PPP Paycheck Protection Program Loan Explained

What is the Paycheck Protection Program (PPP Loan)

The Paycheck Protection Program (PPP) is a loan program conceived and implemented by the United States Federal Government in early 2020, which was a part of a massive economic stimulus bill called the Coronavirus Aid, Relief and Economic Security (CARES) Act.

The program’s purpose was to provide financial assistance to American small businesses negatively impacted by the COVID-19 pandemic.

Initially, $342 billion was allocated to PPP loans through the CARES Act, offering eight weeks of financial aid to eligible businesses.

The aim was to incentivize small business owners to retain their workers by helping them cover their payroll costs and other operating expenses.

The program was expanded in April 2020 with an additional $320 billion in funding, and in December 2020, with $285 billion in funding.

Amendments were also added to allow businesses that previously received a PPP loan to apply for a second one.

The list of eligible expenses also broadened.

The PPP officially ended on May 31, 2021.


PPP loans are guaranteed by the Small Business Administration (SBA), which means if a borrower fails to repay the funds, the federal agency can pursue administrative enforcement against them.

How Does a PPP Loan Work?

To obtain a PPP loan, the borrower must meet at least one of the following eligibility criteria:

  • Operate a business as a sole proprietor, independent contractor, or self-employed individual
  • Operate a small business that meets either the industry size standard or alternative size standard of the Small Business Administration (SBA)
  • Operate a business, non-profit organization, veterans’ organization, or tribal business concern with the greater of 500 employees or that meets the SBA industry size standard if it employs more than 500 employees.
  • Operate a business classified as an accommodation and food services business by the North American Industry Classification System (NAICS) that has more than one physical location and employs fewer than 500 employees per location

Next, they would apply for funding at one of the many financial institutions partnered with the SBA to issue PPP loans.

If the borrower is applying for the first time (known as a “first draw”), they will complete the PPP First Draw Borrower Application.

The lender that originates the loan will ask for this document.

As part of the application process, the borrower must supply documentation that verifies specific aspects of their business operations, such as the number of employees they have, their total payroll costs, and monthly lease payments.

The lender will process the application on the borrower’s behalf by submitting it to the SBA for evaluation and approval.

The maximum amount a borrower can receive is 2.5 times their average monthly payroll costs, up to $10,000,000.

The borrower must use at least 60% of the loan proceeds to cover payroll expenses.

The remaining 40% can be allocated to other operating costs, such as lease payments, utilities, supplier expenses, mortgage interest, and expenses incurred to comply with COVID-19 health and safety regulations.

To apply for a second PPP loan (called a “second draw”), the borrower must demonstrate that they’ve realized a 25% reduction in their gross income compared to the same period in the prior year.

They must also employ fewer than 300 employees and have used proceeds from the initial loan to pay for authorized expenses only.

For a second PPP loan, the maximum amount a borrower can receive is 2.5 times their average monthly payroll expenditures, up to $2,000,000.

PPP loans issued before June 5, 2020, mature in two years and those issued after June 5, 2020, mature in five years.

Thus, borrowers must repay the loans within two and five years, respectively.

All PPP loans charge a 1% interest rate.

Paycheck Protection Program Loan Application Document

Are Canadians Eligible for PPP Loans?

Based on the eligibility criteria for PPP loans, there’s a possibility that Canadian-owned companies that have an active presence in the United States may qualify to participate in the program.

At the minimum, these companies would have to prove that they pay tax to the United States government and have American employees, among other possible requirements.

Beyond that, Canadians, in general, aren’t eligible to receive PPP loans.

The program is based in the United States and geared toward American businesses.

However, the Canadian federal government has instituted a program similar to the PPP called the Canada Emergency Business Account (CEBA).

The program aims to provide financial aid to businesses that experienced a severe decline in income due to the COVID-19 pandemic.

It launched on April 19, 2020.

Export Development Canada (EDC) administers CEBA, with funding provided by more than 220 financial institutions throughout the country.

Due to the unpredictable nature of the pandemic, the federal government amended the program numerous times.

The Canadian Federation of Independent Business released a helpful report in January 2022 that highlights these updates.

Qualified borrowers could have received up to $60,000 in interest-free funding, with up to a third of the loan forgivable if the balance is repaid by December 31, 2023.

The final date to submit a CEBA application was October 21, 2021.

Did You Know?

More than 898,000 Canadian businesses received funding through the CEBA program.

Frequently Asked Questions

  • Does a PPP loan have to be paid back?
  • Will PPP loans be forgiven?
Mark Gregorski

Mark is a freelance writer who specializes in covering personal finance topics related to investing, mortgages, credit cards, and more.

He is passionate about educating people on how the financial markets work and providing tips to help them better manage their money. Mark holds a bachelor’s degree in finance from the Northern Alberta Institute of Technology and has more than a decade of experience as an accountant.

Outside of writing and finance, he enjoys playing poker, going to the gym, composing music, and learning about digital marketing.