Qualifying for a PPP Second Draw Loan – Are You Checking All the Boxes for Eligibility?

calculating PPP loan forgiveness

On December 27, 2020, President Trump signed the Consolidated Appropriations Act, which included a number of changes to the Paycheck Protection Program, including the introduction of the ability to take a PPP second draw loan. The SBA began taking applications for these loans on January 15 and the program is open until March 31, 2021.

Over the past several weeks, we have been assisting many borrowers in assessing whether they are eligible for a PPP second draw loan. On the surface, the requirements are fairly straightforward. In order to qualify, borrowers must:

  1. Have already used or will use the full amount of their initial PPP loan for authorized purposes on or before the expected date of disbursement of the second draw PPP loan,
  2. have 300 or fewer employees (subject to exceptions for certain hard hit industries), and
  3. demonstrate a 25 percent or more reduction in revenues for any calendar quarter in 2020 compared to the same quarter in 2019, or for the entire 2020 year compared to 2019.

While these requirements are clear, they don’t tell the whole story about whether a borrower is eligible for a PPP second draw loan. What many borrowers are overlooking is whether they meet the good faith certification requirements to be eligible for a PPP loan.

The good faith certification requirements have been a topic of considerable debate and much confusion for borrowers since the PPP loan program began. For PPP first draw loans, the SBA  issued a notice that it will review all loans of $2 million and greater to determine whether the borrower met the good faith certification requirements. For-profit borrowers of a first draw PPP loan need to complete SBA Form 3509 – Loan Necessity Questionnaire as part of the SBA’s loan review process; SBA Form 3510 should be completed by non-profit entities.

It is important to note that PPP second draw loans carry the same good faith certification requirement as PPP first draw loans. The good faith certification requirements are outlined in FAQ #31 which states:

  • Before submitting a PPP application, all borrowers should review carefully the required certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
  • All borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application.
  • Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.

Borrowers must certify that they meet these conditions when they sign the loan application, and this is a critical detail. The certification requirements for a second draw loan have to be based on the borrower’s circumstances at the time they apply for the second draw loan. The conditions that existed at the time of the borrower’s first draw loan are irrelevant and do not apply to the second draw loan.

The SBA has said it will be issuing new guidance on loan forgiveness and loan review. While this guidance is still forthcoming, we anticipate that the level of loan review for second draw loans will be lowered from the current $2 million threshold for first draw loans. Our suggestion for PPP second draw borrowers is to clearly assess whether you meet the good faith certification requirements and document your situation at the time of the loan.

We have published three articles on this subject that you may find helpful as you evaluate whether you meet the good faith certification requirements for your second draw PPP loan.

As always, if you have any questions about these matters or would like assistance as you go through the PPP second draw loan process, please contact us. We will continue to keep you updated as new developments emerge.

Mario Vicari, Kreischer MillerMario O. Vicari is a director and a specialist for the Center for Private Company Excellence. Contact him at Email.   

 

 

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