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What is the PPP Second Draw loan and how does it work?

Only hard-hit small businesses are eligible for another PPP loan but more costs qualify for forgiveness.

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The new coronavirus stimulus package allows some small businesses to apply for a second loan through the Paycheck Protection Program (PPP). But not everyone is eligible — and loans are smaller than they were before. If your business can’t qualify, it might still be eligible for more funding on its first PPP loan.

WATCH: How the Second Draw loan works

What is a Second Draw loan?

The Second Draw loan is a second round of new coronavirus assistance available to small businesses that have been particularly impacted by COVID-19. It effectively works the same as a regular PPP loan, with a few adjustments. Here’s how it breaks down:

  • Maximum loan amount: 2.5x monthly payroll costs, up to $2 million — with exceptions
  • Interest rate: 1%
  • Term: Five years
  • SBA guarantee: 100%

Who qualifies for a Second Draw loan

Second Draw loan requirements are tighter than the first round of PPP funding. First, your business must have received a PPP loan and fully spend the funds before you receive the second draw loan (you don’t need to spend it all before you apply, however). It also must be an eligible type of business and meet stricter size requirements.

Types of businesses eligible for a Second Draw loan

The following types of businesses are eligible for another round of PPP funding:

  • Small businesses
  • Nonprofit organization
  • Veterans organizations
  • Tribal businesses
  • Eligible self-employed individuals
  • Sole proprietors
  • Independent contractors
  • Small agricultural cooperatives
  • 501(c)(6) organizations
  • Nonprofit news organizations

Generally, these are similar to the requirements for a regular PPP loan. But there are some newly-eligible organzations like 501(c)(6) organizations — local chambers of congress — and news broadcasters registered with the FCC. But, political organizations, advocacy groups and lobbying groups still wouldn’t qualify. Businesses with ties to China or Hong Kong might also have trouble qualifying, as might any businesses owned by a registered foreign agents.

Second Draw size requirements

To qualify, your business must also meet the following criteria:

  • No more than 300 employees
  • Saw a 25% drop in revenue from 2019

there are some exceptions to the size requirements. For example, 501(c)(6) organizations can only qualify as long as they have no more than 150 employees. Business with more than one location in the accommodation and food services industry or broadcast news can also qualify for a Second Draw loan as long as they have no more than 300 employees per location

How does the SBA measure the drop in revenue?

If your business saw a drop of 25% or more in gross sales during a quarter before and after the pandemic, you meet this requirement for a Second Draw loan.

  • Established before 2019: The SBA compares your gross receipts from all quarters in 2019 and 2020 to see if there’s a year-over-year drop.
  • Established after the second quarter of 2019: The SBA compares revenue from a 2020 quarter to revenue from the third or fourth quarter of 2019.
  • Established after the third quarter of 2019: The SBA compares revenue from any 2020 quarter to the fourth quarter of 2019.
  • Established after the fourth quarter of 2019: The SBA compares your second or third quarter of 2020 revenue to revenue from the first quarter of that year.

When will Second Draw loans be available?

Second Draw loans are available from January 13, 2021 to May 31, 2021. As of January 19, 2021, the SBA has started accepting applications from all lenders. The easiest way to get a loan is to go through your current lender. But you can also apply through a new PPP loan provider if you weren’t happy with your first experience.

How much can I borrow?

The maximum you can borrow through the Second Draw program is $2 million — businesses could get up to $10 million the first time around. Like with the original PPP, how much your business is eligible for depends on your payroll costs. The proposed loan program uses the same calculation, too: 2.5 times your average monthly payroll costs in 2019, 2020 or over the past 12 months.

Maximum amounts for seasonal businesses

Seasonal businesses will be able to calculate their maximum loan cost by multiplying the average monthly payroll costs during one of the two following periods by 2.5:

  • February 15, 2019 or March 1, 2019 to June 30, 2019
  • May 17, 2019 to September 15, 2019

Maximum amounts for new businesses

If your business was established after 2019, the Second Draw program uses a slightly different formula. You can calculate your maximum loan amount by first adding up all of the eligible payroll costs you’ve incurred since you started the business. Then, divide that result by the number of months that those payroll costs covered. Multiply that result by 2.5.

