There’s a lot of misinformation floating around about the new pandemic relief package signed into law in December. Understandably so—it’s part of a complex document that’s over 5,000 pages long. Marilyn Landis, founder of Basic Business Concepts, steps in to clarify some of the myths regarding the Payment Protection Plan (PPP) loans. Be sure to speak with your accountant and lender as early as possible as you prepare your documents for the necessary applications.

Understanding The First Draw PPP Loan Program: For Businesses That Didn’t Receive PPP Funds Under The CARES Act

Myth: All the eligibility requirements are different under the newly passed law.

Fact: There are now some new eligibility requirements.  The new guidelines state that the business must have been in operation on February 15, 2020 and must submit documentation as proof of payroll.  Acceptable documents are payroll records, payroll tax filings, 1099, tax form Schedule C or F, or bank records.  If you were not in business on February 15, 2020, you are not eligible. Additionally, an entrepreneur is not eligible if their business is permanently closed. The business owner must demonstrate that any break in operation is a temporary closure or suspension of operations, and that they have a reopening plan.

It’s also important to note that the new stimulus will prevent any borrower who is currently delinquent on a preexisting SBA loan, or has defaulted on a prior SBA loan, from receiving a Payroll Protection Program (PPP) loan in this round.

What hasn’t changed? The regulations regarding payroll spending outlined in the CARES Act for the first PPP round remain in place, unless specifically changed by the new law. Caution to borrowers: be sure you are reading the changes to the first draw PPP Loan when deciding if you are eligible and what your loan and forgiveness will look like.

Myth: Owners of multiple small businesses who were eligible for last year’s round of PPP will be eligible for the second. 

Fact: Not true. The first round of PPP started without SBA applying its normal affiliation rules. The new regulations stipulate the use of the SBA affiliate rule for eligibility.

Under SBA rules, entities may be considered affiliates based on factors including, but not limited to stock ownership, overlapping management, and identity of interest.  The borrower application requires the applicant to list other businesses with which they have common management (including management agreement),.  That information should be used to assess whether they have affiliates when meeting size standard, maximum loan and revenue reduction threshold. All companies related by common ownership or management contract must be aggregated when determining size or other eligibility. Borrowers should review the SBA affiliate rule and list all appropriate affiliates before signing the attestation.

However, the law waives the affiliation rules for:

  • businesses in the NAICS code beginning with 72 (hospitality)
  • businesses operating as franchisees
  • businesses with investments funded by Small Business Investment Companies (SBICs)
  • broadcasting businesses under NAICS code 511110 or beginning 5151
  • Non-profits under NAICS code beginning 5151.

Myth: The affiliation rule does not limit loan size.

Fact: The new rules do apply the affiliation rule. If the borrower is majority-owned by affiliates–even affiliates who are exempt from affiliation rules–the maximum loan to the whole corporate group, a.k.a the sum of all the affiliates, is $10 million.

This rule goes beyond common ownership; often missed here is the “common management contract” reason to call a company an affiliate. If the borrowing company has any contracts with another company that gives the other company control over the operation of the borrow, it is an affiliate.

Myth: The new law created a set aside for minority-, veteran- and women-owned business or businesses in underserved communities.

Fact: In actuality, the law created a set aside for lenders who serve these markets. This means SBA will prioritize loans from these lenders and other small lenders who serve those identified in the new law for priority. The tiered rollout of the program started with Community Financial Institutions, which include Community Financial Development Institutions (CDFI), Minority Depository Institutions (MDI), Community Development Corporations (CDC), and Microlender Intermediaries. If you feel you qualify for this set-aside, SBA will be using its Lender Match program to match inquiries to appropriate lenders.

Even if your business is part of one of these groups, you can expect a delay if you plan to apply with a large lender. Check this map to see if your business is in a census track that qualifies as an underserved community.

Understanding The Second Draw PPP Loans: For Businesses Who Used Their Initial Funds

Myth: Qualifying for the second draw PPP is the same as qualifying for the first draw.

Fact: There are some key changes for business owners to be aware of. The company must document that all of the first PPP loan was used for forgivable expenses.

