thus, for PPP loans taken out before June 5, 2020, the covered period could be chosen as 8 weeks or 24 weeks. For loans taken after this date, the only option for the covered period was 24 weeks. The PPP Renewal Law has provided more flexibility by allowing borrowers to choose the covered period to end at any time during the period starting from the 8th week after the loan is taken out until the end of the 24th week. The covered period for PPP loans has also been extended until March 31, 2021.

Increase in Old PPP Loan Amount

The PPP Renewal Law has made it possible for borrowing businesses to request an increase in their old loan amounts due to the new regulations, as long as their loans are not forgiven:

• Businesses that have returned all or part of their PPP loans can reapply for a loan equal to the difference between the amount received and the maximum amount.
• Businesses that have not accepted the full PPP loan can request a modification to increase the loan amount to the maximum possible amount.
• If a borrower is eligible for more PPP loans as a result of changes in the legislation that allow for loan increases, it can request an increase in the loan amount even if it has received the full amount of the initial loan or filed a Form 1502 application.

The law requires the SBA to issue rules or guidance by January 13, 2021 (within 17 days after the law takes effect) for businesses that have returned all or part of their PPP loans or have not accepted the full loan amount and will reapply for an increase in the loan amount. must be published.

PPP Second Draw Loans

Small businesses in certain sectors, such as restaurants, have been particularly hard hit by the COVID pandemic. The COVID pandemic has significantly reduced the revenues of these businesses, threatening their long-term viability without federal assistance. The PPP Renewal Act allowed these struggling small businesses to receive a second PPP loan, called a PPP Second Draw Loan , of up to $2 million. However, to ensure that additional PPP loans are only available to smaller and more economically impacted businesses, eligibility requirements for the second PPP loan have been toughened.

Eligibility Requirements for PPP Second Draw Loans

Small businesses can apply for a PPP Second Draw Loan if the following conditions apply

• Not employing more than 300 workers
• Gross revenues decreased by at least 25% in any quarter of 2020 compared to the same quarter of 2019 (reference periods are also included for businesses that did not operate in 2019)
• They have utilized or will utilize their first PPP loan in full

PPP Second Draw Loan Amount

The maximum loan amount is equal to the lesser of 2.5 times the borrower's average monthly salary expenses for the 1-year period preceding the date of the loan or 2.5 times the borrower's average monthly salary expenses for the calendar year 2019 and $2 million.

Seasonal employers can calculate average monthly salary costs based on any 12-week period between February 15, 2019 and February 15, 2020. For new businesses not operating in the 1-year period prior to February 15, 2020, average monthly salary costs will be calculated based on the period up to the loan application date.

For small businesses with North American Industry Classification System (NAICS) codes starting with 72 (Accommodation and Food Services Industry), the maximum loan amount is equal to 3.5 times the applicant's average monthly salary expenses less $2 million.

Businesses that meet the initial PPP conditions and have more than one location must have no more than 300 employees per physical location (mainly applicable to restaurants and hotels).

Forgiveness of PPP Second Draw Loans

Forgiveness of PPP Second Draw Loans is similar to the previous PPP loan forgiveness rules. PPP Second Draw Loan borrowers' total salary expenses for the covered period, as well as mortgage, rent and utility payments; operating expenses; property damage expenses; supplier costs; and employee protection expenses are eligible for loan forgiveness. As before, borrowers must spend at least 60% of their PPP Second Lien Loan on salary expenses for the loan to be forgiven in full.

Simplifying PPP Loan Forgiveness

Available PPP Loan Forgiveness Application Forms

Normally, PPP Loan Borrowers are required to apply for loan forgiveness by filing SBA Form 3508, issued on May 15, 2020. This form includes calculations of reductions in employment and wages/hourly rates, and supporting documentation must be submitted with the form.

After the PPP Flexibility Act was enacted, the SBA revised Form 3508 accordingly and released an easier PPP Loan Forgiveness Application Form (3508EZ) that requires fewer calculations. SBA Form 3508EZ can be used by borrowers who meet or are exempt from the employment and wage/hourly rate reduction requirements.

