NEW JERSEY -- The newly issued guidelines on Paycheck Protection Program (PPP) lending overseen by the SBA and the U.S. Treasury Department will better target New Jersey's small businesses, especially those owned by minorities or located in low income areas.

The Economic Aid Act makes it possible for hard-hit businesses to get second loans from the PPP lending initiative. It also places restrictions on the types of companies that can obtain PPP loans. For instance, limitations have been put into place to reduce the incidences of large companies taking money designed for small businesses that don’t have access to capital markets.

Under the latest guidelines released on Wednesday, Jan. 6, there are now two different kinds of loans that small businesses can take through the PPP: “1st Draw” loans and “2nd Draw” loans (meant for those businesses that already received funding from the first round of PPP funding, which ended on August 8, 2020). On Friday, Jan. 8, the government released the official forms that will be used to apply for both first draw and second draw loans.

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Eligibility rules are a bit different for each loan type. For second draw loans, eligible companies may have no more than 300 employees, and no business or corporate group can get more than $4 million in second draw loans. Second draw applicants must also certify that they have used their previous first draw loan for approved expenses or that they will use all the funds by the time they receive their second draw. 

In general, the rules of the program from the first round of the program largely remain in effect. Importantly, the provision making all PPP loans potentially forgivable, if borrowers use the money for approved purposes, will remain in place.

Business owners that previously received PPP funding (“1st Draw” loans) now are able to obtain another infusion of capital (“2nd Draw” loans). The SBA’s new guidelines attempt to clarify details that were not totally clear before. For instance, to be eligible to receive a second draw loan, a company must show that it has experienced a 25% reduction in gross receipts. The SBA has now clarified the definition of gross receipts and has also explained that business owners who saw a full 25% drop in revenues between 2019 and 2020 will be able to report this instead of having to show a quarterly drop.

Another important change to know about is designed to help the struggling businesses in Accommodation and Food Services industries (NAICS Code 72). For second draw PPP loans, restaurants, hotels, and others in the accommodation industry can get funding for 3.5 times their payroll, as opposed to 2.5 times the payroll for companies in other industries.

PP2 comes at a critical moment for struggling restaurants. While many  saw their revenues go up in September and October when COVID restrictions were eased, the second wave of the coronavirus led to the return of tighter restrictions in December, typically a month when restaurants do well. Restaurateurs are holding out for an infusion of cash that will ensure survival until a time when the vaccines help the country get somewhat back to normal and people have the confidence to go out to eat again.

The SBA has wisely put in place new rules designed to prevent fraud. Applicants for second draw PPP funding now must submit the following documents as proof of a 25% or more revenue reduction in 2020:

  • 2019 tax returns (since 2020 returns have not been filed)
  • Quarterly income statements
  • Bank statements

For borrowers requesting less than $150,000, these documents don't have to be submitted to their lender until they are applying for loan forgiveness. Business owners should also expect to provide the following for first and second draw PPP loan applications they submit:

  • Payroll summary report
  • Payroll tax filings – IRS 940 (or 990), IRS 941 for applicable quarters
  • Identity documents: driver’s license or passport for principals

The SBA Administrator has released a statement affirming the agency’s commitment to small and underserved businesses and has announced that the SBA will start opening the loan portal to only small lenders for at least the first few days of program's reopening. Set asides providing $15 billion for lenders with less than $1 billion in assets and another $15 billion for lending institutions with less than $10 billion of assets should provide incentives for banks and other lenders to make small loans.

We saw during the initial stages of PPP in the spring that big banks preferred to work with larger companies with whom they had existing banking relationships. The new law tries to address that flaw in the initial legislation, which was passed very quickly to help desperate small business owners. The government is also raising the fees that lenders can charge for approving PPP loans of $50,000 or less, which provides incentive to make small loans that often have helped minority business owners and firms in under-served areas.

The SBA has released new forms (including the SBA 2483-SD) on its website, and the online portal for loans to be processed by the SBA is expected to open for all lenders soon after the initial period for community financial institutions -- perhaps as early as Wednesday Jan. 13. The SBA has also released helpful overviews on its website for anyone who wishes to learn more about the program:

Now, the whole financial industry must make the preparations to get this program started again. The first round of PPP lending was a success. More than 5 million loans were approved totaling $525 billion (an average loan size of $100,729) by 5,460 lenders. The second draw can have similar impact, especially now at a time when coronavirus numbers are spiking.

It is of the utmost importance that borrowers prepare their applications now before the program opens. When the program opens, the funds could be used up in near-record time. Many companies are barely hanging on. If they do not receive funding soon, it is likely that they will not survive, which would be devastating to the local economies in New Jersey and across the nation.