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SBA Paycheck Protection Program — explained
The deadline extension means you now have until August 8th to get your application in.
Updated . What changed?
This emergency loan program offered by the Small Business Administration (SBA) is designed to help small businesses retain employees during the coronavirus outbreak. Rates are fixed at 1% — much lower than a traditional business loan or an SBA disaster loan.
Keep your full staff on the same salary and you could get the full loan forgiven after eight weeks. But even if you lose some staff, you may still be eligible for forgiveness.
Paycheck Protection Program Flexibility Act makes it easier to qualify for forgiveness
The Paycheck Protection Program Flexibility Act was passed by both the House and Senate on June 3, 2020, making it easier for businesses to qualify to have their loan forgiven. Under the Act, businesses now have up to 24 weeks to spend the money to qualify for forgiveness — extended from the original eight weeks. It also gives businesses more flexibility in how they use the funds — with 60% of the funds being used for payroll and 40% on other costs.
Paycheck Protection Program in a nutshell
- Interest rate: 1%
- Maximum loan amount: $10 million based on payroll expenses
- Fees: Waived guarantee and annual fees
- SBA guarantee: 100% of loan amount
- Term: 2 or 5 years, with payments deferred until forgiveness is issued or up to 10 months after the covered period — interest accrues during deferment
- Collateral: No collateral or personal guarantee
- Turnaround: Faster than a 7(a) loan — lenders don’t have to wait for SBA approval
- Other criteria: No requirement to prove you tried and failed to get credit elsewhere
- How to apply: Fill out the 2-page application with any bank, credit union or online lender participating in the program
Note: The stimulus package set maximum interest rates at 4% and maximum terms at 10 years for the Paycheck Protection Program. It also allowed for deferments to run as long as a year. But the Treasury Department announced it would offer a 0.5% rate, shorter terms and a shorter deferment period on April 1, 2020. On April 3, it raised the rate to 1% after receiving complaints from lenders.
What's in this guide?
- What is the Paycheck Protection Program?
- How does the Paycheck Protection Program work?
- Apply for a Paycheck Protection Program loan today
- Need funding fast? Apply for an online business loan instead
- What businesses can qualify for the Paycheck Protection Program?
- SBA requirement clarifications
- How much can I borrow?
- How do I apply?
- What can I use the PPP loan for?
- How does forgiveness work?
- Top 4 tips to get a PPP loan
- Other perks for small businesses in the stimulus package
- Frequently asked questions
What is the Paycheck Protection Program?
The Paycheck Protection Program (PPP) offers government-backed loans for businesses that have been affected by the coronavirus outbreak, called a Paycheck Protection Program loan or Paycheck Protection Loan (PPL).
It was created by the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020 as a way to encourage employers to keep employees on payroll, hire back staff and help cover overhead expenses. It covers eight or 24 weeks of eligible operating costs, starting on February 15th up to December 31st — and you can apply for forgiveness.
Applications are open from April 3, 2020 to August 8, 2020, but funding may run out before the end date so it’s recommended you apply as soon as possible.
How does the Paycheck Protection Program work?
The PPP is a modification of the SBA 7(a) loan program that works like a combination of a loan and a grant. Generally, you’ll follows these steps:
- Apply for a loan. Business owners apply with a private lender for a loan to cover operating costs.
- Defer payments. The lender defers payments for six months after the loan is issued.
- Apply for forgiveness. The borrower applies to have eligible operating costs forgiven after the 24 weeks are up.
- Repay balance. The borrower repays any remaining balance after forgiveness as a two-year term loan.
Apply for a Paycheck Protection Program loan today
Below is a list of online lenders offering SBA Paycheck Protection Program loans. We recommend applying as soon as possible, since funds are available on a first-come, first-served basis. Get help filling out the application with our guide.
Watch out for Paycheck Protection Program scams
The SBA warns small business owners to look out the following red flags and scams when applying for a PPP loan:
- Solicitations. The SBA and the Treasury Department will never reach out and ask you to apply for a PPP loan. Stay away from anyone who does.
- Upfront fees for guaranteed approval. While the Paycheck Protection Program has more flexible requirements than most SBA loan programs, lenders can’t guarantee approval before you apply — and can’t charge any upfront fees.
- High broker fees. Brokers can’t legally charge more than 1% for loans of $350,000 or under, 0.5% for loans from $350,001 to $2 million or 0.25% for loans over $2 million. Stay away from any loan connection service or broker that does.
- Fake emails and links. Don’t open emails claiming to be from the SBA, unless the email address ends with sba.gov. And don’t trust any SBA website links that end with anything other than .gov.
- Email requests for information. Reach out to your lender by phone before responding to any requests for sensitive information, like your bank account or Social Security number.
