Paycheck Protection Program Loans: The Ultimate Guide

Small business owners can borrow up to $10 million to pay for payroll, rent, mortgage interest, and utilities under the newly available Paycheck Protection Program (PPP) loan. The loan is available from any Small Business Administration (SBA)-approved lender as well as through online loan brokers. Loan proceeds used for eligible expenses will be forgiven for up to eight weeks of eligible expenses, effectively converting the loans into small business grants.

The above providers are available nationwide and have no application restrictions.

On Dec. 27, 2020, the federal government authorized an additional $284.5 billion in funding for PPP loans. Under this new authorization, PPP loans are available to first-time borrowers as well as businesses that have already received one PPP loan. Similar to prior funding rounds, we anticipate that this allocation will likely be depleted quickly.

Paycheck Protection Program Loan Overview

What the Paycheck Protection Program Loan Is

The Coronavirus Aid, Relief, and Economic Security (CARES) Act required the SBA to help lenders across the country extend loans to small business owners struggling to make payroll during the COVID-19 pandemic. These loans are offered by banks, brokers, credit unions, and other financial institutions with the same costs, terms, and qualifications nationwide.

Businesses that receive a Paycheck Protection Program loan can use the proceeds to cover payroll, rent, and utility expenses. If loan funds are only used on these qualified expenses during the pandemic period, the SBA will forgive the loan at the end of the forgiveness period. The forgiveness period extends for up to 24 weeks and is intended to help small business owners avoid layoffs and closure.

The Paycheck Protection Program can help small businesses overcome:

• Disruptions to the supply chain: Businesses that have lost the ability to get goods delivered entirely or at a reasonable price
• Challenges with staffing: Companies that are struggling to take on employees, find staff, or otherwise hire during this time
• Reduced earnings: Small businesses with declining earnings due to COVID-19
• Lost customers: Storefronts that have less foot traffic due to pandemic restrictions
• Closure: Businesses that have had to remain closed entirely due to state requirements

Our Experience

Fit Small Business learned about the Paycheck Protection Program loans through our coverage of the CARES Act and analysis of how small businesses can leverage the program to maintain operations. Like other businesses, our business has been affected by the COVID-19 pandemic, so we applied for—and received— a PPP loan to help keep our business operational. During our initial search for a lender, we evaluated the application process for numerous providers and found that Lendio, an online business loan broker, offered the easiest application process.

Visit Lendio

How the Paycheck Protection Program Loan Works

A Paycheck Protection Program loan converts into a grant if it’s used to cover payroll, rent, mortgage, and utility costs during the forgivable period of the loan (up to 24 weeks). For most small business owners, the entire process is relatively straightforward—from determining eligibility to applying for forgiveness.

The steps small business owners must take for the PPP loan include:

1. Determine eligibility
2. Gather necessary documents
3. Select a lender
4. Submit an application
5. Receive funding
6. Track payroll, utility, and rent or mortgage payments
7. Apply for forgiveness
8. Repay any remaining balance

Our Experience

We recommend that small business owners take their time to ensure all paperwork is in order prior to applying. Having all of your documentation gathered in advance will make the application process easier. We also recommend that you keep detailed records of how you spend your PPP loan funds as this information will need to be reported to your lender when you apply for loan forgiveness.

Paycheck Protection Program Loan Qualifications

• Entities: Small businesses, nonprofit organizations, veterans organizations, tribal businesses, sole proprietors, self-employed individuals, and franchisees
• Number of employees: Fewer than 500 (300 or fewer for second PPP loans)
• SBA size standards: These vary, but a restaurant, for example, must have less than $8 million in annual revenue, and a chain of convenience stores must have fewer than 500 employees
• Operational requirement: The business must have been operating as of Feb. 15, 2020
• Additional requirements: Must pay payroll taxes

The PPP loan is available to most types of businesses. The only exception is businesses that were closed as of Feb. 15, 2020, for reasons unrelated to COVID-19. Large businesses also will be restricted from qualifying. However, the size standards offered by the SBA accommodate for industries that typically have large staffs.

Our Experience

As a small business that employs fewer than 100 employees, Fit Small Business qualifies for the program. We’ve spoken to dozens of business owners who employ from one to as many as 300 workers, many of whom applied for a loan during the first two rounds of funding. We struggled to find businesses that needed this funding but could not qualify.

Paycheck Protection Program Loan Terms

• Maximum loan amount: Up to $10 million (up to $2 million for second PPP loan)
• Repayment term: Up to 2 years
• Repayment schedule: Monthly
• Payment deferral: Six months

For amounts borrowed in excess of the forgivable maximum, the SBA will allow up to two years for repayment. You can borrow up to $10 million for first draw PPP loans and up to $2 million for second draw loans. However, covering payroll, rent, and mortgage payments will be a priority for loan limit calculations.

The two-year repayment term begins when the lender issues the loan and not after the initial deferral of payments. During the deferral period, your business won’t be required to make payments, but the loan will still accumulate interest. Still, the interest rate is just 1%, which means that for every $1 million you borrow, you’ll owe $830 in interest per month.

