What businesses need to know about second-draw PPP loans

In late December 2020, Congress passed the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act), the much anticipated sequel to the stimulus relief provided by the Coronavirus Aid, Relief and Economic Security Act (CARES Act) that was enacted in March 2020. Under the authority provided by the Economic Aid Act, borrowing under the Paycheck Protection Program (PPP), originally authorized by the CARES Act, reopened in January 2021 with some new parameters and a few adjustments. Additionally, certain businesses that received a PPP loan in 2020 have been given the opportunity to obtain a “second draw” PPP loan.

Second draw PPP loans work much like the first draw PPP loans, but with targeted eligibility and lower maximum loan amounts. With the benefit of 10 months of perspective on the effect of the COVID-19 pandemic on American businesses, the Economic Aid Act attempts to tighten the reigns on the PPP program, while still providing the relief opportunities desperately needed by so many small businesses.

PPP Loan Eligibility under Economic Aid Act

For businesses that have not yet obtained a PPP loan, the Economic Aid Act allows eligible businesses to apply for a PPP loan through March 31, 2021. The Economic Aid Act expanded eligible — and forgivable — uses of the PPP loans to include worker protection costs related to COVID-19, uninsured property damage costs caused by vandalism or looting during 2020, and certain supplier costs and expenses for operations. However, as with PPP loans issued in 2020, in order to be fully forgivable, 60% of the loan proceeds must be spent on payroll costs, the loan proceeds have to be spent on those specified forgivable expenses, and employee and compensation levels must be maintained.

The Economic Aid Act specifically excludes a number of businesses from this round of PPP Loans — whether first or second draw loans. Some notable examples of ineligible businesses are (a) businesses primarily engaged in political activities or lobbying, (b) businesses that have significant Chinese or Hong Kong ownership or influence (i.e., 20% or more ownership or a Chinese resident as a member of the board), (c) publicly traded companies, and (d) businesses that have permanently closed (as distinguished from those that have temporarily closed).

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Second-Draw Loan Amounts and Eligibility

Generally, the terms of the second draw PPP loans are the same as first draw PPP Loans, particularly as they relate to calculating payroll and permissible/forgivable uses. One key difference is the targeted eligibility for the second draw PPP loans.  Where first draw PPP Loans have been available to a fairly broad number of businesses, some of which may not have been considered “small” in the eyes of a layperson, the Economic Aid Act narrows the pool of eligible borrowers. An eligible business — and its affiliated entities, as defined under applicable SBA regulations — cannot have more than 300 employees, and the applicant has to demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020. Like with first draw PPP loans, second draw loan amounts are based on 2.5x average monthly 2019 or 2020 payroll costs, with a maximum loan amount of $2 million (first draw PPP loans were maxed out at $10 million in 2020). However, loan amount for the hard to hit industries included in NAICS code (mostly restaurants and hospitality businesses) amount is based on 3.5x average monthly payroll. Businesses that are part of a single corporate group may not receive more than $4 million of second draw PPP loans in the aggregate.

Application Certifications and Criteria

While a first draw PPP borrower had to certify in its application that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” the borrower did not have to specifically prove a downturn in business to obtain a first draw PPP loan. Doing so would likely have proven disastrous for businesses, as the PPP loans began to be made in the early days of lockdown when there were so many unknowns, particularly in the long-term effects of the pandemic on “normal” daily life. Nonetheless, there was a significant amount of hand wringing over what it meant to make this certification in good faith, particularly as the guidance seemed to lag behind the loans.

The application for a second draw PPP loan contains same certification as to the necessity of the loan, but the Economic Aid Act goes a step further to require borrowers demonstrate a 25% decrease in gross receipts from one quarter in 2020 compared to the same quarter in 2019 in order to be eligible. Some flexibility has been built into this requirement, allowing, for example, an applicant to do an annual comparison between 2019 and 2020 as opposed to a quarter-by-quarter comparison, acknowledging that many small businesses may not have quarterly financials.  There is also reasonable flexibility for those businesses that may not have been open during all of 2019, without which the requirement may have inadvertently precluded newer businesses from being eligible for assistance, and the application instructions provide guidance to applicants on how to determine the appropriate reference quarter.

While “gross receipts” is not defined in the Economic Aid Act, applicable guidance points to the definition of gross receipts in the SBA’s size regulations, defining receipts generally as the “total income” — or “gross income” in the case of a sole proprietorship, independent contractor or self-employed individual — with some specific inclusions and exclusions. Therefore, it is critically important to review the applicable regulations in determining whether a business meets the revenue test for second draw PPP eligibility. It should be noted that the applicable guidance provides that the amount of forgiven first draw PPP loans will not be included toward any gross receipts.

In determining whether a business has experienced the requisite decline in revenue to be eligible for a second draw PPP loan, it must include the gross receipts of its “affiliates” (as defined by the SBA regulations) in the equation. This is comparable to the manner in which the SBA looks to affiliate employee numbers in determining size eligibility.  Affiliate rules can be complicated, particularly if the business has been involved in any merger and acquisition activity, and timing of an acquisition or divestiture may affect whether or not that affiliate is included in the calculation and to what extent.

To demonstrate the decline in gross receipts, applicants for loans exceeding $150,000 will have to submit appropriate documentation — such as tax forms, quarterly income statements and bank statements — with the loan applications, and borrowers with smaller loans will be required to submit the documentation with the forgiveness application or, if the borrower does not request forgiveness, at the SBA’s request.


While additional parameters have been put in place for the second draw PPP loans, these guidelines should not operate to preclude small businesses that have been adversely impacted by the pandemic. Businesses looking to obtain PPP loans in this round of funding should reach out to their lending partners or consult the SBA’s website to help in finding a lender, keeping the March 31, 2021 deadline in mind.

Callie Whatley is a partner and vice-chair of the Corporate and Tax Practice Group at Burr & Forman LLP in Birmingham, where she regularly advises clients on mergers and acquisitions and other corporate issues, including PPP loans.


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