How Does The Paycheck Protection Program (PPP Loan) Work?

Note: As the PPP Loan is a new product created by the SBA to relieve small businesses during the coronavirus pandemic, details regarding its availability and structure may change on a weekly, daily or hourly basis. Once new details become available, we’ll be sure to update this post.

National Business Capital & Services has already submitted the maximum allotted PPP loan applications to our SBA accredited lender and is not accepting more at this time.

Small businesses nationwide suffered financially as a result of the coronavirus pandemic. The new SBA Paycheck Protection Program loan aims to give them some much-needed relief. However, because the program is new, many business owners in need of funding are confused about how exactly the PPP loan works.

If you have questions about who’s eligible, what the PPP loan can be used for, and where to file for one, you’re not alone. Business owners everywhere looking to secure the future for their businesses (and employees) are seeking clear answers too.

In this post, you’ll learn everything you need to know about how the PPP loan works.

how the ppp loan works

What is the PPP Loan?

The PPP loan, or Paycheck Protection Program loan, is a new program created by the SBA to give small business owners the money they need to continue paying their employees throughout the coronavirus crisis, despite financial difficulties. 

These federally guaranteed funds are designed to help small businesses cover payroll, even without normal cash flow, Small businesses that follow the SBA’s guidelines about spending these funds will be fully forgiven.

Are PPP Loan Funds Exhausted?

Not yet. As of this writing, the second round of PPP loans remains open for business owners to apply for funding. This second round will also help those who applied (but were not funded) during the first round to have their applications considered.

As the government is working in real time to make funding available, Congress has been authorizing funding in waves.

During the first round of PPP funding, which opened on April 3rd, lenders processed and approved over 1.6 million loans. This window closed on April 16th. The average loan size was 206K, and there was a $349 billion pool of allocated funds.

The second round of PPP funding, which opened on April 27th and will likely remain open for a two-week period, made an additional $310 billion available.

Experts anticipate a third round of PPP funding.

Business owners that applied during the first round and were not funded should confirm that their application will be processed. Those that have not yet applied should do so through an accredited SBA lender.

How The PPP Loan Works: Everything You Need to Know

The goal of the PPP loan is to help small businesses that have been impacted by the coronavirus pandemic through the crisis with confidence. To understand how the PPP loan works, it’s important to recognize that it’s not quite like other SBA products on the market. It’s also quite different from other small business loan programs available through private and bank lenders.

The PPP loan is part of the CARES Act, a $2 trillion package passed by the federal government to combat all aspects of the coronavirus pandemic. 

Following the spread of the virus and state closures, many small businesses suffered financially. Between losing customers through foot traffic, shutting down altogether, and potentially losing customer payments, many small businesses were unable to keep cash flow consistent. The PPP loan aims to help them remain operational, rather than shutting down.

The PPP loan is structured with the following terms:

  • An interest rate of 1%
  • Total maturity of 2 years
  • Full or partial loan forgiveness
  • No personal guarantees or collateral required
  • Payments deferred for the first 6 months
  • No minimum credit score required
  • No fees

What The PPP Loan Can Be Used For: Payroll, Operating Costs & More

With the PPP’s low interest structure and forgiveness come certain stipulations. Unlike most small business loans, you won’t be free to spend the money how you see fit. Instead, the SBA requires that, for the loan to be forgiven, small businesses put PPP funding toward:

  • Payroll 
  • Interest on mortgage 
  • Rent payments
  • Utility payments

The SBA also provided additional guidance for specific costs that fall under the umbrella of payroll:

  • Payroll (including annual salaries, hourly wages, commissions, cash tips, or other compensation plans)
  • Leave expenses (including sick leave and vacation time, as well as parental, family and medical leave)
  • Severance payments
  • Payments for group health care benefits, including insurance premiums
  • Payments for employee retirement benefits
  • Both state and federal taxes based on compensation

However, the PPP loan covers individual employee salaries up to $100K. This means that if individual employees are earning over $100,000, their full salaries will not be covered.

Who Qualifies for the PPP Loan?

