What’s new in 2021 PPP loan update? (second-draw loans, differences between 2020 PPP)

Please note, though the PPP application deadline is being extended, you only have until May 31, 2021 to get your application submitted to the SBA. After that, the SBA will only process existing applications that have already been submitted, until the PPP deadline of June 30, 2021.

In this 4-minute read:

  • What’s new in PPP 2021?
  • SBA has another $284b in PPP loan funds to distribute
  • New rules to help smaller lenders and diverse/underserved businesses
  • Community financial institutions tasked with serving low-income, minority-owned and other disadvantaged businesses will have first dibs on funds, with larger banks held back until a later (yet undetermined) date

IMPORTANT NOTE: As of March 3, 2021, applicants who report their income with IRS Form 1040 Schedule C (i.e., most independent contractors, 1099 workers, and sole proprietors) will be able to use their GROSS (instead of net) profits to determine their max loan amount. This can make a big impact on the amount you can borrow, depending on how much you make and how you have reported your profits. Read more about the latest 1040 Schedule C/PPP loan rules changes, and see the new rules, and the new PPP application form for Schedule C applicants.

In late December 2020, congress approved a $284 billion renewal of the PPP (Paycheck Protection Program) loan program under the CARES act, in order to help provide relief to American businesses still struggling due to the COVID-19 pandemic’s financial impact. This includes second draw loans for businesses that received PPP funding in 2020.

In addition, the SBA and congress have modified some of the requirements and rules in response to criticism that larger borrowers who used bigger banks had an advantage over smaller borrowers using less established banks during the first several rounds of PPP funding during 2020. Let’s go over the basics of the PPP program and the differences for 2021.

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First draw PPP loans (if you didn’t get a PPP loan in 2020)

Eligible businesses with 500 or fewer employees—including nonprofits, veterans organizations, tribal concerns, faith-based organizations, self-employed individuals, sole proprietorships, and independent contractors—can apply for first-draw PPP loans.

Key PPP updates for 2021 include:

  • PPP borrowers can set their PPP loan’s covered period to be any length between 8 and 24 weeks to best meet their business needs;
  • PPP loans will cover additional expenses, including operations expenditures, property damage costs, supplier costs, and worker protection expenditures;
  • The Program’s eligibility is expanded to include 501(c)(6)s, housing cooperatives, destination marketing organizations, among other types of organizations;
  • The PPP provides greater flexibility for seasonal employees;
  • Certain existing PPP borrowers can request to modify their First Draw PPP Loan amount; and
  • Certain existing PPP borrowers are now eligible to apply for a Second Draw PPP Loan.

Smaller, community lenders will be prioritized in order to better serve minority-, women-, and veteran-owned businesses

Initially (for at the first two days after the application portal opens) PPP loans applications will be reserved for smaller, community lenders that typically serve a greater portion of minority-, women-, and veteran-owned businesses. This will hopefully spread more of the PPP funding to a broader portion of America’s truly small, local businesses (and the community lenders that serve them). Read more details about the SBA’s efforts in this regard here.

Go deeper: Can you apply for a PPP loan with an ITIN?

What if I applied for a PPP loan in 2020 but didn’t receive loan forgiveness or I returned some/all of my funds?

Regarding reapplying and PPP loan increases: Existing “first draw” PPP borrowers that did not receive loan forgiveness by December 27, 2020 may: (1) reapply for a First Draw PPP Loan if they previously returned some or all of their First Draw PPP Loan funds, or (2) under certain circumstances, request to modify their First Draw PPP Loan amount if they previously did not accept the full amount for which they are eligible.

What if I have 10 or fewer and/or my business is in a low-income neighborhood?

At least $15 billion is being set aside for First Draw PPP loans to eligible borrowers with a maximum of 10 employees or for loans of $250,000 or less to eligible borrowers in low- or moderate-income neighborhoods.

How do I receive forgiveness for a first draw PPP loan?

First Draw PPP Loans made to eligible borrowers qualify for application for full loan forgiveness (you don’t have to pay it back) if during the 8- to 24-week covered period following loan disbursement: 

  • Employee and compensation levels are maintained
  • The loan proceeds are spent on approved payroll costs and other eligible expenses
  • At least 60 percent of the proceeds are spent on payroll costs.

Read more about PPP loan forgiveness.

What Is the maximum amount I can borrow for a first-draw PPP Loan?

For first-time PPP borrowers, you may borrow 2.5 times your average monthly payroll costs, up to a maximum of $10 million. So if your average monthly payroll over the last 12 months was $100,000, you could borrow up to $250,000.

However, you can also add to your loan amount any outstanding amount of an EIDL (Economic Injury Disaster Loan) made between January 31, 2020 and April 3, 2020, less any “advance” that is forgivable under an EIDL COVID-19 loan. (You can’t borrow PPP money to pay back a $10K EIDL “grant” for example, since the EIDL grant is forgivable.)

Second draw PPP loans (if you got a PPP loan in 2020)

Since America’s small businesses are still in dire straits due to the devastating impact of the ongoing COVID-19 pandemic, the SBA is allowing some first-time recipients to apply for a second round of PPP loan funding. However, not ALL businesses that got PPP funding in the first round will be eligible for a second-draw PPP loan.

Second draw PPP loan qualification and exclusions

In order to qualify for application for a second-draw PPP loan, your business:

  • Can’t have more than 300 employees, and
  • Must be able to demonstrate a 25 percent or greater reduction in revenue in 2020 vs. 2019, and
  • Has received a “first draw” PPP loan and has used, or will use, the full amount of the initial PPP funding on or before the expected date on which the Second Draw PPP Loan is disbursed to you, and
  • Has used the full amount of your first PPP Loan on eligible expenses under the PPP rules

What’s the maximum amount I can borrow for a second draw PPP loan?

IN GENERAL the maximum loan amount for a Second Draw PPP Loan is equal to the lesser of: A. two and half months of the borrower’s average monthly payroll costs; or B. $2 million. Obviously the intent here is to prioritize smaller businesses without millions of dollars of payroll costs.

IMPORTANT NOTE: For borrowers in accommodation and food services sector (NAICS 72, full list here), maximum loan amount is increased to 3.5x average monthly 2019 or 2020 payroll.

Read more about second draw PPP rules here.

For full details of eligibility for second draw PPP loans, including certain exclusions, please refer to the SBA’s document regarding second draw PPP loans.

$25 billion is also being set aside for eligible borrowers with a max of 10 employees or smaller loans of $250,000 or less to eligible borrowers in low- or moderate-income neighborhoods

Second draw PPP loan forgiveness

In general, the rules for second-draw PPP loan forgiveness are the same as first-draw PPP loan forgiveness. You may apply for second-draw PPP loan forgiveness if during the 8 to 24 week period following loan disbursement:

  • Employee and compensation levels are maintained in the same manner as required for the first draw PPP loan
  • The loan proceeds are spent on payroll costs and other eligible expenses
  • At least 60 percent of the proceeds are spent on payroll costs

How and when to apply for PPP 2021 first or second draw loans

Eligible businesses can apply for a first or second draw PPP loans via SBA-approved lenders until May 31, 2021. 

PLEASE NOTE: it is free for businesses to apply for PPP loans. If someone says you need to pay a fee to apply for any SBA/PPP loan, find another lender. The fees are paid by the SBA, not by the borrower.

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