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PPP 2nd Draw OK Before 1st Loan Forgiveness

  • Written by Steel Rose

Second Draw Loan Terms

The terms of Second Draw Loans are the same as for First Draw Loans:

  • 100% SBA guaranteed
  • No collateral required
  • No personal guarantees required
  • 1% interest rate (calculated on a non-compounding, non-adjustable basis)
  • Five-year maturity

All guidance issued in connection with First Draw Loans applies to Second Draw Loans, except as specified in the new guidance applicable to Second Draw Loans.

SBA Guaranty

As with First Draw Loans, Second Draw Loans are subject to an SBA guaranty of 100% of Second Draw Loans. As a result, a lender who makes Second Draw Loan will not bear the financial risk of non-payment, as long as the lender complies with its obligations under the program.


Eligibility for Second Draw Loans is much more limited than for First Draw Loans. To be eligible an applicant must be a business concern, nonprofit organization, housing cooperative, veterans organization, tribal business concern, eligible self-employed individual, sole proprietor, independent contractor, or small agricultural cooperative that (i) employs not more than 300 employees, (ii) experienced a 25% or greater reduction in gross receipts for at least one quarter in 2020 as compared to the same quarter in 2019, (iii) received a First Draw Loan, and (iv) has used, or will use, all proceeds of its First Draw Loan for payment of eligible expenses before the Second Draw Loan is funded. While applicants must have used all proceeds of the First Draw Loan for payment of eligible expenses, the applicant need not have applied for loan forgiveness or received loan forgiveness with respect to its First Draw Loan. See Section III regarding Bankruptcy Issues Impacting PPP Eligibility for more information.

The application for a Second Draw Loan still includes a certification that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." The SBA has yet to offer any clear guidance on how it will analyze this test when it audits or reviews PPP Loans.

Paycheck Protection Program - What Has Changed?

Counting Employees

It is important to note that the 300 employee test is the total number of employees (counting all full-time and part-time employees), not full-time equivalent employees. The total number of employees is determined in the same manner as for First Draw Loans, under the SBA affiliation rules applicable to the PPP (i.e., 13.C.F.R. 121.301(f)). Thus, the applicant and all affiliates must not have more than 300 employees on a combined basis.

Revenue Reduction Test

In general, an applicant that was in business during calendar year 2019 can satisfy the revenue reduction test if its gross receipts during any calendar quarter in 2020 were 25% or more below its gross receipts during the same quarter in 2019. In addition, an applicant that was in business only during the last quarter or last two quarters of calendar year 2019 can satisfy the gross receipts test if its gross receipts during any quarter of 2020 were 25% or more below its gross receipts during any quarter of 2019 during which it was in business. Applicants who were not in business during 2019, but were in business on February 15, 2020, are to compare gross receipts for the second, third or fourth quarters of 2020 to gross receipts for the first quarter of 2020. As an alternative, applicants in business during all of 2019 may compare annual gross receipts in 2020 with annual gross receipts in 2019.

Gross receipts are to be calculated on a cash basis for cash-basis taxpayers and on an accrual basis for accrual-basis taxpayers.

Although not entirely clear, it appears that gross receipts calculations must be made on a calendar year/ quarter basis, not a fiscal year/fiscal quarter basis. However, entities that use a fiscal year to file taxes may document a reduction in gross receipts with income tax returns if the applicant's fiscal year contains all of the second, third and fourth quarters of the calendar year.

For a for-profit business, gross receipts are calculated in a manner consistent with the definition of "receipts" in the SBA regulation published at 13 C.F.R. 121.104. Gross receipts generally include all revenue, including receipts from the sales of products or services, interest, dividends, rents, royalties, fees or commissions (less returns and allowances). Gross receipts exclude net capital gains and losses. Gross receipts do not include:

Taxes included in gross or total income, such as sales or other taxes collected from customers Proceeds from transactions between affiliates Amounts collected for another by a travel agent, real estate agent, advertising agent, conference

management service provider, freight forwarder or customs broker

Paycheck Protection Program - What Has Changed?

Gross receipts include other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer's request, investment income and employee-based costs such as payroll taxes.

For a nonprofit applicant, gross receipts are described in section 6033 of the Internal Revenue Code.

For all applicants, the affiliation rules apply to calculating gross receipts unless a waiver of the affiliation rules applies. Thus, in the absence of a waiver of the affiliation rules, an applicant's gross receipts calculation must include the gross receipts of all affiliates.

Gross receipts do not include forgiven First Draw Loan amounts or Economic Injury Disaster Loan (EIDL) advances, which are not subject to federal income tax.

Submission of Evidence of Revenue Reduction

For loans of $150,000 or less, an applicant is not required to submit documentation of its reduction in revenue at the time of loan application, but must submit such documentation before or with the filing of the loan forgiveness application. For all other loans, the required documentation must be submitted with the loan application.

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