What Costs Are Considered Payroll

The Paycheck Protection Program offers a broad definition of payroll, including:

• Salary, wages, commission, or similar compensation
• Cash or tip equivalent
• Vacation, parental, family, medical, or sick leave
• Allowance for dismissal or separation
• Provisions of group healthcare benefits, including insurance premiums
• Retirement benefits
• State or local tax that’s part of employee compensation like unemployment taxes

Paycheck Protection Program Loan Permitted Uses

Small business owners can use the loan to pay for:

• Payroll costs, including taxes
• Insurance premiums and costs associated with healthcare benefits during periods of paid sick, medical, or family leaves
• Employee salaries, commissions, or similar compensations
• Mortgage interest
• Rent
• Utilities
• Interest on debt incurred before the covered period

Determine How Much You Can Borrow

The PPP loan regulations provide calculations that can help small business owners determine the amount of funding for which they may be eligible.

• Most small businesses: Multiply average total monthly payroll costs for a one-year period before the date of the loan by 2.5
• Seasonal small businesses: Calculate average total monthly payroll for one quarter, and multiply by 2.5
• Businesses refinancing loans: Small business owners can also refinance an outstanding loan made between Jan. 31, 2020, and the date upon which they receive a Paycheck Protection Program loan if the previous loan’s proceeds were used to cover a qualified expense

Payroll Calculation Restrictions

When calculating payroll for relief, businesses may not be included in the calculation:

• Any individual employee earning an annual salary greater than $100,000; however, payments up to that amount are forgivable
• Taxes imposed or withheld under Chapter 21, Chapter 22, or Chapter 24 of the Internal Revenue Code of 1986
• Employees living outside the United States
• Sick leave wages for employees for which the Families First Coronavirus Response Act (Section 7001) offers a tax credit
• Sick leave for self-employed individuals for which the Families First Coronavirus Response Act (Section 7003) offers a tax credit

Calculating How Much to Borrow for Forgiveness

For a more accurate estimate of forgiveness, download our spreadsheet or follow these steps:

1. Determine the number of employees your business has, including employees you will rehire
2. Cap all employee salaries for the calculation at $100,000
3. Divide the resulting payroll into days by dividing by the number of days in the month
4. Multiply by 56 to represent the number of workdays in eight weeks
5. Do the same calculation for utilities and rent or mortgage payments
6. Get the sum of rent or mortgage, utilities, and payroll costs

The resulting total is the loan amount that can potentially be forgiven. While this calculation isn’t as quick as the provided in the language of the CARES Act or on the form, it will give you some peace of mind. The best advice we’ve received from our conversation with lenders is to keep great records of each expense paid from the proceeds of the loan to ensure you have a paper trail when asking for forgiveness.

Our Experience

At Fit Small Business, we used a more detailed method for our internal calculations for what we could borrow and the forgiveness amounts. However, the official SBA form uses the method described in the act. In comparing the calculations, we found that both methods produced similar results, and we expect it will be the same for most business owners. The only exception is if you have high payroll or rent/mortgage costs due to location or staffing.

Paycheck Protection Program Loan Costs

• Interest rate: Up to 1%, charged only on the amount of unforgiven financing
• SBA guarantee fee: Waived
• Prepayment penalties: None
• Personal guarantee: None
• Collateral: None

SBA loans are generally considered to be inexpensive business loans. However, the Paycheck Protection Program has taken a relatively inexpensive program and made it even more affordable for small business owners. The government has authorized a fixed interest rate of 1% and waived all fees and collateral requirements for borrowers.

Our Experience

As written in the CARES Act, all PPP loans will have a maximum interest rate of 1%. This was true for the loan we received as well. There were no surprise interest rates or additional fees associated with our loan when we received our loan agreement.

Paycheck Protection Program Loan Required Documents

Compared to other types of SBA loans, the documentation requirements for PPP loans are minimal. While there may be some variation in the verification documents requested by different lenders, you can expect to provide documentation pertaining to the organization of your business and various documents to verify your payroll and other eligible expenses.

You can download a Paycheck Protection Program loan checklist to track your documents in preparation.

Borrower Documents

• Articles of incorporation or organization
• Bylaws or operating agreement
• Color copy of driver’s licenses for each owner of the business

For Payroll Expense Verification

• IRS Form 940 and 941 (contact your payroll processor or accountant for these forms)
• Payroll summary report or employee pay stubs, including payroll benefits like vacation, healthcare, and retirement for the fiscal quarter
• 1099s (if independent contractor)

Other Verification Documents

• Trailing 12-month business profit and loss (P&L) statement as of the date of your application
• Most recent business mortgage statement and/or rent/lease statement
• Most recent business utility bills like electric, gas, telephone, internet, or water

You’ll also need to submit SBA Form 2483, the Paycheck Protection Program application form.

Our Experience

In the days between the signing of the CARES Act and the SBA beginning to issue lender guidance on PPP loan requirements, we saw real-time evolution of lenders’ diminishing documentation requirements. What started out as instruction to apply for a standard SBA 7(a) loan rapidly evolved into the shortened list of required documents that you see above. Lenders have since streamlined this process even further and many, like Lendio, have processed thousands of loans since the program’s inception.

