What Is A PPP Loan? Overview, And How It Works

Many businesses lost their revenue to Covid-19 lockdown and they had to lay off much staff. Revenue Stopped rolling in and employers have to let go of many which will in turn increase the unemployment rate of the State.

The US government created a scheme that allows small businesses to retain all their workforce through a loan system that can be used to pay for employees’ salaries, insurance, rents, vacations, medicals, and others.

The best about the scheme is that employers get the chance to not repay the loans through loan forgiveness. Let us look at how they did it…

What is PPP Loan?

The CARES act (Coronavirus Aid, Relief and economic security) was passed into the law by the US Senate and its subset is the paycheck protection program (PPP).

PPP is initially a 350 billion dollar program in which loan is made available to small business owners to cover their employer’s payroll and other expenses carefully stated out in the terms of the loans.

This loan has a period of spending of about 8 weeks and in which repayment would start 10 months after the loan has been completely spent.

December 2020 saw the second stimulus signed into law and it is about 285 billion dollars to further ease the burden on employers. The second stimulus is for those who got the first stimulus and yet their revenue is still decreasing.

In essence, the program seeks to help small business run their programs as usual while the government borrows the money to cater to the welfare of their staff.

The program is monitored by the small business administration SBA and it is applied for through SBA- accredited lenders. While a business owner can apply for forgiveness, forgiveness is guaranteed if an employer uses at least 60% of the loan for payment of payroll and the remaining for the other expenses as outlined in the loan terms.

We will discuss the intricacies of this program further down the line but first thing comes first, the rate of unemployment shows the level of the weakness of the US economy and that is what they are trying to lower by providing loans for business owners and mandating it on them to retain the number of staffs they had before the Covid – 19 outbreaks.

Read: 10 Effective Steps To Get A Business Loan


The loan was designed to cut across various types of businesses; however, within a certain range. This range has few workers and low income is generated by them. These groups include:

Sole proprietorship: Turn in a Schedule C from their tax return filed (or to be filed) showing the net profit from the sole proprietorship.

Independent contractors: will need to submit Form 1099-MISC (now 1099-NEC in 2020) in addition to their Schedule C.

Self-employed individuals submit payroll tax filings reported to the Internal Revenue Service.

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PPP loan coverage

The loan has a strict spending formula in which the borrower will be asked to sign a binding agreement that it will be spent that way and anything otherwise is tantamount to fraud! Yes, it is as serious as that. The spending formula is stated below:

60% is strictly for covering the payroll of employees: the reason for existence is to lower the unemployment rate during the massive retrenchment. Employees benefit-cost is also in this category.

Payroll costs under the PPP program include:

  • Salary, wages, commissions, tips, bonuses, and hazard pay (capped at $100,000 on an annualized basis for each employee)
  • Employee benefits including costs for vacation, parental, family, medical, or sick leave allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit
  • State and local taxes assessed on compensation
  • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.

In other words, most payroll costs are covered. However, the following scenarios are not covered:

  • Payments made to independent contractors
  • S corps and C corps owners who aren’t on payroll (shareholders distributions don’t count as payroll under this program)

The remaining 40% can be strictly spent on the following:

  • Interest payment on mortgages
  • Lease and rents
  • Operational costs
  • Uninsured property damage during 2020
  • Recurring expenditures (utilities)
  • Supplier’s cost

Why am I emphasizing strictly following the spending formula? Borrowers can be freed from the obligation of paying back the loan if certain conditions are met and the most important one is spending the money as you have signed that it will be spent.

Read: How To Become A Business Loan Broker In 2022| Expert Guide

How much can I receive when I apply for a PPP loan?

The maximum amount you can get is $2 million and the minimum you can get is the average of your payroll in 3 years (2018,2019 and 2020) multiply by 2.5.

However, those in food and accommodation can get up to 3.5 times their average payroll in three years. You can also calculate the amount receivable.

Applying for a PPP loan

Before you apply, you firstly need to find a lender that fits your profile because SBA does not give the loans but rather back the lenders to give to loan out to individuals.

You can find out if a lender fits your profile here. You will verify/ attest to the following:

  • How the economy has affected your business
  • That you will adhere to the spending formula
  • The documentation of your employee and the payroll used to pay them in the past.