If you run into a PPP scam, call 800-767-0385 to file a report. Or, fill out a form on the SBA’s Office of Inspector General website.
Application delays and setbacks
The Paycheck Protection Program is an emergency loan program that was launched before the SBA and Treasury Department issued clear guidance for lenders and borrowers. As a result, there’s been a lot of confusion for both lenders and borrowers.
Many smaller banks aren’t offering PPLs at all, and many that are offering them are only working with current customers. Most borrowers who have managed to apply have yet to hear a response. If you need funding within a few days, consider other financing options in addition to the PPL — or as an alternative.
What businesses can qualify for the Paycheck Protection Program?
All businesses must be established before February 15, 2020 and have employees that they reported on payroll tax or contractors reported in an IRS Form 1099-MISC. Your business must also not be in bankruptcy proceedings.
The SBA also expanded eligibility to business owners with a felony criminal past on June 8, 2020. Under a new ruling, the typical five-year look-back period was reduced to one year for business owners with non-financial felonies.
Eligible types of businesses
The following types of businesses are eligible, as long as you have fewer than 500 employees or meet SBA size standards for your industry, or meet the SBA’s alternative PPP size standards — whichever is greater:
- For-profit businesses
- Sole proprietorships
- Independent contractors
- Nonprofit 501(c)(3) organizations
- Veteran 501(c)(19) organizations
- Tribal 31(b)(2)(C) organizations
- Hospitality and food service businesses with more than one location
How do I know if my business meets SBA size standards?
You can find out if your business meets traditional SBA size standards by using a tool on the SBA website. It varies depending on your industry.
If you don’t meet traditional SBA size standards, you still can qualify by meeting these alternative size standards:
- Tangible net worth of $15 million or under
- Net income of $5 million or under for two full fiscal years
Do affiliates affect my business’s size?
Not necessarily. For PPP applicants, the SBA doesn’t consider affiliate businesses when calculating the size of service industry businesses, franchises or businesses that receive help from a Small Business Investment Company (SBIC).
Additional requirements for independent contractors
If you’re an independent contractor or sole proprietor with no employees, you must have had a net profit above $0 on your 2019 tax returns to qualify for a PPP loan. The SBA plans on issuing guidance for independent contractors that were not around in 2019 — likely after the PPP receives more funding.
Restrictions on business activity
The SBA has a few restrictions on what types of business activity can qualify for a PPP loan.
- Illegal activity. Businesses involved in any activity that violates federal law are ineligible. This includes the cannabis industry.
- Gambling. Businesses that made either $1 million or over 50% in revenue from gambling activities are not eligible for this loan.
- Household employers. Individuals who have maids, nannies, private chefs and other staff in their homes don’t qualify for a PPP loan.
Generally, if your business doesn’t qualify for an SBA 7(a) loan due to your business’s industry or activity, it also is ineligible for a PPP loan.
Can faith-based organizations qualify?
Yes — even if they don’t provide secular services. Places of worship such as churches, synagogues, mosques and temples don’t need to be a registered nonprofit, though they have to meet 501(c)(3) requirements.
If your organization is affiliated with another larger organization that is essential to your organization’s religious teachings or structure — such as a diocese — affiliate rules don’t apply when calculating business size.
Everyone with a 20% ownership stake in the company or higher must also meet a few criteria:
- US citizen or permanent resident
- Not delinquent on a federal loan, including SBA loans
- No federal loan defaults in the past seven years
- Not currently in bankruptcy proceedings
- Not currently facing criminal proceedings or incarcerated
- No felony or misdemeanor charges or convictions against a minor in the past seven years
- Legally able and willing to complete the application
Does my credit score matter?
The SBA doesn’t set any specific credit requirements, but it also doesn’t prohibit lenders from considering your credit score.
However, since it’s fully guaranteed by the SBA and comes with forgiveness, it’s likely your credit score won’t factor into your application as much as it would with other SBA loans.
SBA requirement clarifications
The SBA and Treasury Department issued clarifications for businesses that might fall into a gray area.
- Seasonal businesses. Businesses that were not operating on February 15, 2020 due to seasonality can qualify as long as they were operating between May 1, 2019 and September 15, 2019.
- Nondiscrimination. Nonprofits are exempt from nondiscrimination requirements covered in Title IX, the Fair Housing Act and the Indian Child Welfare Act. And religious organizations can hire employees and have membership requirements based on religion.
- Student workers. Student workers can count toward your business’s payroll costs, unless you’re an institution of higher education or their employment was part of the Federal Work-Study Program or a similar state program.
- Lender affiliations. Directors and equity shareholders with less than a 30% stake in a PPP lender can qualify for a Paycheck Protection Loan with that lender. But officers and key employees of the PPP lender who own a PPP-eligible business must apply through a different lender.
