PPP Loans: How the Paycheck Protection Program Works
The Paycheck Protection Program (PPP) provided forgivable loans that helped small businesses sustain payroll, cover rent, and manage other essential expenses during the COVID-19 pandemic. While the program officially ended in May 2021, its lasting impact can still be seen in the continued forgiveness process for eligible borrowers.
The Paycheck Protection Program (PPP) was a lifeline for small businesses during the COVID-19 pandemic. Created in 2020 under the CARES Act, it was a government-backed loan through the U.S. Small Business Administration (SBA) to help businesses keep employees and pay for payroll, rent, and utilities. Even though the program ended on May 31, 2021, some businesses that received PPP loans may still be eligible for forgiveness.
About the Paycheck Protection Program
The Paycheck Protection Program was created under the CARES Act to help small businesses survive the economic crisis of the COVID-19 pandemic. The SBA administered the program with support from the Department of the Treasury. It was a fully SBA-guaranteed loan with the possibility of full forgiveness. The goal was to help businesses keep employees and pay for expenses.
PPP loans covered up to 8 weeks of payroll costs, including benefits, and could be used for mortgage interest, rent, and utilities. To support job retention, the program allocated almost $953 billion in multiple funding rounds: $349 billion in March 2020, $310 billion in April 2020, and further allocations in late 2020 and early 2021.
Eligibility was for small businesses, non-profit organizations, veterans’ organizations, tribal businesses, self-employed individuals, and independent contractors who met the program’s size requirements. The SBA in collaboration with the U.S. Census Bureau monitored the program’s economic impact to ensure it was a financial safety net during the crisis.
Paycheck Protection Program Rules
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Loan amount. Businesses could get a loan of up to 2.5 times their average monthly payroll for 2019, with a maximum of $10 million.
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Eligible expenses. PPP funds could be used for payroll (wages, salaries, PTO, and health benefits), mortgage interest, rent, and utilities as long as these obligations were in place before February 15, 2020. Utilities included electricity, gas, water, transportation, phone services, and internet access.
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Forgiveness. If 60% of the loan was used for payroll and the rest for eligible expenses the loan was fully forgiven.
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Loan terms and maturity. PPP loans had a 1% interest rate, 100% SBA guaranteed, and no collateral or personal guarantees. Initially, two-year maturity but the Paycheck Protection Program Flexibility Act of 2020 extended the minimum term to five years for loans made on or after June 5, 2020. Borrowers with earlier loans could negotiate an extension with their lender.
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How the Paycheck Protection Program Works
The Paycheck Protection Program went through SBA-approved lenders including federally insured banks, credit unions, and other financial institutions. It was for both first-time borrowers and Second Draw PPP borrowers. Even though the program is closed borrowers who received funding can still apply for forgiveness if they meet the eligibility requirements.
What Amount Was Available per Borrower?
First draw. Up to $10 million or 2.5 times your average monthly payroll cost in 2019, whichever was lower.
Second draw. Eligible businesses could get up to $2 million or 2.5 times their average monthly payroll cost in either 2019 or 2020, whichever was lower.
Who Is Eligible?
Small businesses. Companies with 500 or fewer employees or those meeting SBA size standards could apply, with a 300-employee limit for Second Draw loans.
Nonprofits, veterans’ groups, and religious organizations. Eligible organizations, including faith-based institutions and tribal businesses, could qualify if they met SBA requirements.
Self-employed individuals and independent contractors. Freelancers, sole proprietors, and gig workers were eligible for funding.
Industry-specific businesses. Restaurants, hotels, news organizations, and certain marketing companies could qualify if they had 500 or fewer employees per location.
Cooperatives and trade organizations. Agricultural cooperatives, housing co-ops, and business leagues under Section 501(c)(6) were eligible with a 300-employee limit per location.
Who Is Not Eligible?
You were not eligible for a PPP loan if at the time of application or before loan disbursement the applicant or any owner with 20% or more equity in the business was involved in a bankruptcy proceeding.
Covered Period
When applying for a PPP loan you could choose a covered period between 8 and 24 weeks. This period started on the day the first loan payment was received, not the day the loan agreement was signed. Payroll expenses incurred during this period were eligible regardless of the employer’s payroll schedule.
Forgiveness Payroll Percentage
At least 60% of the PPP funds had to be used for payroll to qualify for full forgiveness. Spending less reduced forgiveness proportionally. The Paycheck Protection Program Flexibility Act lowered this requirement from 75%. Payments to independent contractors did not count as payroll expenses.
Is the Paycheck Protection Program still available?
No, PPP loans are not available. The program ended in May 2021 when all funds were depleted. However, existing borrowers can still apply for full loan forgiveness, including principal and interest. Improperly forgiven loans are considered taxable income.