Read: 10 Business Start-up Loans 

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  • Schedule C for a sole proprietorship
  • Pay tax filing
  • Payroll tax form from 2020

How to apply for a PPP loan:

Step 1

Log on to the SBA website to start your application. You fill and submit the form on the site and log-in details will be sent to your inbox for log in to the SBA partner website to complete your application.

Step 2

Add or confirm existing business information. This information includes:

  • Business tax ID
  • Business address
  • Type of business
  • Loan requested
  • Employee count

Step 3

Add new business information; this information includes:

  • Industry
  • Business start date: this must be the same as the date you registered on file at the secretary of state.

Step 4

Enter of confirming ownership: the ownership percentage must be greater than zero.

Read: Great Lakes Student Loan Services Reviews 2022

Step 5

Upload your documents: these are the documents needed to complete your applications. They are as important as the application itself. They include:

  • Driver license for owners with 20%+, that is, every owner with 20%+ ownership should submit the colored photocopy of the front and back of their valid driver’s license.
  • A business applying for PPP should submit:
    • 941 quarterly tax filings (2019, 2020 Q1)
    • 944 annual tax filings 2019)
    • Payroll register for previous 12 months
    • 12 months recent bank statements
  • For 1099 independent contractors and self-employed individuals
    • IRS 1040 schedule C
    • Income and expenses report for 2020
    • 1099s under which you were paid.

Step 6

Check your mail for additional information from SBA or your lender; once you have completed your application.

Your documents are categorized and sent to the lenders who observe your papers and decide to lend you money or otherwise. If you are successful in your application, you will receive a mail stating how disbursement will go.

Generally, disbursement takes 10days but some lenders need few more days to disburse.

PPP loan forgiveness

The beauty of this loan program it can be forgiven in the sense that if the borrower follows the spending formula and did not cut down workers or jobs, then they can get the loan forgiven without repaying one dime.

However, if you have to repay the loan, your interest rate is 1%.

How to apply for PPP loan forgiveness

24 weeks following your loan signing date, all expenses related to the following can be forgiven:

  • Payroll—salary, wage, vacation, parental, family, medical, or sick leave, health benefits, bonuses, hazard pay.
  • Mortgage interest—as long as the mortgage was signed before February 15, 2020
  • Rent—as long as the lease agreement was in effect before February 15, 2020
  • Utilities—as long as service began before February 15, 2020
  • Operations expenditures—any software, cloud computing, or other human resources and accounting needs
  • Property damage costs—any costs from damages due to public disturbances occurring in 2020 and not covered by insurance.
  • Supplier costs—any purchase order or order of goods made before receiving a PPP loan essential to operations.
  • Worker protection expenditures—any personal protection equipment or property improvements to remain COVID compliant from March 1, 2020, onwards.
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You’ll need to keep your records and have accurate bookkeeping to prove your expenses during the loan period. You will also need to have spent 60% of the loan on the payroll to qualify for forgiveness on the entire loan.

When your covered period is up (or your PPP funds are spent), you will apply for forgiveness through your lender. Typically, this is being handled through online portals. Check your lender’s website to see if one is available.

Read: Best Personal Loans for Bad Credit

Loan forgiveness and taxes

PPP loan will not affect your tax billing. Your forgiven loan will not be taxed. However, if you use a PPP loan to purchase a machine, you will pay the tax on the machine as if you want to buy it regularly.

Frequently asked questions about PPP loans

What is a PPP loan and how does it work?

You’ll need to spend 60% on payroll and the rest on other qualifying expenses within 24 weeks. Qualifying expenses include utilities, rent, mortgage payments, debt payments, costs of property damage, supplier costs, protection equipment, and some operation expenses like cloud computing

Who qualifies for a paycheck protection program?

Small businesses with 500 or fewer employees—including nonprofits, veteran’s organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors— are eligible. Businesses with more than 500 employees are eligible in certain industries.

How long does it take SBA to approve a PPP loan?

The SBA’s rules say they must fund approved PPP loans within 10 calendar days from the date of approval, although if the borrower hasn’t provided correct information then it can be up to 20 days. However, if day 10 (or 20) falls on a weekend and/or bank holiday, then it’s the next business day.

Who is not eligible for a PPP loan?

In general, if the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan.


The US Government has done tremendously well to ensure her citizens are not thrown out of jobs when the outbreak happened. Thousands of businesses benefitted from this scheme. The program has ended in 2022.



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