Loan Options When Your Small Business Revenue is Too High for PPP Second Draw

As of December 27th, 2020 the Paycheck Protection Program is back, and Biz2Credit can get your business started with an easy process to help you get funded quickly.

Throughout the last year of the Coronavirus pandemic, many small businesses have relied on the Paycheck Protection Program (PPP) to stay afloat. The program, created by the CARES act (Coronavirus Aid, Relief, and Economic Security Act), and implemented by the U.S. Small Business Administration (SBA), has worked with the U.S. Treasury to provide low-interest loans to a multitude of small businesses around the country.

Small businesses with less than 500 employees, such as nonprofit organizations, veterans organizations, and tribal businesses were qualified to receive loans to help keep their employees on salary. Under a broader category, self-employed workers, sole proprietors, and independent contractors were also able to receive loans through the program. Recently, President Biden signed the American Rescue Plan Act, which provided additional funding to many PPP lenders and lending programs.

As the loan program showed success through the 2020 calendar year, Congress passed the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) in late December to allow for a “second draw” of PPP loans for select businesses.

Because it is targeted at businesses who experienced the highest levels of revenue reduction, Second Draw PPP loans will apply to a much smaller category of businesses than the previous First Draw PPP loans. This is helpful for the businesses most impacted by the pandemic.

On the other hand, the new SBA guidelines will inhibit many businesses from receiving the second round of loans, even though many of these businesses still need aid. Most commonly, businesses exceed the number of employees allowed for the Second Draw Loan, or, as we will focus on in this article, a business has revenue that is too high to meet the eligibility standards.

We will briefly go over the new eligibility requirements for the PPP Second Draw Loan, before examining alternative loan options for businesses that don’t meet these requirements.

Second Draw vs. First Draw

Because of the many changes, variations, and amendments that have been made to the PPP loan program over the last year, we wanted to briefly outline the newest requirements for eligibility. For a more in-depth exploration of the requirements, check out our article that outlines Second Draw requirements for small businesses.

Many of the eligibility factors are similar to the first round of loans, although the maximum loan amount allowed for Second Draw PPP Loans is significantly smaller than the first time around. But, the few differences between the two can exclude a large number of small businesses.

Similarities

Loan Conditions

The PPP program has been in high demand since its inception, mostly due to the extremely favorable conditions of the loans themselves.

Thankfully, Second Draw loan conditions remain generally unchanged. This includes:

  • A non-compoundable, non-adjustable, 1% interest rate
  • No required personal guarantees or collateral
  • A loan maturity of five years
  • No government or lender fees

Loan Forgiveness

Similarly, the PPP Loan Forgiveness terms of the Second Draw loans have remained the same.

Small business owners can still send in loan forgiveness applications for full loan forgiveness if, during the covered period of 8-24 weeks following loan disbursement, the business can:

  • Maintain employee and compensation levels
  • Show that at least 60% of the loan was used to cover payroll costs
  • Show that the loan has been only used for payroll costs and other eligible expenses.

Eligible Expenses

The SBA’s definition of eligible expenses has also remained the same between First and Second Draw loan requirements. While the majority of funds still must be used to cover payroll costs, they can also be used to pay for:

  • Mortgage interest
  • Rent
  • Utilities
  • Covid-19 related worker protection costs (e.g. personal protective equipment)
  • Uninsured property damage costs, in relation to possible looting or damaging in 2020
  • Supplier costs and operating expenses.

Differences

While on the surface it may appear that the loans will still aid most small businesses, there are three key differences that have made it more difficult to qualify for the loan. Borrowers that are sending in PPP loan applications for Second Draw Loans must:

  1. Have received and used the full amount of the First Draw PPP loan.
  2. Have no more than 300 employees (an exception is made for Accommodation and Food Service businesses with a NAICS code 72, which allows for 300 employees per location)
  3. Show at least a 25% revenue reduction in gross receipts between comparable quarters in 2019 and 2020.

The PPP loan program has been incredibly helpful for many small businesses, but if your small business doesn’t fall exactly within the revenue reduction range of 25%, you won’t be able to qualify for the second round of loans.

The good news is that there are plenty of alternative lenders that can still help you and your business.

Loan Alternatives

Though they also help to maintain the PPP loan program, the SBA has a number of different grants and loans that you can still apply for. There are two main alternative SBA loans you should consider; EIDL (Economic Injury Disaster Loans), and Standard 7(a) loans.

