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The opportunity for business to take a second Paycheck Protection Program (PPP) loan became a possibility on December 27, 2020 with the signing of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act. Let’s cover the key points here.

Reference Documents

If you want to dive into the boring Department of Treasury documents we reference for this article, they are:

We’ll try and give you the “Cliff Notes.”

Eligibility for Round 2

Unlike the first round of the PPP, the rules for eligibility are more tightly focused on smaller businesses who have experienced sales losses.

Most of the rules from Round 1 apply, with some added qualifications:

  • Business has no more than 300 employees AND
  • Business had a sales decrease in at least one quarter in 2020 of at least 25% compared to the same quarter in 2019

Additional Eligibility

Certain organizations who weren’t eligible for PPP in Round 1 are now eligible.

This includes:

  • Non-profit 501(c)(6) organizations
    • As long as they don’t receive more than 15 percent of donations for lobbying AND
    • Their activities are no more than 15 percent lobbying.

Loan Amount

The loan amount is similar to Round 1, with some key changes:

  • Loan amounts include a borrower’s average monthly payroll costs multiplied by 2.5.
  • Really cool for restaurants, hotels, and anyone with NAICS code 72 (Accommodation and Food Services) as the loan amount can be average monthly payroll costs multiplied by 3.5
  • Average monthly payroll may be calculated based on calendar year 2020 or calendar year 2019
    • This is really awesome for those who experience sales declines in 2020.
  • Borrowers are also permitted to use the precise 1-year period before the date on which the loan is made to calculate payroll costs if they choose not to use 2019 or 2020
  • In calculating a borrower’s payroll costs, the borrower must subtract any compensation paid to an employee in excess of $100,000 on an annualized basis.
  • The maximum amount of the loan is $2 million.

Payroll Costs

Payroll costs again consist of:

  • Salary, wages, commissions, or similar compensation; cash tips
    • Again, these are capped at $100,000 annualized.
  • Payment for vacation, parental, family, medical, or sick leave
  • Payment for employee benefits: group health care or group life, disability, vision, or dental
  • Payment of state and local taxes assessed on compensation of employees
  • For an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.

These costs were the same as round 1.

Loan Eligible Forgivable Expenses

The December Economic Aid Act made some changes for what expenses can be forgiven. Spend here to make your loan a grant.

The original eligible expenses included:

  • Payroll costs (see above)
  • Mortgage interest payments
  • Rent payments
  • Utility payments

New forgivable expenses include:

  • Key operations expenses:
    • Payments for any business software or cloud computing service that facilitates business operations
    • Product or service delivery
    • The processing, payment, or tracking of payroll expenses, human resources, sales and billing functions
    • Accounting or tracking of supplies, inventory, records and expenses
  • Supplier costs
    • Payments made by a borrower to a supplier of goods for the supply of goods that:
      • Are essential to the operations of the borrower at the time at which the expenditure is made
      • Is made pursuant to a contract, order, or purchase order
        • in effect at any time before the covered period with respect to the applicable covered loan
        • with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan
  • Worker protection that may include
    • Drive-through window facility
    • Air filtration systems
    • Physical barriers such as a sneeze guard
    • Expansion of business space
    • Onsite or offsite health screening

Note that 60% of forgivable spending should come from payroll costs.

Loan Terms

The loan terms are as follows:

  • 1% APR
  • 5-year maturity date

Coverage Period

Borrowers can use an 8- or 24-week coverage period. We recommend the 24-week period as it will maximize eligible payroll costs.

Applying for Round 2

Most banks and lending institutions who supported businesses during Round 1 are supporting loans again.

Applications start on January 13, 2021.

Recommendations

There are a lot of details we didn’t cover here but know that the PPP is better than ever. Forgiveness is very likely making this a grant, if used properly.

Use this loan to stay in business so you can hire when demand resumes because it’s a lot easier to hire from an existing business than a new one.