The “First Draw” program offers new startup funding opportunities, particularly for underserved markets who missed out on the first round of funding. The revised guidelines include eligibility criteria and maximum loan amounts, with $35 billion set aside for applicants, and a maximum of $10 million available for “First Draw” borrowers. The program expands eligibility to various business entities, including independent contractors, self-employed individuals, non-profits and more. It also includes expanded guidelines for seasonal employers and new entities, as well as expanded use of proceeds. However, it’s important to note that there may be further clarification of these guidelines, as the first round of funding saw 30 updates and a 26-page FAQ released. The lending community will need to incorporate these provisions into their lending portals before applications can be made.
Overview of the Revised “First Draw” Program Guidelines
Information as of January 9th.
Key Guidelines for “First Draw” Program Applicants
Although much attention has been given to the ability of existing PPP applicants to obtain a 2nd loan, for many clients in underserved markets who were unable to obtain first round funding, the rules that apply to the revised “First Draw” program merit noting (many of these guidelines also apply to “Second Draw” credits). $35 billion has been set aside for these applicants, and the guidelines include:
Eligibility Criteria and Maximum Loan Amounts
– Borrowers must be able to certify that the loan was “necessary”. The SBA has stated that they will not require proof for loans under $150,000, but other agencies (IRS etc.) may do so. Also, a list of all recipients will be made public (which could create social media issues)
– $15 billion has been set aside for borrowers with no more than 10 employees or loans of $250,000 or less to entities located in low-to-moderate-income neighborhoods
– The maximum available for “First Draw” borrowers is $10 million and the maximum single location number of employees remains at 500
– The maximum amount of loans for seasonal employers, new entities, and businesses with more than 1 physical location
Expanded Eligibility Entities
– Any business entity
– Independent contractor
– Self-employed individual
– Sole proprietor
– Non-profit
– Veterans’ organizations
– Tribal businesses
– Housing cooperatives
– Small agricultural cooperative
– Eligible 501 c(6) entities (must have 300 or fewer employees, lobbying must not exceed 15% of receipts or activities, with total budgets of $1 million or less)
– Eligible nonprofit new organizations
– Destination marketing organizations
Calculations for Seasonal Employers and New Entities
– Seasonal employer definition has been re-worked and now is an entity that operates more than 7 months or learned no more than 1/3rd of its revenue in any 6 months in the prior calendar year. Furthermore, they can calculate PPP amounts based on the average monthly payroll costs for a 12-week period selected by the borrower that began 2/15/19 or 3/1/19, and ended 6/30/19, or they can elect to use any consecutive 12-week period beginning after 2/14/2020 and ending before 1/1/21, multiplied by 2.5X, not exceeding $2 million
– New entities can qualify based on the average monthly payroll costs up through the date when they apply, multiplied by 2.5, not to exceed $2 million
Expanded Use of Proceeds and Ineligible Businesses
– The eligible use of proceeds has been expanded to include:
– Payroll costs:
– Group life insurance
– Group disability insurance
– Group vision insurance
– Group dental insurance
– Tip income can now be included
– Non-payroll costs:
– Business software or cloud computing
– Costs incurred due to social unrest not covered by insurance
– Supplier costs
– PPP and other expenses mandated by federal, state, or local health agency requirements
– Farmers and ranchers can now use gross income for either 2019 or 2020 instead of net income
– The list of ineligible businesses has been expanded to include:
– Entities that have permanently closed
– Businesses not in operation on 2/15/2020
– Publicly traded companies
– Lobbying organizations
– Hedge funds or private equity firms
– Entities organized in the People’s Republic of China
– Entities registered under the Foreign Agents Registration Act
– Executive Branch leaders and members of Congress and spouses with 20%+ ownership
– Household employers
– Entities in bankruptcy
– Provisions also include new applications for borrowers that have returned/repaid all their original PPP loan prior to applying for the new credit
It merits noting that further clarification of these guidelines are likely given that with the first round of funding there were 30 updates issues along with 26 pages of FAQs. Also, the lending community will need to digest these provisions and incorporate them into their lending portals prior to allowing applications. This is especially true for borrowers that may seek to increase their existing PPP loan rather than seek a “Second Draw” credit.
Question & Answer
What is the “First Draw” program and who does it target?
The “First Draw” program offers new startup funding opportunities, particularly for underserved markets who missed out on the first round of funding.
What are the eligibility criteria and maximum loan amounts for “First Draw” borrowers?
Borrowers must be able to certify that the loan was “necessary” with $10 million being the maximum loan amount available for “First Draw” borrowers.
Which entities are now eligible under the expanded guidelines of the “First Draw” program?
Expanded eligibility entities include any business entity, independent contractors, self-employed individuals, non-profits, veterans’ organizations, tribal businesses, and more.
What are the expanded use of proceeds and ineligible businesses under the revised guidelines?
The eligible use of proceeds has been expanded to include various payroll and non-payroll costs, while the list of ineligible businesses now includes entities that have permanently closed, publicly traded companies, and more.
