What is a PPP Loan? Exploring the Paycheck Protection Program

The Paycheck Protection Program (PPP) was created in 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide financial assistance to small businesses impacted by the COVID-19 pandemic. PPP loans are low-interest, forgivable loans designed to help businesses retain employees and cover other operating expenses during times of economic hardship.

What is a PPP Loan?

A PPP loan is a loan guaranteed by the Small Business Administration (SBA) and issued by approved lenders to eligible small businesses. The goal of PPP loans is to help businesses keep their workforce employed during the COVID-19 crisis.

Key features of PPP loans include:

• Low interest rate – The interest rate on PPP loans is 1%.
• Possible full forgiveness – PPP loans may be fully forgiven if at least 60% of the loan proceeds are used for payroll costs and the remainder is used for other eligible expenses over a set period of time after loan origination.
• Short maturities – PPP loans issued before June 5, 2020, have a 2 year maturity. Loans issued after June 5, 2020, have a 5 year maturity.
• Payment deferral – Payments on PPP loans are deferred until the SBA remits the borrower’s loan forgiveness to the lender, or if the borrower does not apply for forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period.
• No collateral or personal guarantees required – Unlike standard SBA 7(a) loans, no collateral or personal guarantees are required for PPP loans.

Who is Eligible for a PPP Loan?

To be eligible for a First Draw PPP loan, the applicant must:

• Have 500 or fewer employees whose principal place of residence is in the United States, or meet applicable size standard for the industry as provided by SBA, if higher
• Be a small business concern as defined in section 3 of the Small Business Act (15 USC 632), and subject to SBA’s affiliation rules under 13 CFR 121.301(f) unless specifically waived
• Have been in operation on February 15, 2020
• Have employees for whom the applicant paid salaries and payroll taxes, or paid independent contractors
• Not be engaged in any activity that is illegal under federal, state, or local law

Certain non-profit organizations, veterans organizations, tribal concerns, sole proprietorships, self-employed individuals, and independent contractors are also eligible.

Second Draw PPP loans have additional eligibility criteria, including:

• Previously received a First Draw PPP Loan and used the full amount only for authorized uses
• Have no more than 300 employees
• Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020

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What Can PPP Loans be Used For?

PPP loan proceeds may be used to cover the following expenses:

• Payroll costs, including compensation to employees in the form of salary, wages, commissions, cash tips, paid leave, and allowances for dismissal or separation
• Employee benefits such as paid vacations, parental, family, medical, or sick leave, health insurance premiums, and retirement benefits
• Interest payments on mortgage obligations that were incurred before February 15, 2020
• Rent payments on leases dated before February 15, 2020
• Utility payments for electricity, gas, water, transportation, telephone, or internet access for service that began before February 15, 2020
• Operations expenditures relating to software, cloud computing services, human resources, sales and billing functions, product or service delivery, etc.
• Property damage costs related to property losses due to public disturbances in 2020 that are not covered by insurance
• Supplier costs on orders in effect prior to taking out the loan
• Worker protection expenditures for personal protective equipment, partitions, air filtration, expansion of outdoor space, etc.

At least 60% of the PPP loan proceeds must be used on payroll costs for the loan to be fully forgiven.

How Much Can You Borrow with a PPP Loan?

First Draw PPP Loans

For most borrowers, the maximum loan amount is 2.5 times the average monthly payroll costs from either 2019 or the 1 year prior to application. Payroll costs include salaries, wages, tips, employee benefits, state and local taxes, and payments made to independent contractors.

The maximum loan amount is $10 million.

Second Draw PPP Loans

Second Draw PPP loan amounts are also generally 2.5 times average monthly payroll costs, but borrowers in the Accommodation and Food Services sector (NAICS 72) may receive up to 3.5 times average monthly payroll costs.

The maximum loan amount for Second Draw PPP loans is $2 million.

How is the PPP Loan Amount Calculated?

For most borrowers, the following steps are used to calculate the maximum PPP loan amount:

1. Determine the reference time period – This is usually 2019 or the last 12 months prior to when the loan application is submitted. Borrowers can choose which time period to use.
2. Calculate average monthly payroll costs – Add up the total payroll costs from the chosen reference time period. Then divide this total by 12 to get the average monthly payroll costs.
3. Multiply the average monthly payroll costs by 2.5 (or 3.5 for NAICS 72) – This provides the maximum loan amount.

There are some adjustments that may need to be made for seasonal businesses or businesses not in operation for a full year in 2019. The SBA also caps compensation per employee at $100,000 annualized when calculating payroll costs.

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How to Apply for a PPP Loan

Small businesses interested in a PPP loan must complete a loan application and submit it to an approved SBA lender along with payroll documentation and other required information.

