What is a PPP Loan and How Does it Work?

Undoubtedly, one of the most unfortunate consequences of the ongoing COVID-19 pandemic has been the loss of employment and economic difficulties faced by many. The impact has been massive, especially for small businesses and those who are self-employed. In order to help alleviate this situation, the U.S. government recently resumed the Payment Protection Program (PPP). Read on to learn about the PPP, how it works and how to apply. If you're eligible, get ready to apply for your loan!

What is a PPP loan?

PPP loans are offered through the Small Business Administration (SBA) Coronavirus Aid, Relief, and Economic Security Act (CARES). The goal of PPP loans is to help fund the expenses of freelancers, small businesses, and nonprofits that have struggled financially due to the ongoing COVID-19 pandemic. This program has been in effect since March 2020. The first round of PPP loans was issued in 2020 during the first months of the ongoing health crisis. On January 11, 2021, the SBA resumed the program, setting March 31, 2021 as the deadline to apply for a PPP loan.

What is the objective of PPP loans?

The government recognizes that this pandemic has created significant economic difficulties. This is why it created PPP Loans - to help businesses like yours cover their basic costs. The main objective of PPP loans is to help cover payrolls and retain employees. In addition, if you need to pay your business’ rent or mortgage, this loan can be of aid in these troubling times. Lastly, supporting expenses related to keeping employees safe from COVID-19 is also one of the objectives of PPP loans.

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Who is eligible for a PPP loan?

PPP loans are intended to assist self-employed individuals and specific businesses. In order to determine if a business is eligible it should fall into the following conditions:

PPP requirements: self-employed workers

  • Single-person businesses, also known as sole proprietorships, which are enterprises owned and operated by a single individual; these can belong to different fields of work, such as accounting, gardening or medical care.
  • Independent contractors, such as doctors, dentists, veterinarians or lawyers; that is, those who provide services to the general public and cannot be directed by the people who hire them.
  • Self-employed people, also called freelancers, such as graphic designers, architects or writers who do not belong to any company and can work on several different projects for short periods of time.
  • Workers in the so-called gig economy; that is, independent workers who are paid for very short-term jobs, such as delivering food or providing transportation.

PPP requirements: corporations

  • Companies that meet SBA standards to be considered as small.
  • Businesses, nonprofits, veterans' organizations, or tribal businesses (Native American-owned businesses) with fewer than 500 employees. If one of these companies has over 500 employees, it may still be eligible if they meet the SBA’s Size Standards.
  • Service and accommodation companies with more than one physical location and fewer than 500 employees per location.

How do PPP loans work?

PPP loans have significant advantages over other types of personal and business loans, including a lower-than-normal interest rate, a five-year maturity, and the possibility of obtaining a forgiveness for these loans.

PPP loans work as follows:

  • They have an interest rate of 1%, which is advantageous when compared to other types of loans, which usually have an annual interest rate of over 4%.
  • The Payroll Protection Program loans issued after June 5, 2020 have a maturity of five years.
  • No personal guarantees or guarantors are required.
  • Neither the government nor lenders will charge any fees.
  • Loan payments will be deferred for those applying for forgiveness until the SBA determines the loan amount that will be forgiven.
  • If a borrower does not apply for loan forgiveness, payments will be deferred to ten months after the end of the covered period for loan forgiveness, which can be of either 8 or 24 weeks.

How much can you borrow with the PPP?

Borrowers will be able to request up to 2.5 times their monthly payroll expenses, based on their 2019 or 2020 tax information. The maximum amount that can be requested is $10 million.

The calculation method for the PPP loan amount varies depending on the type of borrower. However, we can summarize the types of expenses you may include as part of your payroll:

PPP expense categories: self-employed workers

  • Wages
  • Commissions
  • Net income

PPP expense categories: corporations

  • Wages, commissions and tips of your employees
  • Redundancy or termination subsidies
  • Retirement payments
  • Holiday, maternity or sickness payments
  • Federal and state payroll taxes

For more detailed information on how to calculate your loan amount we recommend you consult the following SBA document.

What expenses are authorized?

PPP loans must mostly be used to finance payroll expenses, but they can also be used for the following expenses:

  • Mortgage, rent, and utilities
  • Workers protection from COVID-19
  • Uninsured property damage caused by looting or vandalism during 2020
  • Supplier costs required for the operation of the company

How does PPP loan forgiveness work?

Borrowers may be eligible for the forgiveness of their PPP loan if they meet the following requirements during the period of 8 to 24 weeks after receiving the loan:

  • Maintaining employment and compensation levels
  • Using 60% of earnings to cover payroll costs
  • Using the loan amount to cover payroll costs and other eligible expenses, such as mortgage, rent, and business utilities

How can you apply for a PPP loan?

If you or your business is eligible for a PPP loan, you must apply by March 31, 2021. To do so, you will need to choose a lender and submit the required documentation, as explained below.

Choose an eligible lender

PPP loans will be issued by SBA-authorized lenders, including a variety of banks and credit unions. Find out which lenders are closest to your location to apply for financing by using  Lender Match, which is made available by the SBA.

What documents are required?

If you want to start preparing your PPP loan application, a good start is to download the sample application form. Please be aware that the application must be submitted to your chosen lender in English.

Some of the documents that you are likely to need in order to apply for a PPP loan are listed below.

PPP loan documents: self-employed workers

  • Proof that the business was operating before February 15, 2020; the start date of the pandemic
  • 2019 tax return
  • Bank statements

PPP loan documents: corporations

  • IRS Form 940 (from 2019 and 2020)
  • IRS Form 941 (from 2019 and 2020)
  • Business tax returns from 2019
  • Payroll reports
  • Incorporation documents
  • 2019 and 2020 bank statements

Second draw PPP loans

With the PPP loan program resuming in 2021, there is the possibility that eligible borrowers who received a first loan in 2020 can apply for a second draw PPP loan under the same general terms of their first loan.

The maximum amount for a second PPP loan is 2.5 times the average monthly payroll costs for 2019 or 2020; only this time, the amount is capped at $2 million. For borrowers in the food and hospitality industries, the maximum amount on their second loan can be 3.5 times the monthly average of 2019 or 2020 payroll costs, not exceeding $2 million.

To be eligible for a second PPP loan, the borrower must meet different requirements than for the first loan:

  • They must have previously received a first draw PPP loan and have used, or have plans to use, the full amount only for authorized expenses
  • They must have under 300 employees
  • They must show at least a 25% reduction in gross income
We hope this guide has been helpful in ascertaining your eligibility in applying for a PPP loan. For more information on the topic, visit the Payroll Protection Program website made available by the SBA. In the meantime, if you need a bank you can trust to deposit your PPP loan or any other activity related to your business, consider applying for a PODERcard.