Should freelancers apply for a second PPP loan?

Update: On February 22, 2021 the Biden administration announced new PPP rules that can affect freelancers who were previously ineligible. Check out this post for more information.

In March of 2020 Congress passed the CARES Act and introduced the Paycheck Protection Program to the world. Intended to give small businesses the resources to keep their employees on payroll, PPP (as it came to be known) benefits also extended to sole proprietors and independent contractors in the form of a 100% forgivable loan for up to 2.5 times their average monthly payroll. The kicker was that, for for self-employed workers with no employees, “payroll” was defined simply as 2019 net business income. For freelancers, it was as easy as (1) apply for the loan, (2) receive the money, and (3) pay themselves, and poof–no repayment needed.

If this all sounds too good to be true…it really isn’t. There were some hitches early on as the program quickly ran through its initial funding, borrowers were confused by evolving eligibility and forgiveness requirements, and lender banks struggled to keep up with the flood of applications. Eventually Congress refunded the program, the eligibility requirements were solidified, the lenders got their act together, and by PPP’s expiration on August 8, 2020 just about everyone who needed a loan was able to get one.

The only problem was that for many people one loan wasn’t enough. Freelancers in the performing arts, travel, and hospitality industries who received 2.5 months’ worth of income in April or May saw their industries remain shut down through the fall. Expanded unemployment benefits (the CARES Act’s other lifeline to freelancers) expired, cutting off another essential source of cash. But PPP’s requirements specifically prohibited borrowers from applying for more than one loan.

In the final days of 2020, Congress finally stepped up and passed an economic aid package that included a revamped PPP. Most significantly, it gave eligible borrowers who had used up their initial loan proceeds the ability to take a “second draw”. If you’re a freelancer whose livelihood has been (or is still being) disrupted by the pandemic, a first- or second-draw PPP loan could be a source of much-needed cash for your living and/or business expenses.

While PPP generally covers businesses with fewer than 500 employees (or 300 for a second-draw loan), for the purposes of this post I’m going to focus on self-employed individuals with no employees. If your business has employees check out the Treasury Department and Small Business Association sites for more information.

First-draw PPP loans

If you haven’t already taken a PPP loan, you can apply for a first-draw loan as long as (1) your business operated in 2019, and (2) you had positive net business income (i.e. your business income was more than your business expenses). Lenders (including most banks and credit unions) will take applications starting January 11 until March 31, 2021. The maximum loan amount for all first-draw borrowers is 2.5 times your monthly net business income from 2019. To calculate this, get out your 2019 tax return and find Line 3 on Schedule 1. Use this number if it is below $100,000, otherwise use $100,000. Divide by 12, then multiply that number by 2.5; the result is your eligible loan amount. The maximum first-draw loan amount for a self-employed person is $20,833.

Example 1: Robbie is a freelance graphic designer who hasn’t applied for a PPP loan before. His net business income in 2019 was $75,000. He is eligible for a first-draw loan of $15,625 ($75,000 / 12 * 2.5).

Example 2: Levon is an HR consultant who hasn’t applied for a PPP loan before. His net business income in 2019 was $125,000. He is eligible for a first-draw loan of $20,833 ($100,000 / 12 * 2.5).

Second-draw PPP loans

If you’ve already taken a PPP loan, you can apply for a second-draw loan if you’ve had “at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020”. To find out if you meet this requirement, pull up all of the business income you earned in 2019 and 2020 (this should be fairly easy if you have bookkeeping software; otherwise you’ll have to go through all of your bank statements from this period). Add up your income by quarter for each year, then compare the first quarters, second quarters, and so on. It will look something like this:

Quarter2019 income (a)2020 income (b)Difference ((b)/(a)-1)
Q1$20,000$25,00025% increase
Q2$20,000$5,00075% decrease
Q3$20,000$10,00050% decrease
Q4$20,000$15,00025% decrease

As long as there is at least one quarter with a decrease of 25% or more, you’ll be eligible for a second draw.

The maximum second-draw loan amount is usually the same as in the first-draw described above. However, you now have the choice of using 2019 or 2020 income to calculate your loan, meaning if your income was somehow higher in 2020 than 2019 you may be eligible for a bigger loan than your first one. Additionally, if you are in the Accommodation or Food Service sector, you can apply for a loan of 3.5 times your average monthly income instead of the usual 2.5 times.

Example C: Joni is a writer whose net business income was $55,000 in 2019. She received a PPP loan of $11,458 in May of 2020. Her work slowed down temporarily, resulting in a 50% decrease in income during the second quarter as compared with the previous year, but business picked back up and her net business income for all of 2020 was $60,000. Joni is eligible for a second-draw loan of $12,500 ($60,000 / 12 * 2.5).

Example D: Carole is a self-employed bartender who works at weddings and other events. Her 2019 net business income was $80,000. She received a PPP loan of $16,666 in June of 2020. Her business was severely disrupted by the pandemic and her 2020 net business income was just $25,000. Carole is eligible for a second-draw loan of $23,333 ($80,000 / 12 * 3.5).

How will a PPP loan affect my credit score?

Even though in practice a PPP loan is essentially a grant that doesn’t require repayment, it is still a loan by statute. You aren’t required to have good or even any credit to be eligible for a PPP loan (though defaulting on a previous SBA loan may be disqualifying), but there could be short-and long-term impacts on your credit as a consequence of taking the loan.

Your lender will likely perform a “hard pull” as part of the application process. These show up on your credit report and may lower your credit score (usually temporarily). Once your loan is disbursed, it will appear as a debt on your credit report until it is forgiven. This could cause issues for you if you’re applying for another loan (e.g. to buy a house or refinance your mortgage).

For most borrowers the benefits of a PPP loan will outweigh the potential impact on your credit, but be aware of how its presence on your credit report might appear to other lenders.

Should I apply for a loan even if I don’t need it?

As you can tell by the examples above, PPP eligibility covers a wide range of circumstances. A person who hasn’t worked since March is treated the same as someone whose income disruption was only a temporary blip, so long as they can both meet the 25% decrease in gross receipts requirement. For some workers it’s a much-needed lifeline while for others it’s an opportunity for a bit of extra spending money.

For those who need the cash there isn’t much downside to applying for a second-draw loan. As with the first version of PPP, the loans are 100% forgivable to self-employed people as owner income replacement. The loan and forgiveness applications and the recordkeeping requirements are a bit of a burden, but if you’ve already gone through the process once you have an idea of what to expect.

For those who don’t really need the money right now it’s more of a personal decision, with arguments for and against taking the “free” money. On one hand this is taxpayer money intended to support struggling small businesses, and you might feel morally conflicted taking the money if you’re already living comfortably. On the other hand the money is there, it’s perfectly legal, and freelancing is inherently unpredictable – who couldn’t use the extra cash cushion?

My personal inclination is toward taking the money, even if you don’t need it at this moment. It might be different if the program seemed likely to run out of funding and some companies were denied much-needed cash because others beat them to it. But the first round of PPP, despite the initial rush, ultimately expired with funds left over. If the same thing happens with this round, those extra funds don’t necessarily go towards helping small businesses–they just fall back into the federal budget. You can help prevent that from happening by taking the loan and using it to support the businesses that matter to you. Once you’ve “paid” yourself with the PPP proceeds, the money is yours to do what you wish with it; you can earmark it for your takeout budget or a performing arts organization or the Patreon of an artist you love. You can also pay some or all of the funds back if you don’t end up needing them. The point is that it’s better to have the money in hand when you need it than the other way around.