Paycheck Protection Program 101: How to Get a Business Loan under the CARES Act

Rebecca Graham

Last Updated: March 25th, 2021



Graphic of a large white capital building with the text "The Paycheck Protection Program PPP (101). How to get a business loan under the Cares Act"

Note: The Paycheck Protection Program closed August 8, 2020. 

As is the case with nearly all aspects of the COVID-19 pandemic, new updates and decisions are being made every day. 

But amid many unknowns, small business owners can count on some relief starting Friday, April 3 thanks to the $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was signed into law on March 27. The aid package includes a $349 billion economic relief program through the Small Business Administration (SBA) called the Paycheck Protection Program (PPP). 

When the initial aid ran out, additional funding was allocated to the PPP and the program is continuing to accept applications until June 30, 2020. 

Beyond the Paycheck Protection Program, additional assistance is available to small business owners and individuals via an Economic Injury Disaster Advance Loan of up to $2 million with a $10,000 advance available.

In addition, through its Debt Relief program, the SBA will pay the principal and interest of current 7(a) loans for a period of six months and the principal and interest of new 7(a) loans issued prior to September 27, 2020. 

As a small business owner, here's what you need to know about Paycheck Protection loans. 

What is the purpose of the Paycheck Protection Program? 

The PPP was designed to support job retention by financially incentivizing business owners to keep employees on the payroll. 

How does it differ from the SBA's existing loan programs? 

The SBA ordinarily provides financial assistance to small businesses primarily through its 7(a) lending program. The PPP is a new program under 7(a) that significantly differs from the other lending programs. Paycheck Protection loans are granted the following unique allowances: 

  • Short-term forbearance 
  • 100 percent guaranteed
  • Collateral and personal guarantee requirements are waived 
  • No government or lender fees 
  • Possibility of loan forgiveness 

What if my business has a different SBA loan?

If your business is paying off a different SBA disaster loan, the due date for that loan has been deferred through December 31, 2020. 

Businesses with pending SBA disaster loans can also get a Paycheck Protection loan as long as the loans are being used for different things. 

What businesses are eligible? 

Any business with fewer than 500 employees (including sole proprietorships, independent contractors, and self-employed individuals) for which "current economic uncertainty makes the loan necessary to support your ongoing operations" is eligible for a loan, according to the Treasury Department's PPP fact sheet. Private non-profit organizations and 501(c)(19) veterans organizations affected by COVID-19 are also eligible. 

Your company must have already been in business as of February 15 to qualify. 

What size loan can my business get? 

A business's maximum loan amount is determined by eight weeks of prior average payroll costs plus an additional 25 percent, or 2.5 times your total payroll expenses for the loan period, up to $10 million. 

A single business can only apply for one Paycheck Protection loan. 

What expenses does the loan cover? 

A Paycheck Protection loan covers the following:

  • Salary wages, commissions, and tips capped at $100,000 per employee
  • Employee benefits including vacation, parental leave, medical leave, and sick leave
  • Mortgage interest, rent, and utilities incurred or in force before February 15, 2020
  • In some cases, interest on other debts 

What is the interest rate for loans under the program? 

The interest rate has been set at 1 percent. That number may rise but the interest rate has been capped at 4 percent. 

What is the timeline for relief and repayment? 

The loan provides economic relief for costs incurred from February 15 to December 31, 2020. 

Loan payments are deferred for six months and have a maturity of five years. In other words, the first payment is due after six months of the loan origination date and the full loan is due after five years. 

Is there loan forgiveness? 

There is a financial incentive to maintain your workforce. The SBA will forgive loans for the first 24 weeks if all employees are kept on the payroll and the money is used for payroll, rent, mortgage interest, or utilities. 

The amount of loan forgiveness includes payroll costs for employees below $100,000 in annual income. 

Forgiveness is reduced if the workforce or wages are reduced, but you can possibly preserve some of your loan guarantee by rehiring employees you've already laid off in response to COVID-19-related economic uncertainty. 

There is a maximum 10-year maturity for loan forgiveness. 

How are lenders compensated?

Lenders participating in the PPP are given the following incentives by the SBA: 

  • Favorable regulatory treatment 
  • Reimbursement for processing fees based on the disbursed loan amount
    • 5 percent for loans up to $350,000
    • 3 percent for loans greater than $350,000 and less than $2 million
    • 1 percent for loans of $2 million or more 
  • PPP loans on a lender's balance sheet receive 0 percent risk weight 

Where can I find and select an approved lender? 

Lenders are mobilizing to prepare for the onslaught of loan applications to answer the greater demand for business loans during this time. The SBA has approved over 1,800 lenders in its network which includes any participating SBA 7(a) lender, federally insured credit union or depository institution, and Farm Credit System. 

Best Company's mission is to help consumers find trustworthy companies that deserve their business. If you don't already have a lending institution or are looking to make a change, we encourage you to consider reviews-based rankings as you shop for a lender for your Paycheck Protection loan. The current top-ranked business loans companies are as follows: 

  1. Lendio 
  2. Headway Capital (temporarily not accepting new applicants)  
  3. Kabbage

View the complete list of best business loan lenders here.   

What do I need to apply? 

Just as you would generally for business loan preparation, you need to gather documentation. Fortunately, a loan under the PPP does not require a separate review by the SBA so your eligibility will be determined by the funding institution via guidelines from the SBA. Presumably, this will greatly shorten the approval period so you can get funds soon after applying for the loan. 

The U.S. Treasury Department's CARES Act resource page has a sample application you can download as a reference, though you'll apply for the loan through your chosen lending institution. 

Prepare documentation of the following information, and you're ready to apply online through your lender:

  • Business TIN number
  • Average monthly payroll
  • Expected payroll costs from February 15–December 31
  • Number of jobs supported by your company
  • Employee headcount over time
  • A list of all owners holding at least a 20 percent stake in the business and affirm they are not party to federal crimes 
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