Press "Enter" to skip to content

How Do PPP Loans Work?


You may have heard of the PPP loan program throughout the COVID-19 Pandemic. These loans were offered by the government to attempt to keep small businesses afloat.

Let’s take some time and look closely at these loans because many business owners signed up without even knowing all the details.

What Is the PPP Loan?

PPP stands for the Paycheck Protection Program. It was launched to help small business owners pay their employees throughout the pandemic.

Recently, the loan has received an additional $284 billion to continue to help those struggling as the pandemic starts to wind down.

Those businesses who follow all the stipulations set forth by the Small Business Administration (SBA) when spending the funds will have their loan totally forgiven, rather than having to worry about repaying the entire loan.

Are PPP Loans Still Available?

Since the second round of funding has been received, PPP Loans are still available for those small businesses who didn’t receive funding during the first round of loan approvals. Some of those who did receive a loan may also qualify to take a second loan.

As far as we know now, there could potentially be more relief in the future, but that’s unknown at this time.

During the initial round of funding, lenders approved over $1.6 million in loans, with the average loan size being around $206,000.

There was $349 billion available at that time. 

Which Businesses Qualify for a PPP Loan?

The PPP loan is specifically for small businesses that are private and not for significant corporations that are publicly traded.

Businesses that can apply for a PPP Loan include:

  • Independent contractors
  • Private non-profits
  • Tribal businesses
  • S-Corps
  • LLCs
  • C-Corps
  • Faith-based organizations
  • 501(c)(6) organizations
  • 501(c)(3) non-profits
  • Veteran groups

Basic Information

The goal of the PPP loan was to offer some small business owners relief throughout the pandemic. As restrictions surged and we were all instructed to stay home, many businesses like retail stores, restaurants, and specialty stores suffered from losing their customer base.

To keep their employees, many of these businesses sought help from the Small Business Administration.

The PPP loan is significantly different than any other product that the SBA offers and other loans to help small businesses through private lenders. The PPP loans are designed to help businesses pay their employees through closures and losing customers.

What Are the PPP Loan Terms?

The PPP loans have some precise terms. They come with an interest rate of just 1% with no additional fees.

Business owners are not required to put up personal guarantees or collateral. There’s no minimum credit score that is required to get approved for a PPP loan.

Loans that were issued before June 5th, 2020, were given under the condition that the maturity would be two years. Loans given after that date have a 5-year maturity. No payments are required for the first 10 months.

The PPP Loans can be fully forgiven or partially forgiven if the business owner appropriately uses them.

What Can the PPP Loan Be Used for?

To qualify for any kind of loan forgiveness, business owners must spend the funds they’ve received in specific ways.

The original PPP loan guidelines were stringent, but now the list of things you can use the money for has been expanded. Since the pandemic has lasted so long, businesses are struggling to pay more beyond just payroll.

PPP Loans can be used for:

  • Mortgage Interest
  • Rent payments
  • Payroll
  • Utility bills
  • Personal protective equipment
  • Supplier costs
  • Any property damage costs incurred
  • Certain operational costs

In terms of payroll, the SBA has specified that the loan can be used for:

  • Annual salaries, hourly employee wages, tips, commissions, or compensation plans
  • Severance
  • Sick leave, vacation payouts, maternity leave, medical leave, and family leave
  • Retirement benefit payments for employees
  • State and federal taxes
  • Employee health care plans
  • Insurance premiums

The PPP loan will only cover employee salaries up to $100,000, so any hourly or salary employee who earns over $100,000 per year will only have their salaries partially covered.

What Do I Need to Qualify?

Your business must have been operational before February 15th, 2020, to qualify for the PPP Loan. You will be required to provide some proof that the coronavirus has negatively impacted your business and that you’re struggling to pay your employees.

If you received funding in the first round, you might still qualify for funding in the second round. If your revenue has decreased at least 25% in any quarter of 2020 compared to 2019, you spent all the original funds, and you have over 300 employees, you can apply for the second round of funding.

What Do I Need to Apply?

