PPP Loans: Ultimate Beginners Guide

TL;DR: Small businesses – including 1099s and sole proprietors – are only eligible for PPP loans if they’ve been in existence prior to February 15, 2020. Acceptance of deposits are subject to account agreements.

The Paycheck Protection Program (PPP) is designed to help small business owners keep their doors open and their employees on the job during the pandemic. But there’s plenty of confusion about how the program works and who qualifies. 

Wondering if your business could be eligible for a PPP loan? 

Here’s an in-depth look at how the Paycheck Protection Program works and how to know if you qualify. 

Better banking for everyone

Fee-free overdraft up to $200¹
No hidden fees²
Get paid up to 2 days early with direct deposit³

The Paycheck Protection Program is a loan program that’s backed by the Small Business Administration (SBA). This loan program has one purpose: helping small business owners keep their workers on the job during the coronavirus pandemic. 

Currently, loan funding is available through May 31, 2021. There are two types of loans you can get:

• First Draw PPP loan
• Second Draw PPP loan

First Draw PPP loans

If you’ve never received a loan through the Paycheck Protection Program you could be eligible for a First Draw PPP loan. The SBA allows you to use this money to:

• Fund payroll costs
• Pay mortgage interest
• Pay rent
• Cover utilities
• Pay pay worker protection costs related to COVID-19
• Cover uninsured property damage resulting from looting or vandalism that occurred in 2020
• Pay certain supplier costs and operational expenses

Here are some of the key details on how this loan works:

• PPP loans have an interest rate of 1%
• Loans issued after June 5, 2020, have a five-year maturity term
• Loan payments will be deferred for borrowers who apply for loan forgiveness until SBA remits the borrower’s loan forgiveness amount to the lender
• If you don’t apply for loan forgiveness, payments are deferred 10 months after the end of the covered period for the borrower’s loan forgiveness (between 8 and 24 weeks)
• You don’t need collateral or a personal guarantee to apply
• There are no fees with this PPP loan

In terms of how much you can borrow with a First Draw PPP loan, the amount depends on the number of employees you have and the size of your payroll but the maximum loan is up to $10 million. According to the SBA, the average PPP loan is $107,000 and 86.5% of all loans offered through the program are for less than $150,000. 

Second Draw PPP loans

Second Draw PPP loans are for business owners who have already received a PPP loan previously. Second Draw loans can be used for the same purposes as a First Draw loan and the same 1% interest rate applies. 

The maximum amount you can borrow with a Second Draw PPP loan is 2.5 times the average monthly 2019 or 2020 payroll costs for your business, up to a $2 million cap. Accommodation and food service businesses can use 3.5 times the monthly average for 2019 or 2020 payroll costs to determine their maximum loan amount, up to the $2 million cap. 

Do PPP loans have to be repaid?

Technically, yes. But you can apply for loan forgiveness which would let you off the hook for repayment. 

You’ll need to apply for forgiveness through your lender. Here’s who can be considered for PPP loan forgiveness:

First Draw PPP loans: Borrowers may qualify for full loan forgiveness if, during the 8- to 24-week period following loan disbursement:

• Employee and compensation levels are maintained
• Loan funds are used for payroll and other eligible expenses
• At least 60% of the money is used to cover payroll

Second Draw PPP loans: Borrowers may qualify for full loan forgiveness if, during the 8- to 24-week period following loan disbursement:

• Employee and compensation levels are maintained following the same requirements for First Draw loans
• Loan funds are spent on payroll and other approved costs
• At least 60% of the money goes toward payroll

You can apply for PPP loan forgiveness any time during the loan term. But if you don’t apply during the initial 10-month period in which you’re allowed to defer payments, you’ll need to start paying on the loan even if you plan to seek forgiveness. 

