‘Second draw’ PPP loan rules arrive; banks await new applications

Another round of Paycheck Protection Program loans is getting closer. But small businesses seeking relief will have to wait a little longer.

Late Wednesday, the U.S. Department of the Treasury and Small Business Administration unveiled new guidance for $284.5 billion worth of federally backed relief loans to small businesses harmed by the coronavirus pandemic. Many of the new transactions will be “second draw” loans from businesses that already got a loan last spring or summer.

The administration did not immediately release new loan forms, though, leaving banks and borrowers in a holding pattern. Chris Hurn, the CEO of Fountainhead Commercial Capital, said new applications for first-time borrowers could arrive as early as Monday, but second draw loan applications would take longer.

“It may take another week or two before they actually launch second draw PPP loans, which I know is going to be very frustrating for the small business community to hear, but that’s the reality of the situation,” Hurn said.

Until those forms are available, Hurn said interested borrowers should spend time rounding up their necessary financial paperwork.

“I’ve seen some lenders attempt to try and do some sort of a pre-application queue. I just don’t know how valuable that’s going to be,” he said. “I think the best thing that borrowers can do is just try to make sure, do they still qualify?”

When the Paycheck Protection Program debuted as part of the Coronavirus Aid, Recovery and Economic Security (CARES) Act, the Small Business Administration left so many questions unanswered that it had to issue a series of clarifying rules throughout the summer. The new guidance released by the SBA suggests the process will be simpler, particularly if borrowers return to the same banks for their second round of loans.

“This won’t be like last year, when this was so new to everybody,” said Chris Stewart, Tampa Bay market president for Centennial Bank. “Even the SBA was trying to figure out, ‘What forms do we use? How do we get it out?’ Congress had passed it and we waited weeks and weeks for the SBA to come out and tell us exactly how to do this. That’s all mostly been done. They might tweak it a little bit, but I think it’ll be much simpler this time around.”

In the early going, Paycheck Protection Program applications tended to favor well-resourced organizations, many of whom received multiple loans.

Among the second draw rules spelled out on the Small Business Administration’s website SBA.gov.:

• Loans are open only to businesses with 300 or fewer employees, as opposed to 500 last spring.
• Loans are capped at $2 million, as opposed to $10 million before.
• Borrowers are required to provide proof that their business declined at least 25 percent from one quarter in 2019 to the same quarter in 2020. The rules suggest the documentation could be simplified for borrowers seeking under $150,000.
• Restaurants, hotels and other hospitality businesses are eligible for slightly more relief, thanks to a formula that multiplies their payroll costs by a factor of 3.5, as opposed to 2.5 for other businesses.

Initial loans for first-time borrowers will still be available under what are essentially the earlier rules — a company may have up to 500 employees and receive up to the full $10 million. Those loans will come from a pool of $35 billion specifically earmarked for that purpose.

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Hurn expects most to go to smaller businesses who, for a variety of reasons — concerns over forgiveness, a lack of documentation, bad publicity — opted not to apply during the first go-around.

“I do know there’s thousands of those folks out there, maybe tens of thousands,” he said. “I don’t know if there’s hundreds of thousands. But they exist.”

In the first two days after the bill became law, Utah lending broker Lendio saw 20,000 first-time borrowers visit its online portal, even though new applications were not live. The company, which had already facilitated $8 billion in relief loans for 100,000 businesses, quickly announced plans to hire 500 additional workers to help with the impending crush of applications in January.

“The first round of PPP only covered two and a half months of payroll,” said Lendio CEO Brock Blake. “Many of those that tried to make it through without getting a PPP loan, they just didn’t feel like the pandemic would last so long, and that there was going to be as many restrictions as continue to be out there. So demand is very high.”

David Tyler is planning to seek more money. In May, he received an Economic Injury Disaster Loan worth $59,300 for Forgotten Angels of Florida, a nonprofit group home in Valrico. It was gone in just a few months.

“As soon as COVID hit, right around mid-March, we started noticing that donations were diminishing, and understandably so — a lot of organizations were just trying to stay afloat,” said Tyler, the group’s executive director. “I can’t tell you on a month-by-month (basis), but from March to November, they went down around 80 percent. So for us, it was a pretty big hit.”

This time around, Tyler said he plans to apply for a Paycheck Protection Program Loan — and he’ll probably do so around the same time he seeks forgiveness on his initial loan. If other recipients do the same thing, it could present a logjam of applications on both ends.

Stewart said he doesn’t expect that to be a problem for lenders.

“It’s like if a client had three or four loans with us already,” he said. “We can handle that.”

The deadline to apply for new relief loans is March 31.