The PPP loan is intended for small businesses—not large, publicly traded enterprises.

The following small business structures can apply for and receive PPP loan funding:

  • S-corps
  • C-Corps
  • LLCs
  • Private nonprofits
  • Faith-based organizations
  • Tribal businesses
  • Veteran groups

To receive government funding, you’ll need to provide a few important details on your application:

  • Your business’s average monthly payroll costs, as well as proof of payroll (IRS form 941)
  • Basic information to identify your business (such as the name, address, and tax ID number)
  • Information about the owner(s), their backgrounds, existing and previous loans, as well as citizenship status
  • Business bank statement(s)
  • Driver’s license
  • Voided business check.

Additionally, you’ll also need to certify in good faith that the conditions brought on by the coronavirus made it difficult to support your business and pay your employees.

In order to qualify, your business must have been operational by February 15, 2020.

How PPP Loan Is Calculated 

Simply put, PPP loan amounts are calculated based on total payroll costs for the duration of the loan’s coverage—2.5 months. It’s important to note, however, that individual salaries are capped at $100K. In other words, the SBA will allocate up to $100K for every employee.

Through the PPP loan, individual businesses can qualify for up to 10 million in funding. Individual funding amounts will depend on the costs incurred during the previous year.

How the PPP Loan Works For Self-Employed Business Owners

The new round of PPP loan funding opened the door for self-employed business owners, sole proprietors and independent contractors to apply.

The way it works for self-employed business owners doesn’t stray too far from the standard procedure. By providing proof of income under normal conditions, you can qualify for a PPP loan. In short, you can use the PPP loan to give yourself a salary based on your normal income.

For freelancers, this might mean submitting one or several 1099 forms.

To learn more about whether your business qualifies, and the documentation you may need, be sure to reach out to your SBA accredited lender.

Where You Can File or Apply for a PPP Loan 

According to the SBA, all existing SBA 7(a) lenders and federally insured banks and credit unions can facilitate these loans. PPP loans that are accepted will be reimbursed by the SBA. This includes large, nationwide business banks, as well as local community banks and credit unions.

Online lenders and marketplaces may also accept applications, which will be routed through SBA lenders. If you choose to apply through an online marketplace, be sure to understand that they won’t’ supply the funding directly.

The SBA’s PPP application should request the same information regardless of which lender you go through, but may have slight variations.

How The PPP Loan Is Forgiven

The potential for complete loan forgiveness is one of the most appealing parts of how the PPP loan works. By following these PPP forgiveness requirements, business owners can move forward without having to repay all (or at least some) of the loan.

Crucially, you must maintain payroll by paying all employees, or rehire the employees that you laid off due to coronavirus-related obstacles by June 30.

If you don’t, you may not be fully forgiven—but there is a middle ground.

Using over 25% of the loan to cover expenses other than payroll could decrease the forgiven amount.

The Bottom Line

If your business needs funding to overcome coronavirus-related obstacles, be sure to apply, and do so soon. You can get started by finding federal or community banks that are still accepting applications. If you’re unable to do so, find an online marketplace—but be sure to remember that they’re forwarding your application to a partner bank.

National Business Capital & Services is the #1 FinTech marketplace offering small business loans and services. Harnessing the power of smart technology and even smarter people, we’ve streamlined the approval process to secure over $1 billion in financing for small business owners to date.

Our expert Business Financing Advisors work within our 75+ Lender Marketplace in real time to give you easy access to the best low-interest SBA loans, short and long-term loans and business lines of credit, as well as a full suite of revenue-driving business services.

We strengthen local communities one small business loan at a time. For every deal we fund, we donate 10 meals to Feeding America!

About the Author, Matt Carrigan

Matt Carrigan is the Content Writer at National Business Capital & Services. He loves spending every day creating content to educate business owners across every industry about business growth strategies, and how they can access the funding they need!


Dislcaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advise from National Business Capital & Services and the author. Do no rely on this information as advice and please consult with your financial advisor, accountant and/or attorney before making any decisions. If you rely solely in this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there maybe errors, omissions, or mistakes.