PPP Loan Forgiveness Updates
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2020. The PPP was launched under the CARES Act and the SBA was able to provide forgivable loans to eligible businesses. On December 27, 2020, the Consolidated Appropriations Act, of 2021 was signed into law and introduced guidelines for a second round of PPP loan forgiveness.
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2021. The PPP ended on May 31, 202,1 but borrowers were still eligible for forgiveness. August 4, 2021 borrowers whose lenders participated in the direct forgiveness program could apply through the SBA online portal. 97% of PPP loan funds were used for payroll expenses. Businesses that used 60% or more of their loan for payroll over 8 to 24 weeks qualified for forgiveness. Loans of $2 million or more required manual review and businesses that didn’t meet forgiveness criteria had to repay the outstanding balance.
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2022. The SBA announced no new PPP applications would be accepted but forgiveness was still available for previous borrowers. The SBA implemented an automated review for all loans and a manual review for loans of $2 million or more. By October 2, 2022, 10.5 million PPP loans totaling $755 billion had been forgiven. Businesses that didn’t meet forgiveness criteria had to repay their loans by maturity.
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2023. Forgiveness continued to be available for payroll, protective equipment, supplier costs, group insurance premiums, property damage, and inventory. Forgiveness based on inaccurate information was considered taxable by the IRS. The SBA could audit loans over $150,000 for up to 6 years after forgiveness and borrowers had to keep documentation for review.
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2024. As of 2024 96% of PPP loans had been forgiven. Around 73,000 businesses out of 11.5 million chose to repay their loans possibly to avoid government audits. The SBA had a 60-day review period starting January 1, 2024, to inform businesses with loans under $100,000 about their loan status and forgiveness options.
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2025. As of 2025, 98% of PPP loans had been forgiven, and approximately 50,000 businesses chose to repay their loans. The SBA expanded audits and compliance reviews, focusing on loans over $2 million and cases flagged for potential misuse of funds. Loans over $150,000 were subject to audits for six years after forgiveness. While PPP funding ended, new financial assistance programs were introduced to support small businesses still facing economic challenges.
Federal Contracting Assistance for Small Businesses
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8(a) Business Development Program. Created by the Small Business Administration (SBA) this program helps level the playing field for small businesses owned by socially or economically disadvantaged individuals. Certified 8(a) businesses can compete for government contracts set aside for the program.
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HUBZone Program. This program supports small businesses located in Historically Underutilized Business Zones (HUBZones). HUBZone-certified businesses are eligible for exclusive contract opportunities.
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Service-Disabled Veteran-Owned Small Business Program. The federal government aims to award at least 3% of all contracting dollars to Service-Disabled Veteran-Owned Small Businesses (SDVOSB). Certified businesses can compete for set-aside contracts within the program.
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Small Disadvantaged Business Program. About 10% of all federal contract dollars are awarded to Small Disadvantaged Businesses (SDB). To qualify businesses must meet SDB eligibility criteria and register in the System for Award Management.
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Women-Owned Small Business Federal Contracting Program. HHS sets aside specific federal contracts for Women-Owned Small Businesses (WOSB) and Economically Disadvantaged Women-Owned Small Businesses (EDWOSB). Certified businesses gain access to exclusive contracting opportunities.
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Innovation and Research Programs. The SBA manages the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs which provide small businesses with opportunities to compete for federal research and development awards.
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Small Business Education and Entrepreneurial Development (SEED). Managed by the National Institutes of Health (NIH) SEED connects small businesses with SBIR/STTR programs and provides support through conferences, technical assistance, professional consultations, and networking opportunities.
Conclusion
FAQ
Do I have to pay back PPP loans?
PPP loans do not have to be repaid if used for eligible expenses, primarily payroll costs and certain non-payroll costs. Under the CARES Act, borrowers can have their loans fully forgiven if at least 60% of the funds are spent on payroll within the covered period. However, to receive forgiveness, borrowers must apply within 10 months after the covered period ends. If they don’t, they will no longer have deferment and will need to start making payments to their lender.
Can I get partial forgiveness?
Yes, partial forgiveness is allowed. If less than 60% of the loan was used for payroll costs borrowers may still be eligible for forgiveness on the amount spent on other eligible expenses like rent, utilities, and mortgage interest. The forgiven amount will be pro-rata based on how the funds were used.
What if my PPP loan is not forgiven?
Any amount not forgiven must be repaid at 1% interest over 5 years. Loan payments are deferred for the first 6 months but interest starts accruing immediately. Borrowers will be responsible for making timely payments on the remaining balance once the deferral period ends.
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