After relaunching the Paycheck Protection Program to select lenders on January 11, today is the first day that second-draw PPP borrowers--that is, those who've already exhausted a first PPP loan--will get another shot at the refundable loan program aimed at struggling small businesses.
While businesses will have access to about $284 billion in program funds this time around, the money could go quickly. The first $349 billion loan program provided under the Cares Act ran out in a mere two weeks after it opened in April 2020. While there were many reasons why a business might have been shut out of round one, one mistake some companies made was heading to their lender unprepared.
Besides filling out the second-draw PPP borrower application form, here are a few things to have at the ready in case your lender asks.
Proof of revenue losses
Eligibility for a second-draw loan comes down to three things: You need to have already exhausted an earlier PPP loan, or will do so soon; you need to have 300 or fewer employees; and you need to have experienced a revenue loss of at least 25 percent in any quarter in 2020 versus 2019. You may also use an annualized number for the full year of 2020 over 2019, according to the latest guidance.
To determine your losses, you must first determine whether you report your taxes on a cash or accrual basis, said Ami Kassar, founder and CEO of MultiFunding, a small-business loan adviser, in a statement. Ask your accountant if you are not sure. If you report on a cash basis, you can simply print out your bank statements and compare your deposits (not including any PPP money you've previously received). If you report on an accrual basis, meaning revenue and expenses are recorded when a transaction occurs rather than when payment is received or made, you need to go into your accounting software and run quarterly comparative reports that don't include PPP money from the previous round. Kassar adds that you need to use actual calendar quarters in your breakdown; you cannot just use any three-month period.
"This point is easy to miss amidst the other complexities," says Greg Ott, CEO of Nav, an online provider of PPP loans, about the revenue loss. "A lot of business owners may miss out on funds because they don't realize they're eligible based on just one quarter."
Borrowers seeking a loan of $150,000 or less do not need to provide the quarterly revenue information to the lender if they use the same lender as they did for their first draw, says Alan Lane-Murcia, SBA program manager at First American Bank. They need only attest to the loss. If you are using a different lender this time around, that lender will likely want a complete file on your business. Per the guidelines, borrowers do need to provide the quarterly revenue when applying for forgiveness whether or not they've worked with a particular lender before. But as Lane-Murcia notes, everything is subject to change.
First American Bank says it is asking businesses to provide those figures, but if they can't do so immediately, it's not a deal breaker. "We are asking for quarterly revenue now, but if some customers don't have the information available now, we will obtain it as soon as we can," says Lane-Murcia.
If you're applying for a loan through the same lender as your first PPP--and your loan is less than $150,000--you do not need to submit 2019 payroll documentation. Of course, you might want to. The latest law allows borrowers to elect to use payroll documentation from either 2019 or 2020. If you're angling to maximize your loan amount, you might want to choose a pay period from the year in which you had more employees, notes Ott. However, the amount you qualify to borrow and the amount that is forgivable may vary. "The small business should look at the rules on forgiveness and use of funds at the same time so they are not surprised if they take a larger loan and have a greater amount that does not qualify for forgiveness."
For borrowers seeking loans of more than $150,000--second-draw loans are capped at $2 million--the easiest way to calculate and verify payroll is to download a Cares Act Report from your payroll provider if they offer it, says Ott. If your provider doesn't offer this report or you don't use one--say, you're self-employed--tax forms can be used instead. For most businesses, you will need to supply IRS Form 941; sole proprietorships or independent contractors need a Schedule C (IRS Form 1040).
To calculate your payroll costs manually, use the same method as in round one--that is, multiply 2.5 times your company's average monthly payroll for 2019 (or 2020). For businesses in the hospitality industry, such as restaurants and hotels, that operate under the North American Industry Classification System (Naics) code starting with the number 72, the calculation is different. These companies must multiply their average monthly payroll by 3.5 times, up to $2 million, to hit their total loan amount. The SBA provides a worksheet for this.
You may also need to file a variety of other forms, depending on your company's unique situation. Here's a list of potentially important documents, according to the New York City Department of Small Business Services:
- Copy of photo ID for all owners who own 20 percent of the business or more
- 2019 and 2020 profit and loss statements to show revenue loss during 2020
- 2019 business tax returns; 2020 returns if available
- For partnerships -- include IRS Form 1065 and Schedule K-1
- For sole proprietors -- include IRS Form 1040 Schedule C
- Articles of incorporation
- Payroll reports with a list of gross wages, paid time off, and taxes assessed for all employees for all 12 months of 2020
- 2020 employer IRS documents (including one of the following for all four quarters of 2020):
Form 941: Employer's Quarterly Federal Tax Return
Form 944: Employer's Annual Federal Tax Return (for smallest employers)
Form 940: Employer's Annual Federal Unemployment (FUTA) Tax Return
Form W-3: Transmittal of Wage and Tax Statements
Documentation to support health insurance and retirement expenses incurred as a part of payroll expenses (for example: a statement from insurance or retirement company)