What Are Paycheck Protection Program Loans?

The PPP aims to help small businesses keep employees on the payroll. Its primary tool is forgivable loans.

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Update: The Paycheck Protection Program was scheduled to stop accepting applications on June 30, 2020. On July 4, the president signed legislation that extends the deadline to Aug. 8.

Banks and other lenders began accepting applications from small businesses for coronavirus relief loans — known as Paycheck Protection Program loans — on April 3, but the rollout hasn’t been smooth.

On April 15, the U.S. Small Business Administration announced that the initial funding of the loan program — $349 billion — had been depleted. On April 24, an additional $310 billion in funding was signed into law.

Throughout this time, small businesses that stand to benefit from the loans have had questions. Here are some of the answers.

What is the Paycheck Protection Program?

The Paycheck Protection Program was created on March 27, 2020, as part of the Coronavirus Aid, Relief, and Economic Security Act, also known as CARES, to help small businesses keep employees on the payroll. The program's primary tool is forgivable loans intended to make paying employees easier during the economic fallout of the coronavirus pandemic.

Changes enacted on June 5:

  • Give businesses more time to spend the money (24 weeks instead of 8 weeks).

  • Extend the minimum loan repayment term (to 5 years from 2 years).

  • Reduce the percentage of funds required to be spent on payroll (60% instead of 75%).

  • Extend the date by which businesses have to rehire workers (to Dec. 31 from June 30).

Who can get a PPP loan?

  • Small businesses, nonprofit organizations, veterans organizations and tribal businesses with fewer than 500 employees or other industry-specific Small Business Administration size standard.

  • Sole proprietors, self-employed workers and independent contractors or side gig workers.

  • Franchise owners.

  • Food service and hotel/accommodation providers with multiple locations but fewer than 500 workers per location.

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How much money can you get?

The amount of the loan is capped at 2.5 times a small business's average monthly payroll costs. In other words, it’s meant to equal two months of payroll plus a 25% buffer. This is subject to a $10 million or $100,000 annualized per-employee cap.

Payroll costs are generally defined as compensation including salary, wages or commission; vacation, sick, and family leave pay; severance; retirement and health care benefits; and state and local payroll taxes.

How do PPP loans differ for self-employed and gig workers?

The only differences for self-employed workers are when they can start applying and how payroll costs are defined.

Lenders began accepting PPP loan applications from the self-employed, sole proprietors and gig workers on April 10.

As with small businesses, the amount available to borrow is limited to 2.5 times the average monthly payroll costs. For sole proprietors and gig workers, payroll costs are defined as compensation or net earnings not exceeding $100,000 in a single year.

How can the money be used?

PPP loans are designed to cover payroll and operating costs such as rent and utilities.

What are rates and terms of the loan?

The loans are being offered at a 1% fixed rate interest. If you have an unforgivable balance, you’ll begin making repayments toward the loan six months after it’s issued — all PPP loans have a six-month deferment period.

The minimum loan term is five years, so any unforgivable balance may be spread across monthly payments for five years from the date the loan is issued.

How do you apply for a PPP loan?

The SBA has a search tool to help locate SBA-approved lenders in your area. Some banks are prioritizing current account holders, so if you have a relationship with a bank offering PPP loans, apply there first.

A few fintech companies and online lenders, such as BlueVine, have been approved to accept PPP loan applications. These companies typically offer a streamlined loan application process, so — assuming additional funding becomes available — they may be able to approve loans and deliver funding more quickly than traditional banks.

You aren’t required to put up collateral for the loans, and there are no application fees. You do have to provide documentation, such as tax and payroll information, so the lender can determine the loan amount.

What can be forgiven?

PPP funds used on payroll costs, rent, utilities and mortgage interest in the 24 weeks after receiving the loan are forgivable. This means you won’t be required to repay that portion of the loan.

Payroll costs must account for at least 60% of your forgiveness amount, and the amount forgiven may be reduced if you’ve had to decrease the number of employees or the amount those employees are paid. You have until December 31, 2020, to restore those reductions.

How is the loan forgiven?

You can submit a forgiveness request to the lender that issued your loan. Check with it for specifics once the forgivable eight-week period is over and before your six-month deferment period is up.

Your lender will likely request documentation verifying how you used the money, such as payroll documents and lease, mortgage and rent statements. It has 60 days to issue a decision on your forgiveness request.

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