How much can I borrow?
Technically, Paycheck Protection Loans run as high as $10 million, but the maximum you can borrow is one month of eligible payroll costs multiplied by 2.5 — according to the SBA as of April 14, 2020.
To learn more about how much you can borrow, read our guide to calculating average monthly payroll costs. We’ve even included a calculator based on the SBA’s formula to make the process even easier. But it’s up to the borrower to accurately calculate the loan amount, so you’ll need to back up your calculation with relevant tax and payroll documents.
Calculating your average monthly payroll costs is a little different if you’re self-employed, an independent contractor or a sole proprietor. Read our guide to applying for a PPP loan as a self-employed borrower for a step-by-step process.
How do I apply?
You can apply through a private lender that offers PPP loans. Applications for small businesses, nonprofits and sole proprietors opened on April 3, 2020. Applications for independent contractors and self-employed individuals opened on April 10, 2020.
Most lenders that work with small businesses are offering this loan — not just SBA lenders. However, you might hit fewer snags if you work with a lender that’s already worked with the SBA. Read our step-by-step guide to filling out the application for help getting started.
Our list of top SBA lenders
How long will it take?
The Treasury Department estimated that the turnaround time would be 24 to 48 hours — or even faster. However, some lenders are skeptical that they’d be able to process applications that quickly, especially during the first few days of the program. But it’s still likely faster than the months it takes to receive funds through a typical SBA 7(a) loan.
“The loans should be approved more quickly than previous SBA-backed loans since the process will be handled entirely by the lender,” Michael W. Myhre, the CEO of the Florida Small Business Development Center (SBDC) Network, told Finder. “There is no separate review being conducted by the SBA.”
What can I use the PPP loan for?
The Paycheck Protection Loan is meant to cover payroll and some operating costs, including:
- Employee salaries, commissions or compensation
- Other eligible payroll costs
- Healthcare insurance premiums
- Paid sick, medical and family leave
- Rent on leases signed before February 15, 2020
- Interest payments on mortgages taken out before February 15, 2020
- Interest on other debt issued before February 15, 2020
- Utilities set up before February 15, 2020
- Refinancing SBA loans issued between January 31, 2020 and the date you take out the PPP loan, including Economic Injury Disaster Loans (EIDLs)
While these costs might be legitimate uses of the funds, not all are eligible for reimbursement.
How does forgiveness work?
You can qualify for 100% forgiveness on your PPP loan if you spend all of the funds on eligible expenses eight weeks after your lender disburses the loan. At least 60% of your forgiveness amount must be based on eligible payroll costs. Only 40% can cover other operating expenses.
If you laid off staff or reduced salaries between February 15, 2020 and April 26, 2020, you have until June 30, 2020 to reverse those changes — otherwise, you’ll only qualify for a reduced amount of forgiveness.
Top 4 tips to get a PPP loan
Here are a few ways to make the most of this new SBA loan program:
- Apply with a lender you have a relationship. Business owners have reported an easier time qualifying with a lender that they have a relationship with, like their bank or an SBA lender.
- Contact lenders before applying. Some lenders may have additional requirements that aren’t advertised online.
- Consider a connection service. If your bank isn’t offering PPP loans, a connection service can help you find a lender willing to work with your business.
- Stay on top of changes. The SBA is constantly changing how this program works, so check back often — we’ll be updating our guide regularly as new details emerge.
Other perks for small businesses in the stimulus package
From tax credits and deferred payroll taxes to grants and SBA loan subsidies, here are a few more benefits for small businesses offered by the CARES Act of 2020:
- Tax credits. To encourage small businesses to retain employees, the government is offering a tax credit for up to 50% of qualified wages — up to $10,000 — per employee per quarter. However, you won’t qualify for this if you take out a Paycheck Protection Loan.
- Deferred payments on payroll taxes. Small businesses can defer paying employments taxes through December 31, 2020.
- SBA loan payment subsidies. The SBA will cover principal, interest and any fees for six months on all SBA 7(a) loans, Community Advantage loans and microloans.
- Unemployment insurance. Expanded unemployment benefits can help you keep your staff if you can’t afford to cover them — and is sometimes higher than what you’d normally pay. But getting a PPP loan can affect their eligibility for these benefits.
The SBA Paycheck Protection Program can help your business cover expenses during the coronavirus outbreak at no immediate cost. And it has more flexible eligibility criteria than other SBA guarantee programs. Read about other financing available to you with our guides to business loans and grants available during the pandemic, as well as other types of SBA loans available to you.
You can also stay up to date on ever-changing coronavirus news with our hub.
Frequently asked questions
Finder.com received a PPP loan in May 2020.
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