COVID Relief Bill: Key PPP Eligibility Issues Loom Large for New Draw Loans

COVID Relief Bill: Key PPP Eligibility Issues Loom Large for New and Second Draw Loans


The COVID-19 relief bill opens the door to new aid for small businesses under the Paycheck Protection Program (PPP). This is welcome news to small businesses throughout the country, but—as detailed below—there are significant issues and uncertainties looming large over the PPP that could render many small businesses ineligible for new or second draw loans.

In Depth

On December 27, 2020, President Donald Trump signed into law a new $900 billion stimulus bill, which includes $284 billion in funding for PPP loans for small businesses. The $284 billion includes funding for businesses that already received a PPP loan under the Coronavirus Aid, Relief and Economic Security (CARES) Act (referred to as “second draw loans”) and businesses that did not apply for a PPP loan in the first round or are only now eligible under the new expanded eligibility criteria (“new borrowers” or “new loans”). The bill also clarifies that borrowers’ PPP loan expenses are deductible, overriding prior Internal Revenue Service (IRS) guidance on this issue.

A comprehensive overview of the bill is available here. Below is an overview of certain issues and uncertainties that loom large over new PPP borrowers and borrowers seeking second draw loans. New borrowers considering applying for the first time and those interested in obtaining a second draw loan should pay attention to these provisions when conducting an analysis of whether they are eligible for a loan. As always, we will have to wait for the US Small Business Association (SBA) and Department of the Treasury to issue guidance and rules to carry out the program. As we saw during the first round of the PPP, this guidance may not always be entirely consistent with the legislation or previous administrative rules and guidance.

Will borrowers need to certify that the loan is “necessary” to maintain ongoing operations?

  • Under the CARES Act, borrowers were required to certify in good faith at the time of loan application that, due to then-current economic uncertainty, the loan was necessary to support the borrower’s ongoing operations.
  • For second draw loans, borrowers will have to meet a new revenue reduction requirement. This requirement provides that eligible borrowers must have “had gross receipts during the first, second, third, or, only with respect to an application submitted on or after January 1, 2021, fourth quarter in 2020 that demonstrate not less than a 25 percent reduction from the gross receipts of the entity during the same quarter in 2019.” It is unclear whether this revenue reduction test will replace or merely supplement the CARES Act’s subjective necessity certification.
  • While second draw loans will have to meet the revenue reduction requirement, the bill does not appear to apply the revenue reduction test to new borrowers. However, it appears that new borrowers will still need to meet the CARES Act’s subjective necessity certification.

What size test applies for new and second draw loans?

  • Under the CARES Act, businesses could qualify for a PPP loan under any of the following size tests: having no more than 500 employees; the size standard applicable to its North American Industry Classification System (NAICS) code; or the “alternative size standard” found in the Small Business Act.
  • For second draw loans, the bill appears to eliminate the NAICS code and alternative size standard qualification pathways, and it reduces the 500-employee cap to 300.
  • For new borrowers, it does not appear that the bill applies the 300-employee cap across the board to new borrowers that did not obtain a PPP loan between April and August. Instead, the original 500-employee cap from the CARES Act appears to still be in effect for new borrowers.
  • However, specific size limits are specified in the bill for newly eligible entities, such as certain housing cooperatives (300 employees), 501(c)(6) organizations (300 employees) and news/media organizations (500 employees).

Can businesses that previously qualified for a PPP loan as a “small business concern” under the Small Business Act’s “alternative size standard” or the size standard applicable to their NAICS Code apply for a second draw loan or new loan?

  • For second draw loans, the bill appears to exclude from eligibility borrowers that previously qualified as a “small business concern” under the “alternative size standard” or the borrower’s NAICS Code. It appears to limit second draw loans to businesses that have no more than 300 employees.
  • However, the bill does not appear to extend this limitation to new borrowers.

What should NAICS Code 72 businesses and franchisees keep in mind when considering a second draw loan?

  • For second draw loans, the bill once again waives the SBA’s affiliation rules for NAICS Code 72 businesses (i.e., restaurant and lodging), franchisees and businesses that receive assistance from a Small Business Investment Company (SBIC).
  • When calculating the maximum loan amount for second draw loans, NAICS Code 72 businesses should take the average monthly payment for payroll costs incurred or paid during either the one-year period before the loan date or calendar year 2019 and multiplying that number by 5. The business will then be eligible to receive the lesser of this figure or $2 million.
  • NAICS Code 72 businesses that employ no more than 300 employees per physical location appear to be eligible even if they employ more than 300 employees across different locations.

Does the SBA rule implementing an aggregate $20 million cap on loans to borrowers that are part of a “single corporate group” apply to second draw loans?

  • On April 30, 2020, the SBA issued a rule providing that businesses that are part of a single corporate group could not receive more than $20 million of PPP loans in the aggregate after April 30. The SBA defined single corporate group as businesses that are “majority owned, directly or indirectly, by a common parent.” This $20 million cap applied even where the affiliation rules had been waived for specific borrowers in the corporate group (e.g., NAICS 72 and franchisees). The SBA reasoned that this limitation, which was not part of the CARES Act, was necessary to “preserve finite appropriations for PPP loans and ensure broad access for eligible borrowers.”
  • The bill does not include any reference to a cap on loans received across a single corporate group. However, it remains uncertain whether the SBA will again exercise its discretion to implement a cap on the second draw or new loan amounts received across a single corporate group.

When can a business apply for a new loan or second draw loan?

  • After sending mixed signals for nearly a week after the bill passed Congress, President Trump signed the bill into law on December 27, 2020.
  • Congress provided the SBA 10 days to issue regulations to implement this new bill after it is enacted.
  • Members have Congress have issued statements indicating that they expect the SBA to work over the holidays to enable businesses to apply for new or second draw loans before the end of 2020. This is probably unrealistic, but we expect a fast rollout.

How will the bill impact the SBA’s audit process?

  • The bill provides the SBA with $50 million to carry out its audit process—which has recently begun for borrowers with loans of $2 million or more—and requires the SBA to submit a “forgiveness audit plan” to Congress within 45 days of the bill’s enactment. Borrowers should keep an eye out for this plan as it will hint at the level of review SBA is conducting or intends to conduct.

Our team at McDermott has extensive experience advising clients on issues relating to the SBA’s affiliation rules, PPP loan eligibility, PPP loan forgiveness, mergers and acquisitions involving PPP loans, and government investigations and audits. Please let us know if we can assist you and your business.