The PPP closed on August 8, 2020 with 5.2 million PPP Loans approved. While 3.57 million (68.6%) of these loans were for loan amounts of $50,000 or less, they accounted for only $62 billion (12%) of the $525 billion in PPP loans. To streamline the PPP Loan Forgiveness process for these loans, the SBA released a simpler version of the PPP Loan Forgiveness application form (SBA 3508S Forum) on October 8, 2020.

Borrowers with a PPP loan amount of $50,000 or less, and whose PPP Loans with affiliates do not exceed $2 million in aggregate, may apply for PPP Loan Forgiveness using the SBA 3508S Form. Borrowers eligible to use SBA Form 3508S are exempt from the rules on reducing the amount of loan forgiveness due to reductions in employment or salary/hourly wages. SBA Form 3508S requires very few calculations and only documentation verifying salary expenses and non-salary expenses need be submitted with the form.

New PPP Loan Forgiveness Form

To further reduce the paperwork burden for borrowing businesses and lenders and simplify the PPP Loan Forgiveness process, the PPP Renewal Act mandates the SBA to create an even simpler PPP Loan Forgiveness form for loans up to US$150,000 by January 20, 2021 (within 24 days of enactment). Under this regulation, a borrower can qualify for PPP Loan Forgiveness by signing and submitting to the lender (bank) a document no longer than one page that includes the following

• Disclosure of the number of employees that the borrower was able to continue to employ as a result of the PPP loan
• Estimated amount of the portion of the loan amount spent on salary expenses
• Total loan amount

The borrower is also required to certify that the information provided is accurate and that the PPP Loan requirements have been complied with. A qualifying borrower with a PPP Loan amount of not more than $150,000 will not be required to submit any documentation other than such attestation and the information required for loan forgiveness when applying for loan forgiveness.

On the other hand, the SBA can review and audit these loans to ensure that there is no fraud. Therefore, it is mandatory to keep relevant employment-related records for four years and other records for three years.

Prioritization of PPP Loans

PPP Loans for Disadvantaged Small Businesses

PPP loans were provided to small businesses on a rolling application basis through lending institutions. As a result, although PPP Loans were open to all eligible small businesses, small businesses with pre-existing relationships with lenders were able to access PPP loans faster and more efficiently. Women- and minority-owned small businesses, smaller businesses with 10 or fewer employees, and businesses in Low to Moderate Income (LMI) areas were particularly vulnerable, as they faced much greater financial risks in this process.

To ensure that PPP Loans are made available to smaller and underserved businesses, the PPP Renewal Law includes some special allocation provisions:

35 billion dollars for the first PPP Loans. Of this, $15 billion will be used for small businesses with 10 or fewer employees, or for businesses in LMI areas that will receive loans of less than $250,000.

25 billion for PPP Second Draw Loans to small businesses with 10 or fewer employees or businesses in LMI areas that will borrow less than $250,000.

PPP Loans to be Extended through Local Credit Institutions

Local lenders play a critical role by providing credit and financial services to individuals and businesses in LMI areas not normally served by traditional financial institutions. Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs) provided PPP loans averaging $74,000 to more than 221,000 small businesses, totaling more than $16.4 billion. The average amount of these PPP loans was relatively small compared to the overall average loan amount of $101,000, suggesting that local lenders are reaching smaller businesses.

Therefore, the PPP Renewal Law includes special allocation provisions to increase lending to hard-to-reach communities and businesses with no or limited access to financial services:

• USD 15 billion for PPP lending (first and second draw) by local financial institutions, including CDFIs and MDIs
• $15 billion for PPP loans (first and second draw) issued by small community banks, small credit unions and small agricultural credit institutions.

The lion's share of the latest COVID relief funds for small businesses ($284.45 billion out of $325 billion) is dedicated to the PPP. Therefore, all small businesses are urged to review the PPP rules to determine if they qualify for a first PPP Loan or PPP Second Draw Loan, and if so, to apply as soon as possible. If you have any questions about PPP Loans or need professional assistance you can contact us.