The regulations for the first PPP round remain in place and apply to the 2Nd Draw PPP loan– unless specifically changed by the new law.  Caution to borrowers – be sure you are reading the changes to the 2nd Draw PPP Loan when deciding if you are eligible and what your loan and forgiveness will look like.

Myth: Businesses applying for the second draw PPP loan need to show a 25% reduction in gross receipts to qualify.

Fact: That’s only partly true. Instead of taking into account only the gross of what a company receives for sale of its products and services, gross receipts under the new regulations include includes interest income, dividends, rents, royalties, fees or commissions (net of returns and allowances) . This changes the focus in two ways. 1) those who benefited from increased investment interest or dividend income to survive any downturn in sales, may not meet the test for revenue reduction. 2) those who found alternative sources of income to survive – such as renting out unused warehouse space – may not meet the test for revenue reduction.

It’s important to note that this eligibility rule applies to all entities related by common ownership or management agreement must aggregate their revenue and show a combined reduction in gross receipts to be eligible.

Other Stimulus Funding

Businesses struggling due to the pandemic can also get assistance through the Employee Retention Tax Credit (ERTC), Economic Injury Disaster Loan (EIDL) grants and the venue and transportation grant programs. We’ve corrected some common misconceptions about these programs below.

Myth: If you received a PPP loan, you do not qualify for the ERTC.

Fact: Under the new law you are now permitted to have both, with one caveat: wages used for ERTC cannot also be claimed to qualify for PPP forgiveness. With the borrower able to select the exact number of weeks for the PPP covered period (minimum of 8 weeks and maximum of 24 weeks) the company can plan for one or two quarters for ERTC and still have room in the year for the PPP covered period. ERTC is only available for the first and second quarters in 2021.

Myth: Your business qualifies for the ERTC only if you have been shut down. 

Fact: Under the new law, you qualify if gross receipts are down 20% from same quarter in 2019 or you have had at least a partial suspension of operations. There is no requirement specifying which quarter can be used for comparison.

Myth: Businesses eligible for venue grants can also receive PPP loans.

Fact: Entrepreneurs can have one or the other – not both. The live venue grant can be, if qualified, up to 45% of gross earned revenue.

Myth: Transportation businesses that receive a transportation grant may not also receive a PPP loan.

Fact: The law does not exclude a company for applying for both a transportation grant and a PPP loan. The limiting factor is that the company not receive grant funds, if combined with other assistance from COVID relief legislation, that exceeds the total amount of revenue earned by the company in 2019.

Marilyn Landis

About the Author

Marilyn Landis

Marilyn D. Landis is the President & CEO of Basic Business Concepts, Inc., a multifaceted service firm providing the support to keep businesses financially balanced, on track and growing. “We provide entrepreneurs access to affordable CFO-level skills that are customized to their unique business” The CFO focuses on strategy and risk and is the forward thinking financial resource to the management team. In this role, Landis has over fifteen years of experience working with small businesses across all industries nationwide, providing financial CFO leadership. Directly, and with her team, she has enabled clients to improve their financial resilience through sound financial planning, improved financial reporting, enhanced cash flow management and improved funding options. Landis has over thirty years of experience in financial services. Prior to focusing on her own business she worked for and with commercial lenders, banks and small businesses throughout Western Pennsylvania. In her career, she has served as a financial consultant; headed training, consumer loans and mortgage departments; collected delinquent loans; and coordinated operations for a multi-bank merger. Marilyn has worked for three of the largest SBA lenders in the country – marketing, originating and underwriting SBA loans. September of 2007, Landis was elected chair of SMC Business Councils, a founding member and Pennsylvania affiliate of the National Small Business Association (NSBA) in Washington DC. January of 2008, she was elected the 2008 chair of NSBA, who since its founding in 1937, has advocated on behalf of America’s entrepreneurs, reaching more than 150,000 small businesses. NSBA is proud to be the first national small-business advocacy organization in the United States. Representing SMC and NSBA member businesses, Landis has testified before US Senate and House committees on issues vital to small business. March of 2009, Landis was awarded The SBA National Financial Services Champion of the Year. August of 2010, she was appointed to the Office of the National Ombudsman Regulatory and Fairness Board and continues to serve. Landis also has extensive Board level experience with nonprofits, ranging from non- profit economic development and social services agencies to for-profit manufacturers.