As small business owners continue fighting to survive and recover from the Covid-19 pandemic, they can enter the new year with renewed hope and much-needed assistance after President Trump signed the latest Covid-19 economic relief package into law in late December.
The legislation includes key provisions related to the Small Business Administration’s Paycheck Protection Program and signature 7(a) loan. The changes are worth noting, especially if you own a business or plan to advise clients on matters related to the relief package.
Here are four key areas in the bill that affect borrowers:
1. Eligible Borrowers Can Obtain A Second PPP Loan
The Paycheck Protection Program was designed primarily to help business owners retain their employees. Under the new law, PPP borrowers are eligible for an additional loan (a second draw) if they meet certain criteria. To qualify, businesses must employ 300 people or fewer. They must have used or will use the full amount of their first PPP loan. And they must demonstrate a minimum 25% reduction in gross receipts during any one quarter in 2020 from the same quarter in 2019.
Those who are eligible may apply for up to 2.5 times the borrower’s average monthly payroll during 2019 or no more than $2 million—whichever is less. The maximum amount is significantly less than the first round of the PPP, which allowed borrowers up to $10 million.
Hard-hit businesses—those in the accommodations and food services industries—may qualify for second-draw loans of up to 3.5 times their average monthly payroll costs, which equates to 140% of their original PPP loan.
2. PPP Loan Forgiveness Rules Remain Intact
The forgiveness rules and processes are generally the same for second-draw loans as they were for the original PPP loans. Borrowers can have their loan forgiven in its entirety if they use the funds to pay for eligible costs during the applicable covered period (any time frame between eight and 24 weeks from loan disbursement).
To qualify for full forgiveness, at least 60% of the loan funds must be spent on payroll costs. The rest may be used for business mortgage interest payments, rent, utilities or other new eligible expenses such as certain operations expenses, supplier costs and worker protection expenditures. More information is expected soon on the additional eligible expenses.
Once the loan proceeds have been exhausted, borrowers can apply for forgiveness within 10 months of receiving the loan. Detailed documentation of PPP-related spending is critical for borrowers to earn maximum loan forgiveness. Acceptable documentation includes paid checks, payroll documentation, receipts and billing statements. As indicated below, some borrowers will not be required to submit supporting documentation with the forgiveness application, but must keep those documents in case of subsequent review by the SBA.
3. The PPP Loan Forgiveness Application Is Simplified
The Small Business Administration had 24 days from the legislation’s enactment to develop forms and instructions for a one-page forgiveness application for loans under $150,000. Borrowers must sign and submit the form and include critical details such as the number of employees retained, the estimated amount spent on payroll and the total loan amount. Borrowers must attest to the accuracy of the certification and that they complied with PPP requirements. Supporting documentation will not be required with the simplified forgiveness application, but must be retained for four years for possible future review by the Small Business Administration.