Paycheck Protection Program Loan Providers

Banks, credit unions, loan brokers, and other financial institutions are authorized to offer an application for the Paycheck Protection Program loans. For most small business owners, an online provider is the best solution. However, there are certain circumstances when a different lender or financial institution would work better.

While many banks offer this program, some are restricting it to borrowers who already have a business checking account with the bank. These banks are a good choice if your business has a complicated application process. Most small businesses should be able to apply for a PPP loan online. The advantage of online lenders is their ability to process applications quickly and their ability to access funding from multiple sources to ensure applications are funded.

Our Experience

We began our search for a lender as soon as the CARES Act became law. Since the program was new, it took some time before lenders were willing and able to accept applications. Now that the program is more established and the guidelines are clear most lenders—especially those that offer standard SBA 7(a) loans—are accepting PPP loan applications.

Paycheck Protection Program Loan Application Process

Once you have determined the loan amount for which you are eligible, gathered all of the documentation, and selected a lender, the application process is simple. Most lenders require you to complete a short online application that asks for basic details regarding your business. You should also be prepared to detail your monthly PPP-eligible expenses like payroll, rent, and utilities.

Once you have entered the basic business information, you’ll need to provide copies of the documentation to the lender. This may be completed via file upload or email attachment, depending on the lender’s preference. Please note that some lenders are instantly declining applications if the business doesn’t supply all requested information with the application.

When your application has been deemed complete, the lender will begin processing your application for funding. While these applications are not complex, lenders are being inundated with applications from small business owners seeking PPP loans, so you may not hear back from your lender immediately.

Our Experience

The application process was still in a state of transition as we applied, which made it a bit challenging to navigate. However, lenders now have more guidance from the SBA, so the process has become quite streamlined. Overall, applying for this program was less challenging than applying for a personal mortgage loan.

Paycheck Protection Program Loan Forgiveness Process

The SBA has created a form specifically for use in requesting loan forgiveness for the Paycheck Protection Program. This form comprises four sections: Forgiveness Calculations, PPP Schedule A, PPP Schedule A Worksheet, and an optional borrower demographic section. Your lender may require you to complete this form or provide you with a worksheet that requests the same information. When preparing your forgiveness application, it is important to understand what expenses are forgivable and to have supporting documentation.

The sum of the following costs, up to $10 million, will make a business eligible for forgiveness:

• Payroll costs
• Interest payments on mortgage obligations, excluding prepayment and principal
• Rent payments
• Utility payments

The documents required to verify loan forgiveness include:

• SBA Paycheck Protection Program Loan Forgiveness Application (or equivalent)
• Payroll tax filings reported to the IRS
• State income, payroll, and unemployment insurance filings
• Canceled checks, payment receipts, account statements to verify mortgage, lease, and utility obligations

What Happens If You Borrow More Than the Forgiveness Amount?

If you borrow more than the amount that will be forgiven, you will be left with a low-interest SBA loan with a two-year repayment term. In the event that loan funds are used for expenses other than those that are forgivable under this program, you may have a loan balance that enters repayment.

The terms for the remainder of the loan are:

• Guarantee: The SBA will continue to guarantee the remaining portion of the loan
• Repayment term: Up to 2 years from the date of issuance
• Interest rate: 1% fixed

The forgiven portion of the loan will be canceled and removed from the principal amount of your loan. Your lender will continue to service the loan until the remaining unforgiven amount is repaid.

How to Calculate the Size of Payments After Payroll Forgiveness

The remaining loan would have a total maturity of 24 months from origination. The interest rate will be 1%, and the payments will be due each month. We’ve created a spreadsheet you can download to estimate the costs of the loan after payroll forgiveness. You’ll want to avoid borrowing more than the business can support, especially since the general economic climate remains uncertain.

If you wish to recreate this calculation, you can use the payment function (=PMT) in Excel. Ensure the interest rate is divided by 12 so that it matches the payment frequency. The only other thing left to add is the accumulated interest, which you can figure out by multiplying the loan amount by the interest rate and dividing the result in half to get six months of deferred payments.

Tax Treatment of Forgiven Debt

Debt forgiveness in the case of PPP loans will not count as income on tax filings. This is an exception in the act to avoid penalizing businesses that needed help from the loan.

Our Experience

Fit Small Business has applied for forgiveness on our PPP loan. Our lender provided us with an Excel worksheet to complete in lieu of the formal SBA form. The worksheet required all of the same information that appears on the SBA Paycheck Protection Program Loan Forgiveness Application. We are still awaiting a final response from our lender on whether or not our application for forgiveness was accepted.

Bottom Line

The Paycheck Protection Program loan is intended to relieve the downward economic pressure on small businesses during the COVID-19 pandemic. Small businesses can get payroll, utility, and rent or mortgage expenses covered by the loan, which can later be forgiven, converting effectively into a grant. For those that have already received a PPP loan, the latest stimulus package has authorized businesses to receive a second PPP loan.