Here are the steps to apply:

1. Contact lenders – Reach out to banks, credit unions, online lenders and other SBA-approved lenders to see if they are offering PPP loans. Focus on lenders you already have a relationship with first.
2. Gather required documents – This includes payroll records, mortgage/lease agreements, utility bills, financial statements, tax documents, and other materials needed to verify payroll and number of employees.
3. Complete loan application – Fill out SBA Form 2483 for First Draw loans or SBA Form 2483-SD for Second Draw Loans. Make sure to calculate the requested loan amount using the provided methodology.
4. Submit application and documents to lender – Your lender will review the application and issue a loan decision. If approved, they will work with the SBA to issue the PPP loan.

It’s important to apply as soon as possible once eligible, as PPP funding is limited.

PPP Loan Forgiveness

One of the key benefits of a PPP loan is the opportunity for full or partial loan forgiveness. Here is an overview of how PPP loan forgiveness works:

• Borrowers apply for loan forgiveness directly through their lender via SBA Form 3508, 3508EZ, or 3508S once they have used all the loan proceeds.
• Loan forgiveness is based on the borrower spending at least 60% of the loan amount on eligible payroll costs within a set covered period following loan origination (either 8 or 24 weeks).
• Borrowers must maintain employee headcount and compensation levels over the covered period to maximize forgiveness, with certain safe harbors and exceptions.
• Lenders have 60 days to make a forgiveness determination. Any loan amounts not forgiven must be repaid under the loan terms.
• The SBA may audit and review forgiveness applications and has the authority to deny forgiveness in cases of fraud or misuse of funds.

To have the best shot at full forgiveness, borrowers need to carefully document use of loan proceeds and comply with program criteria.

PPP Loan Terms and Conditions

All PPP loans have the the following terms:

• 1% fixed interest rate
• 5 year loan term for loans made after June 5, 2020. 2 year term for earlier loans.
• Payments deferred until the SBA sends the forgiveness amount to lender or if not forgiven, 10 months after the covered period ends
• No collateral or personal guarantees required
• No SBA fees charged

The interest rate, maturity, deferral provisions, and other terms are set by law and apply to all borrowers. The lender you choose will handle your loan but cannot change these terms.

PPP Loan vs EIDL Loan

The SBA’s COVID-19 Economic Injury Disaster Loan (EIDL) program provides low interest loans directly from the SBA that can be used for working capital and normal operating expenses.

Here’s a comparison between PPP and EIDL loans:

A small business can use both loan programs as long as they don’t pay for the same expenses with both loans.

Conclusion

The Paycheck Protection Program provided a valuable lifeline to millions of small businesses during the pandemic. While the program is no longer accepting new applications, it served its purpose in helping companies retain employees and stay operational when economic activity slowed dramatically. PPP loans offered low-cost financing and incentivized keeping workers on payroll through potential forgiveness. Despite some complications with the rollout, the program ultimately delivered $800 billion in emergency relief to American small businesses. The legacy of PPP loans will be a stronger and more resilient small business sector that made it through the worst public health crisis in 100 years.

PPP Loan Forgiveness FAQ

Here are answers to some frequently asked questions about PPP loan forgiveness:

How do I apply for PPP loan forgiveness?

You apply through your PPP lender using SBA Form 3508, 3508EZ, or 3508S once you have used all the PPP loan proceeds you are requesting forgiveness on.

When can I apply for PPP loan forgiveness?

You can submit your loan forgiveness application any time before the maturity date of the loan once you have used all the loan proceeds. You must apply within 10 months of the end of your loan forgiveness covered period to avoid PPP loan payments.

What documentation is required for PPP loan forgiveness?

You will need to provide payroll records, rent/lease agreements, utility bills, and other documentation to verify eligible expenses and compliance with program rules.

How long does it take to get PPP loan forgiveness?

Lenders have 60 days to review and make a forgiveness determination. The SBA may take additional time for review.

Can my PPP loan be 100% forgiven?

Yes, if at least 60% is used on payroll costs and the remainder on other eligible expenses, and you maintain salaries and headcount, per program rules.

What happens if my entire loan is not forgiven?

Any loan amount not forgiven must be repaid under the loan terms. Your lender will notify you of monthly payments due.

Can my PPP loan forgiveness be reduced?

Yes, if you use less than 60% on payroll costs or do not maintain salary/headcount levels. There are exceptions for businesses unable to rehire or operate at full capacity.

Can I appeal if my forgiveness request is denied?

Yes, you may file an appeal within 30 days of a denial to the SBA Office of Hearings and Appeals.

Are PPP loans taxable?

The IRS treats forgiven PPP loans as tax-free. Loan expenses are still deductible for tax purposes.

In another related article, What is a Home Equity Loan? A Comprehensive Guide