Melissa McCord, Partner

Publications & Media

Small Businesses Get Another Chance to Borrow Under Paycheck Protection Program

Business Law Patrick Maxwell, Melissa McCord

ppp loan

Small businesses grappling with surging coronavirus cases and new restrictions imposed to stop the spread of the virus are poised to receive additional relief from the federal government under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”), which Congress approved and President Trump signed into law late December 27, 2020.

The Economic Aid Act provides an additional $284.5 billion in funding for the Paycheck Protection Program (the “PPP”), gives certain prior PPP participants the opportunity to borrow a second time, and expands how borrowers can use the loan proceeds.

The original PPP made available low-interest and potentially forgivable loans to businesses that employ fewer than 500 people (generally). PPP loans were meant to help small businesses pay for certain overhead costs and to encourage small businesses to keep their workers employed through the early stages of the COVID-19 crisis.

The U.S. Small Business Administration (the “SBA”) administers the PPP, which was created in March under the Coronavirus Aid, Recovery, and Economic Security Act (the “CARES Act”), as modified by the Paycheck Protection Program and Health Care Enhancement Act (the “PPP Enhancement Act”) and the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”). Find our prior alerts about the program here.

In addition to providing increased PPP funding, the Economic Aid Act provides $600 of economic impact payments to people earning $75,000 or less and reinstates supplemental federal unemployment benefits of $300 per week for 11 weeks, among many other measures designed to mitigate the effects of the COVID-19 crisis.

More PPP Funding. The Economic Aid Act increases total funding for PPP loans by $284.5 billion and, importantly, will permit certain businesses that previously borrowed under the program to apply for a “second draw” PPP loan of up to a maximum of $2 million (as compared to $10 million under the first round).

The new round of funding, which will close on March 31, 2021, is expected to generate high demand, yet fewer businesses will be eligible for funding (see below). At this time, it is unclear whether borrowers and lenders will experience the same frenzied, chaotic environment that plagued the PPP in its early days.

More Eligibility Requirements. To channel the new funds to smaller businesses hit hardest by the COVID-19 crisis, the eligibility criteria for the Economic Aid Act is narrower than the criteria under the original CARES Act. To qualify, an applicant must generally, among other things:

  • employ not more than 300 employees (as compared to 500 under the first round);
  • have used or will use all proceeds from its first PPP loan; and
  • show at least a 25 percent reduction in gross receipts during any quarter in 2020 as compared to the same period in 2019.

Eligible borrowers are businesses, certain nonprofits, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural cooperatives, so long as they were in operation on February 15, 2020.

Borrowers may receive loans up to 2.5 times their average monthly payroll costs, although borrowers in the hospitality and food services industry may receive loans of up to 3.5 times their average monthly payroll costs.

More Permitted Uses. Under the original CARES Act, allowable and forgivable uses of PPP loan proceeds included payroll costs, mortgage interest, rent payments, and utility payments. The Economic Aid Act provides borrowers with greater flexibility by making the following uses eligible for forgiveness:

  • Payments for software, cloud computing, and other human resources and accounting needs;
  • Costs related to uninsured property damage caused by public disturbances;
  • Supplier costs that are essential to the borrower’s operations pursuant to a contract, purchase order, or order for goods; and
  • Costs for personal protective equipment and similar investments to comply with COVID-related health and safety guidelines.

If a borrower would like to apply for loan forgiveness, the borrower must spend the PPP loan proceeds on the forgivable uses outlined above, and at least 60% of the amount forgiven must consist of payroll costs.

Under the original CARES Act, borrowers needed to spend the PPP loan proceeds within eight weeks of receipt to qualify for forgiveness. That measurement period was later expanded to 24 weeks. Now, under the Economic Aid Act, borrowers may pick a measurement period between eight and 24 weeks after receipt of the loan.

More Changes. The Economic Aid Act also:

  • Permits borrowers to deduct expenses that were paid for with the proceeds of a forgiven PPP Loan.

  • Creates a simplified application and forgiveness process for loans under $150,000.

  • Allows borrowers that returned all or part of their PPP loan to reapply for the maximum amount so long as they have not received forgiveness on any retained portion of their PPP loan.

  • Permits borrowers that were eligible for an increased PPP loan due to regulatory changes to work with their lenders to increase their loan amount.

  • Repeals an earlier rule that required PPP borrowers to deduct the amount of any Economic Injury Disaster Loan grant from their PPP forgiveness amount.

  • Provides a separate targeted grant program for certain industries—music/performance venue operators, movie theaters, etc.

  • Expands the definition of payroll costs to include group life, disability, vision, and dental insurance.

Many of the above changes are retroactive to existing PPP Loans, but not loans “for which the borrower received forgiveness” before the Economic Aid Act was enacted. Based on this text in the statute, it is not clear if a borrower that received partial forgiveness of a PPP Loan could revise its forgiveness application and seek additional forgiveness due to the new provisions in the Economic Aid Act.

More Audits? Borrowers that applied for PPP loans were required to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations” of their business. However, borrowers that, together with their affiliates, received PPP loans of less than $2 million are deemed to have made the required “necessity” certification in good faith.

The SBA automatically will audit all loans of $2 million or more. In October, the SBA released a questionnaire that such borrowers must complete which is meant to aid the SBA in assessing whether such borrowers needed the loans (see our prior alert on the questionnaire here).

As borrowers tap the PPP program for a second time, a larger number of them will have received more than $2 million in funding, and it is unclear at this time whether the SBA will adjust the threshold triggering SBA review.

More Information. The SBA is required to issue additional guidance within 10 days after the Economic Aid Act becomes law, and may issue more guidance in the future. The complete text of (i) the CARES Act is here, (ii) the PPP Enhancement Act is here, (iii) the PPP Flexibility Act is here, and the Economic Aid Act is here.

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