Insights and Observations on Recent PPP Loan Originations
This blog was written by Thomas Danielson, Financial Institutions Principal.
$284 billion was allocated to the Paycheck Protection Program (PPP) as part of the Consolidated Appropriations Act. First draw PPP loan borrowers can now apply for additional PPP loans. This includes new first draw loans, revised first draw loans and second draw loans.
First Draw Loans – What’s New?
Please see Christine DiMenna’s excellent blog, First Draw Paycheck Protection Program Loan Increases and Reapplications for details on what’s new for first draw PPP loans.
Who’s Eligible for a Second Draw PPP Loan?
A second draw PPP loan applicant who obtained a first draw PPP loan is likely eligible for a second draw PPP loan if they experienced a 25% or greater reduction in gross receipts in any quarter in 2020 compared to the same quarter in 2019. Gross receipts is a broader concept than revenue and will more likely impact farmers and some not-for-profit entities. The SBA provided additional guidance to lenders outlining expected documentation, annotation, and traceability provided by applicants. It is important that applicants understand these expectations when applying for second draw PPP loan.
Additionally, applicants must make the following representation, “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The recent funding for additional PPP loans was authorized by Congress to ensure those businesses most impacted by the pandemic are able to continue to operate.
Second draw PPP loans are capped at a maximum of $2 million and, generally speaking, the number of employees must be 300 or fewer. Applicants in the Food and Accommodation Industry (NAICS Code 72) are eligible for PPP loans equal to 3.5 months of payroll costs instead of the 2.5 months for everyone else.
Our Observations So Far
As expected, there is a déjà vu feeling when reviewing form 2483-SD, Second Draw Borrower Application Forms. Applicants are still challenged to fill out the form correctly and completely. It is very easy to overlook a question, miss an item that needs an initial or figure out if they are operating as a sole proprietor, LLC, or independent contractor. Many business owners struggle to identify their NAICS code which is now required as part of the second draw PPP loan application.
Many applicants are confused about which payroll costs are eligible and how to generate the payroll reports or find the necessary quarterly payroll tax returns. The expanded list of eligible employer paid benefits is often unknown, or possibly not considered by many applicants. This is very similar to our experience with first draw PPP loans in the spring of 2020. Patience and empathy are necessary when responding to applicant errors and concerns.
Sole proprietors and partners struggle to differentiate self-employment income from draws. Self-employment earnings, not draws, are used to size the loans. We find ourselves reminding lenders and applicants that they may get a better answer if they consider 2020 earnings or payroll instead of going back to 2019.
New for second draw PPP loans is that applicants are struggling to extract their quarter-over-quarter gross receipts from their accounting records and failing to provide the support for their claimed drop in receipts. Most lenders appear to be asking that all applicants provide the documentation when applying for the loan even though the SBA says that for loans under $150,000 the documentation is not required until the forgiveness period. Lenders view this decision as a way to protect the applicant from a potential loan if they did not understand the gross receipts definition.
We are fielding numerous questions related to farmers. The questions are quite varied. The most common one relates to a farmer or rancher applying for a first draw PPP loan and then immediately requesting a second draw PPP loan. Eligibility questions arise fairly often. For example, can this farmer apply for a PPP loan? A family farmer was actively farming in 2018 but did not plant a 2019 crop because they decided to rent out the farmland. To add complexity, they sold their crop inventory in 2019 so they had 2019 farm income. If you are interested in our responses to these and other questions, please tune into our January 29 webinar, Insights and Observations on Recent PPP Originations and New Forgiveness Forms. Click here to register.
Reviewing a second draw PPP loan often provides insight into the underwriting of the first draw PPP loan. We can see the lender’s understanding of the rules evolve. We were all a bit confused about the rules the first time around. In some cases, lenders have had to inform their applicants that they don’t qualify for a new PPP loan. This often means they didn’t qualify for the first draw loan either and forgiveness may not be in the cards. We hope this doesn’t happen to you, but you should be prepared.
To date we have not seen a rush to file for second draw PPP loans but are listening carefully to the experiences of lenders.
How Can We Help?
CLA can help you with the details of PPP loan requirements. We stand ready to discuss the advantages of using our portal to assist you and your applicants in applying for PPP loans. Join our webinar on Friday January 29, 2021 for a deeper dive into PPP originations and the new forgiveness forms. Watch for further articles and webinars on relevant and timely topics.
Susan is a CPA with more than 20 years of combined experience in public accounting and the financial institution industry, including experience with Fortune 500 financial services companies. Susan serves as the managing principal of CLA’s financial services group. Her responsibilities include providing engagement oversight in the areas of assurance and internal audit. In addition, Susan provides board advisory and management consulting services in the areas of strategic planning and mergers and acquisitions. Susan has been involved in multiple mergers and acquisitions of sizes ranging from $150 million to $500 billion with engagement at all stages of the process.
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