The SBA has some guidelines on who can apply for a PPP loan. In terms of who may qualify for a First Draw PPP loan, the list includes:

• Sole proprietors, independent contractors, and self-employed persons
• Any small business concern that meets SBA’s size standards (either the industry size standard or the alternative size standard)
• Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) with the greater of:
  • 500 employees, or
  • That meets the SBA industry size standard if more than 500
• Any business with a NAICS code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location

For Second Draw PPP loans, you may qualify if:

• You previously received a First Draw PPP loan and will or have used the full amount only for authorized purposes
• Your business has no more than 300 employees
• You can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020

Your business has to have been affected by the COVID-19 pandemic in some way. And you must have been operational before February 15, 2020. 

Who is NOT eligible for a PPP loan?

There are certain businesses that cannot apply for a PPP loan. These same businesses are also ineligible for other types of SBA-backed loans. 

Generally, you’re excluded from PPP loan eligibility if any of the following are true:

• Your business has defaulted on federal loans
• Your business is delinquent on federal taxes
• Your business is located in a foreign country or is owned by undocumented aliens
• You run a pyramid scheme
• Your business limits membership to certain people
• You engage in discriminatory hiring practices
• Your business is government-owned
• You run a passive business (i.e. leasing land for cellphone towers, owning real estate, etc.)
• Your business is engaged in lending or similar financial activities
• Your business is centered around illegal activity
• Your business primarily promotes religion
• You run a business that derives most of its revenue from products or live performances of a prurient sexual nature
• One or more of your business associates has a poor character
• Your business is primarily engaged in political or lobbying activities
• You run a speculative business (i.e. investing, engaging in research and development, etc.)

The SBA has said it will make exceptions for certain types of businesses that would otherwise be ineligible. But it’s best to clarify with the SBA first whether your business type will be allowed because applying for a PPP loan when you don’t qualify can lead to serious consequences. 

It’s important to understand if you’re eligible for a PPP loan before applying to make sure you qualify. If you apply without verifying your eligibility your loan application can be denied. Applying incorrectly, meaning including errors on your application, can also lead to a denial of your loan.

The SBA could deny your application if it determines that you knowingly submitted an application when you were ineligible for a loan. In the worst-case scenario, you could be charged with PPP loan fraud if you receive funding through the program when you’re ineligible. 

Things that could lead to a felony fraud charge include:

• Lying on the PPP loan application
• Falsifying your income or business details
• Submitting forged documents

The SBA does make a distinction between borrower error and fraud so if you accidentally enter a wrong digit for your income, that’s not necessarily going to lead to a criminal charge. But if you apply for PPP thinking you qualify just because you run a business you could unknowingly be attracting charges of bank fraud, wire fraud or mail fraud in the process. 

If you think you qualify for a PPP loan, the first step is finding a lender. You can use the SBA’s lender lookup tool to find an approved lender near you. Or you can use the SBA’s Lender Match service to get connected with a PPP loan lender. It can take a couple of business days to get matched this way. 

Once you choose a lender, the next step is applying for a PPP loan. This means filling out a loan application and providing any supporting documentation the lender requests, which may include: 

• Government-issued ID for all owners who have a 20%+ share in the business
• Proof that you were in business on or before February 15, 2020
• Copies of applicable tax forms, including a full business tax return
• Documentation of payroll costs, which may include W2s, IRS Form 944 or a third-party payroll processing report
• Bank statements

You’ll also need to provide a bank account number and routing number for the account that you’d like your funds deposited into. If you’re applying for a Second Draw PPP loan, you’ll need to fill out a different application. 

Once you submit your application and supporting documents, the lender will review them to determine if you’re eligible and what amount of loan funding you qualify for. You’ll have a chance to review the loan terms before signing any final paperwork to confirm that you want to move ahead with borrowing. SBA rules require lenders to disburse PPP loan funds no later than 10 calendar days of approving an application. 

If you think your small business could benefit, it’s important to get your application in sooner, rather than later since funding for the current round is only approved through May 31, 2021.  Just remember: receiving funding when you’re not eligible can lead to felony fraud charge – so make sure to check the rules before applying as your business.