Congress restarted the popular Paycheck Protection Program in the latest round of coronavirus aid legislation passed late last December, and many local banks are preparing for their next round of applicants.
The program was first established with the CARES Act in March 2020, and ultimately made up to $522 billion in forgivable loans available, to be distributed to small and medium-sized businesses nationwide. The loans were to be used to cover payroll costs and a limited set of other business-related costs during the economic downturn caused by the coronavirus pandemic.
Banking institutions including commercial banks, private lenders and credit unions are the actual lenders for PPP loans, which are then guaranteed by the Small Business Administration. Lenders are either permitted to collect on the loans they distributed according to SBA guidelines, or the SBA pays the lenders for the full amount they disbursed in the event that the loan is forgiven. Applications for the first round of PPP loans closed on Aug. 8, 2020, but forgiveness processes are ongoing.
Representatives for Watertown Savings Bank, Northern Credit Union and Community Bank, N.A. all said they are preparing for the second round of PPP loans. According to the SBA, lenders with less than $1 billion in assets will be able to submit applications starting on Friday, and all other lenders will be able to submit applications starting Jan. 19.
Community financial institutions, which include lenders like the New York Business Development Corporation, were allowed first access to submit applications, starting Monday. According to the SBA’s website, this was done to “promote access for smaller lenders and their customers,” which often include businesses in underrepresented communities, women and minority owned businesses, and extra-small businesses.
Nationwide, more than 5.2 million businesses received PPP loans, for a total of more than $525 billion. More than 5,400 lenders issued PPP loans, for an average size of $100,700 per loan.
According to public information from the SBA, 2,536 businesses in Jefferson, Lewis and St. Lawrence counties received PPP loans in the first round. A vast majority, 2,220 of those businesses, received less than $150,000, while 316 received between $150,000 and $10 million.
In the three-county region, Watertown Savings Bank distributed the largest number of PPP loans, reaching 652 businesses for a combined total of about $61 million.
The bank with the second-highest number of loans to tri-county region businesses is Community Bank, N.A., based in DeWitt. That bank issued 359 loans in Jefferson, Lewis and St. Lawrence counties. Nationally, Community Bank issued 3,480 PPP loans, for a combined total of nearly a half-billion dollars. Closely following Community Bank’s local lending reach is Northern Credit Union, which issued 350 PPP loans to tri-county region businesses, and 454 loans altogether, for a combined total of more than $30 million.
In the most recent package of coronavirus aid legislation, Congress reopened the program with up to $248 billion available, with some key changes. This second authorization of the program establishes two loan categories, called “first draw” and “second draw” loans.
For businesses that did not apply for, or applied for and then returned a PPP loan in the first round, applications for first draw loans are reopening. Those loans will be issued following the guidelines set last year, meaning they will be open to any business with fewer than 500 employees or any chain in the hospitality or food service industries that maintains fewer than 500 employees per location.
Applicants can receive up to 2.5 times the amount they spend on payroll in a month, for a maximum of $10 million.
For businesses that received and have used all or most of their first draw PPP loan, they will be permitted to apply for second draw loans. These loans will follow similar guidelines to the first draw loans, but will only be available to businesses with 300 or fewer employees. Additionally, applicants must be able to show they lost at least 25% of their gross income between comparable quarters in 2019 and 2020.
For second round loans, most applicants generally can receive up to 2.5 times the amount they spend on payroll in a month, although the maximum loan has been reduced from $10 million in round one to $2 million. For applicants in the hospitality and food service industries, however, they can receive up to 3.5 times the amount they spend on payroll in a month, again for a maximum of $2 million.
Interest rate policies for both first and second draw loans are similar. Before an applicant applies for loan forgiveness, the loan has a 1% interest rate, and matures over either 2 or 4 years, depending on when the loan application was submitted. Payments do not start until at least 10 weeks following the end of the loans monitoring period, which is either 8 or 24 weeks, and if an applicant is in the forgiveness process, payments are deferred.
To qualify for loan forgiveness for both first and second draw loans, a business must show that it maintained the number of employees it had when it first applied for the loan, and paid those employees at the same rates as well. They must also demonstrate that they used at least 60% of the loan’s proceeds to pay for payroll costs. There is a slight change between first and second draw loans on what the remaining 40% of proceeds can be used for. For first draw loans, that 40% can be used to pay for rent, utilities and other business-related expenses. For second draw loans, that 40% can be used for all the things included in the first draw, as well as pandemic-related expenses like face masks, plexiglass shields, and even laptops purchased to allow employees to work from home.
According to Mark R. Lavarnway, president and CEO of Watertown Savings Bank, about 45% of all loans the bank issued in the first round of PPP loans have been forgiven.
“The remaining 65% that haven’t started the forgiveness process yet, that’s not problematic,” Mr. Lavarnway said. “They still have 10 months from the end of the program to apply for forgiveness.”
According to Rob Barlow, Northern Credit Union’s director of commercial lending, about half of all PPP loans issued by the credit union have been forgiven by the SBA, and more forgiveness applications are being received all the time.
According to a spokesperson for Community Bank, N.A., about 450 of their loans have made it through the forgiveness process.
According to SBA data last updated on Nov. 12, nearly 600,000 businesses have applied for loan forgiveness nationally, and $83 billion in loans have been forgiven.
According to Mr. Lavarnway, a major change for this next round of PPP loans is the anticipated demand for the program. In the first round, Mr. Lavarnway said banks and applicants were encouraged to apply quickly, as money was expected to run out.
“We were working around the clock because we found that the portal the SBA was using for approvals was less busy at 3 in the morning,” he said. “We were getting approvals for customers at 3, 4 in the morning because we didn’t want the money to run out and leave north country businesses in the lurch.”
The first pot of $349 billion set aside for the PPP was used up within 10 days, but then Congress authorized another $310 billion, which never fully ran out. At the end of August there was about $138 billion left in the program’s funding. Mr. Lavarnway said, this time around, the SBA is preaching patience for lenders and applicants.
“They said there would be enough to go around,” he said. “They’re telling applicants to be patient.”
Another major change that local banks are anticipating is that the forgiveness process will be simplified for any loans issued under $150,000.
According to Joseph F. Serbun, executive vice president and chief banking officer at Community Bank, N.A., forgiveness applications for loans under that $150,000 cap will be pared down from the multi-step applications used in the first round.
“According to recent legislation, a one-page application will be provided for forgiveness, simplifying the previous process for the customer,” he said.
Mr. Lavarnway said he anticipates that simplified forgiveness process will be clarified in the coming days, as it is currently unclear whether all PPP loans under $150,000 will be subject to the simpler forgiveness process, or only second draw loans. The SBA is expected to release more information as it develops the specifics of the program for commercial lenders within the coming weeks.