To apply for the PPP Loan, you’ll require the following documents:

  • Driver’s Licence
  • Business bank statements
  • Voided business check
  • Details about the owners, including any previous and existing loans, citizenship status, backgrounds, etc.
  • Business identification like the name, address, tax ID number
  • The monthly payrolls costs
  • Proof of payroll from IRS form 941

How Do PPP Loans Work as a Self-Employed Business Owner?

Initially, the PPP loan was not available for self-employed individuals, independent contractors, and sole proprietors.

However, now, if you are one of those, you can apply. The procedure isn’t much different, but you’d need to submit proof of income under normal circumstances. Freelancers may need to submit several 1099 forms.

If you’re not sure if your business qualifies, contact an SBA accredited lender.

Where Can I Apply for a PPP Loan?

The SBA has announced that all SBA 7(a) lenders can provide the PPP Loan. You can also go through any federally insured bank or credit union. The SBA will reimburse any approved PPP loan, whether you receive it through a community bank or credit union.

You may be able to find a PPP lender through online avenues and marketplaces, which are then routed through SBA lenders, so you won’t get your funds through the online lender.

You can download the PPP application form on the SBA’s website. Every available lender should have the same or very similar requirements.

How Is the PPP Loan Calculated?

The amount you will qualify for when you’re approved for the PPP loan will depend on your payroll costs for two and a half months.

The hospitality industry and seasonal businesses, like hotels and restaurants, are likely eligible for funding beyond the two-and-a-half-month time frame. Those businesses may be able to qualify for 3.5 times the business’s monthly payroll amount.

The newest round of funding comes with a maximum amount of $2 million, decreasing from the original maximum of $10 million.

Borrowers will now have the option to extend their coverage to 24 weeks. The funding amounts will depend on any costs that came up during the previous year.

How Do I Maximize PPP Loan Forgiveness?

When you receive your PPP loan, you want to ensure you are spending it according to the SBA guidelines. You will want to carefully document where the money is going and ensure that you’re spending at least 60% of the loan on your payroll costs.

Your employee numbers are likely changing throughout the pandemic, so you will want to keep track of new hires, rehires, and dismissals to ensure the total number of employees is similar.

If you received a large loan and then lost all of your employees, you likely wouldn’t be able to spend 60% on payroll costs. As long as you follow the guidelines, you should be forgiven.

How Is the PPP Loan forgiven?

Most, if not all, business owners are likely looking to have their loans forgiven. It’s one of the most appealing parts of applying for the PPP loan over other financial endeavors. When business owners stick to the guidelines set out by the SBA, they can have their loans forgiven and won’t have to repay the entirety or a portion of the loan.

You must ensure that the loan is being spent on payroll costs and spend 60% or more on paying your employees. You would be rehiring anyone you laid off during the initial round of closures, and the loan would cover 24 weeks of payroll.

As mentioned, other expenses that the loan can cover include utilities, rent, mortgage payments, operating expenses, and property damage. If you aren’t spending the money on these things, you’ll likely be stuck repaying the loan in full.

Am I Able To Use an Economic Injury Disaster Loan (EIDL) Grant and a PPP Loan?

Originally, business owners would be penalized for taking an EIDL grant. The amount would be held against how much of the PPP loan would be forgiven.

However, now businesses can take an EIDL grant up to $10,000 and can have their PPP loans forgiven whether they’ve taken one or both.

Am I Allowed To Use the Employee Retention Tax Credit and a PPP Loan Simultaneously?

Originally, borrowers had to choose one or the other. You could not take advantage of the PPP loan and the Employee Retention Tax Credit at the same time. However, since December 2020, Congress announced that businesses could do both.

Additionally, there has been an expansion of the Employee Retention Tax Credit that provides some impressive benefits to business owners. They can now take advantage of them regardless of whether they received a PPP loan.

Has the PPP Loan Worked?

It’s still a bit early to tell, but it has kept many hardworking people employed throughout a stressful time and kept many well-loved businesses afloat as well.

Is the PPP Loan Right for Me?

Finally, if you’re a business owner that qualifies and you need some assistance through the end of the pandemic, definitely apply for a PPP loan before this round of funding is no longer available. If you need assistance, contact the small business administration, and they can provide you with guidance.