This one’s a little confusing, so it helps to look at an example:

Say your business was established on February 1, 2020, and you applied for a loan on January 1, 2021. You paid a total of $800,000 in eligible payroll expenses during that time.

Since it covered 11 full months, you’d divide that $800,000 by 11 to get $72,727. Multiply that $72,727 by 2.5 and you get your maximum loan amount: $181,818.

You can get more details on what counts as an eligible expense by reading our guide to calculating payroll costs for the PPP.

Maximum amounts for accommodations and food service businesses

Food service and accommodations businesses that fall under sector 72 of the North American Industry Classification System (NAICS) have to calculate their maximum loan amount slightly differently. It’s the lesser of the following:

  • Average monthly payroll costs over a 12-month period before the day the loan is made, multiplied by 3.5
  • Average monthly payroll costs during the calendar year 2019, multiplied by 3.5
  • $2 million

Maximum amounts for businesses with multiple locations

Businesses with more than one location can only receive one loan of up to $2 million. It can’t have more than 300 employees per location. Like with other businesses, the maximum amount you can receive depends on when your business was established.

How do I apply?

Applications are similar to the first time around. You can read our guide to apply for a Second Draw loan for step-by-step instructions.

How would Second Draw forgiveness work?

You have to spend at least 60% of the loan on eligible costs to qualify for full forgiveness on the Second Draw loan — just like a PPP loan. Otherwise, you would only qualify for partial forgiveness — or none at all if you splurge it all on ineligible costs, like say, a Lamborghini.

As it stands, the following types of costs would be eligible for forgiveness under the Second Draw loan:

  • Payroll expenses — including group insurance plans
  • Rent
  • Mortgage interest payments
  • Purchase of software or cloud computing systems for general business operations, like tracking inventory
  • Repairs to property damage due to vandalism or looting not covered by insurance
  • Utility payments
  • Supplier costs for costs from a contract signed before you received the funds
  • Worker protection expenses to meet health and safety guidelines, like personal protective equipment

Apply for a Paycheck Protection Program loan today

Below is a list of online lenders offering SBA Paycheck Protection Program loans. We recommend applying as soon as possible, since funds are available on a first-come, first-served basis. Get help filling out the application with our guide.

Name Product Min. Credit Score Turnaround Time Required Documents
Lendio Paycheck Protection Program loans
No minimum credit score
Varies by demand
Documented payroll costs — like 1099s, W2s, average monthly payroll expenses, payroll report for 2019 and 2020. Must provide number of employees, driver’s license or other government-issued ID, or 2019 IRS Form 941 or Form 944.
SmartBiz paycheck protection loans
No minimum credit score
Varies by demand
Documented payroll costs — like 1099s and W2s.
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Compare up to 4 providers

Second Draw loan alternative: Expand your current PPP loan

If you don’t qualify for a Second Draw loan but received a PPP loan, your business could still get more funding through this program. The second stimulus bill expanded the types of expenses that are eligible for PPP funding and forgiveness to include the operating expenses, property repairs, supplier costs and worker protection expenses. Contact your lender to learn how and when to apply for more funds.

  • Expanded First Draw loans. Businesses that don’t qualify for Second Draw PPP loans might be able to add funds to their original PPP loan. That’s because the second stimulus bill made more expenses eligible for forgiveness, like spending on personal protective equipment, supplier costs and software necessary to run your business. Ask your PPP lender about how to apply.
  • Additional disaster loan grants. If you received a grant on an Economic Injury Disaster Loan (EIDL) under $10,000, you might qualify to receive more funds, up to a total of $10,000.
  • Shuttered venue grants. The second stimulus grant launched a grant program for live venues, museums and other companies that depend on ticket sales. Applying for this program makes you ineligible for a Second Draw PPP loan — but you could receive more funds.
  • First Draw PPP loans. If you have a 501(c)(6) organization that’s newly eligible for a PPP loan, you’ll have to apply for a First Draw loan before you can access the second round of funds.
  • Local loans and grants. Local governments and private organizations are still offering loans and grants — though it may be harder to find financing than in March. Reach out to a local business organization to learn about your options.

Photo: Getty Images

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