Running a small business during the coronavirus outbreak comes with unprecedented challenges. To assist small businesses during this time, the federal government passed a number of aid packages, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act, in addition to the Consolidated Appropriations Act, to provide low-cost loans and other financial support.
One program created under the initial CARES Act is a Small Business Administration (SBA) loan program known as the Paycheck Protection Program (PPP). The SBA PPP provides low-interest loans, with a possibility for loan forgiveness, to eligible small businesses affected by COVID-19. Keep reading to learn more about how the PPP works, what businesses are eligible, and how to apply.
What is the CARES Act?
The CARES Act allocated approximately $2 trillion in support for individuals and businesses affected by COVID-19. One of the ways it provides support to small businesses is through two Small Business Administration (SBA) programs:
- The newly created Paycheck Protection Program (PPP)
- Expanded funds to the existing SBA Economic Injury Disaster Loan (EIDL) program
What Changed in the Consolidated Appropriations Act?
The Consolidated Appropriations Act provided another $284 billion in PPP funding for small businesses affected by COVID-19. Some of the key details related to PPP loans include:
- Simplified application process for smaller loans
- Expansion of approved loan principal expenses, including protective equipment and other costs related to business adaptations
In addition to federal aid, many cities and states have created assistance programs for small businesses. Check out our guide to see what programs may be available to your business.
Businesses are eligible to apply for multiple CARES Act assistance programs – like both the EIDL and the PPP – though there are some restrictions.
What is the Paycheck Protection Program?
SBA PPP loans provide small businesses who have been impacted by COVID-19 with payroll assistance. These loans are backed by a federal loan guarantee.
SBA PPP loans are designed to get funds to small businesses as quickly as possible. Because of this, the application process for an SBA PPP loan will be different than the application process for other existing SBA loan programs.
One of the goals of the PPP is to incentivize small businesses to keep employees on their payrolls. Because of this, borrowers are eligible for loan forgiveness if they meet certain requirements related to the loan, as defined below.
What Businesses Are Eligible to Apply?
Businesses that have been impacted by COVID-19 and meet the following requirements are eligible to apply:
- Businesses employing less than 500 employees (this includes all employees – full-time, part-time, or any other status)
- Businesses that otherwise meet the SBA’s size standard
- A 501(c)(3) with fewer than 500 employees
- Individuals who are sole proprietors, independent contractors, or are otherwise self-employed
- Tribal business concern that meets the SBA size standard
- A 501(c)(19) Veterans Organization that meets the SBA size standard
How Do SBA PPP Loans Work?
PPP loans have the same terms, regardless of details like the lender or borrower’s location.
Amount and Terms
First Draw PPP Loans are available to qualifying small businesses for up to $10 million. For Second Draw PPP Loans, the maximum loan amount is $2 million. Most small businesses can borrow up to 2.5x their average monthly payroll costs.
Loan term lengths are 5 years, though the loans are eligible for loan forgiveness. For PPP loans made prior to June 5, 2020, the term length is 24 months.
Interest Rates, Fees, and Repayment
Interest rates are 1%. There is no fee to apply for these loans. The payment deferral period for PPP loans is dependent on if and when you apply for loan forgiveness:
- For borrowers who apply for forgiveness within 10 months after the end of the covered period (8- to 24-week period after you received your funds), PPP Loan payments are deferred until you have applied and received a forgiveness decision from the SBA, but interest will continue to accrue during this time.
- For borrowers who apply for forgiveness after that 10-month mark but before the maturity date of their PPP loan (the maturity date is the date on which the final payment of the loan is due), then PPP loan payments are no longer deferred, and you will have to begin making loan payments to your PPP lender. Once you receive a forgiveness decision from the SBA, depending on the approved forgiveness amount, your PPP lender may have to reimburse the payments you’ve already made.
- For borrowers who do not apply for forgiveness, payments are deferred for 10 months after the end of your covered period.
There is no collateral or personal guarantee requirement to secure these loans.
For more information on the latest PPP updates, visit our most recent resource center article.
What Is the Loan Forgiveness Program?
A key part of SBA PPP loans is they are eligible for loan forgiveness. Businesses that meet certain criteria are eligible to have up to their full loan funds forgiven if the funds were used for covered expenses like payroll costs, interest on mortgages, rent payments, utility payments, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and operational expenses made in the 8 to 24 weeks following loan disbursement.
For more information on loan forgiveness, requirements and required documentation, head to this SBA guide.
How Do I Apply for an SBA PPP Loan?
SBA-approved lenders – and some other financing providers – are now accepting applications for SBA PPP loans. Learn more on the SBA website.
OnDeck is here to support small businesses – check out our COVID-19 Resource Hub for more helpful information for small businesses impacted by COVID-19.
The information in this article is provided for educational and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial, legal or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.