EIDL

Traditionally, the EIDL program is intended to provide assistance to businesses impacted by a natural disaster. This has since been applied to the Coronavirus pandemic and is available to businesses with 500 employees or less that have been affected by the virus.

As of April 6th, 2021, loans that are approved can receive a maximum loan amount of $500,000, at an interest rate of 3.75% for businesses, and 2.75% for nonprofit organizations. Though this is a higher interest rate than the PPP, an EIDL loan has a maturity of 30 years, allowing for a broader safety net for businesses struggling from the pandemic.

You can apply for both EIDL and PPP loans simultaneously, although you must use the funds for separate expenses. For example, at least 60% of the PPP loan amount must be used to cover payroll expenses, so money from an EIDL cannot be used to cover the same thing. Money from an EIDL can also not be used to cover lost sales or profits.

Unlike the PPP, an EIDL loan doesn’t offer any loan forgiveness amount and must be repaid. However, the 30-year maturity of this loan gives better long-term financing options for any business that qualifies.

7(a) Loan Program

This loan program offers significantly lower eligibility requirements than PPP and can be applied to a number of areas to help your business get back on its feet. The 7(a) loan program is SBA’s primary money assistance program, and offers many different types of loans, depending on your situation.

Much like the PPP, the 7(a) program works through SBA accredited lenders, and 85% of the loan is guaranteed through the SBA. Make sure that you and your lender discuss which type of 7(a) loan you should apply for, as there will be loans better suited to your needs than others.

The loans have a typical maturity rate of 7 years, and interest rates between 2.25% and 4.75%, depending on which program you choose.

7(a) loans are one of your best options apart from the PPP, as it allows for much wider use of the funds and is usually best for borrowers that can demonstrate solid revenue and profitability. Much of the loan eligibility depends on good business credit, where your business operates, and how your business receives income. If you are not able to receive PPP Second Draw loans because of your high revenue, consider a 7(a) loan instead.

State-Level and Local Options

Currently, the federal government is not the only governmental body working on providing relief to small businesses. Many states have started their own programs to help small businesses survive and recover from the pandemic. Florida, for example, has a number of programs currently running to assist small businesses in gaining access to funding and loans. Many other states have similar programs as well.

Additionally, many businesses have agencies designed to help small businesses. Be sure to stay up to date with their offerings and check their websites. They often provide the latest information on loans and other funding opportunities available for small businesses.

You should also be sure to check with your local township and municipality or nearby local charities for what sorts of aid they might be providing small businesses. Fighting the COVID-19 pandemic has really been a nationwide effort, and there are many grassroots and local organizations helping lead the charge. Talking with them and researching the programs they are running could make a huge difference for your small business.

Taking Out a Traditional Loan

If there are no other options available to your small business, you can also consider taking out a traditional loan. If you have a well-established business with a strong credit rating, you should be able to get a loan from a regular lending institution.

This can be inhibited by the overall impact the pandemic has had on your revenues and bottom line, especially since lenders will want to be confident that you will be able to repay your loan. However, odds are if you don’t qualify for the PPP Second Draw then your revenues probably haven’t been impacted to the point where lenders won’t consider you. Interest rates are also extremely low right now, so there is definitely an opportunity for businesses to score a great loan.

Reach Out to a Certified Public Accountant (CPA)

It is a good idea to reach out to a CPA before settling on any of these options. A trained CPA who specializes in assisting small businesses will be able to help you get all of your business’ ducks in a row before applying for any funding, and they should have a good idea of what sorts of funding options are available to you. Applying for loans often requires quite a bit of paperwork and other documentation. CPAs will know exactly how to configure and aggregate this information.

A CPA will also be able to provide you with relevant information and advice that is specific to your business regarding how loans might impact your tax liabilities. This is something to consider before taking out any loans.

Conclusion

The PPP is a great solution for a lot of people, but if you fall outside of its eligibility, all is not lost! Even outside of the SBA, there are plenty of loans and grant applications that can help you and your business survive the adversity of the previous year. Make sure you know what you are eligible for and keep researching other loans you may qualify for.

As always, Biz2Credit is invested in helping small businesses, especially as they look to navigate this incredibly challenging time. Be sure to keep checking back here at our Biz2Credit Blog for all the latest information and news about funding opportunities and other programs that are either in progress or starting soon to help small businesses weather the remainder of the COVID-19 pandemic.



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