CARES Act: What the Paycheck Protection Program Means for Your Small Business

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Along with the $2 Trillion stimulus package known as the CARES Act, comes a $349 billion Paycheck Protection Program to assist small businesses. Read on to find out what these loans mean for your business, how you can apply and potentially have your loan forgiven.

January 11, 2021, Paycheck Protection Loan Update

Congress has passed a third round of stimulus that goes into effect the week of January 11th. This includes $284 billion in relief funds for small businesses to be made available through the Paycheck Protection Program (PPP) and a slew of updates for the Economic Injury Disaster Loan (EIDL) program that will go into effect on January 15, 2021. Click here to learn where you can apply for the new PPP funds and here for up-to-date information on the EIDL changes.

The passing of the $2 trillion coronavirus stimulus package, and the $1,200 direct payment to most adults that comes with it, is the breath of fresh air that most people have been looking for throughout the COVID-19 pandemic. But for small business owners, it may bring another level of uncertainty: HOW and IF this funding will support small businesses?

While the direct payments to individuals have been the primary talking point throughout its development, the Coronavirus Aid, Relief, and Economic Security (CARES) Act also includes the $349 billion Paycheck Protection Program to assist small businesses. Here’s a quick overview of everything in the loan program with details below.

Quick Overview of the Paycheck Protection Program

1. It’s a direct loan from Small Business Association (SBA) approved lenders, with additional lenders to be vetted and approved by the Department of the Treasury.

2. Eligible applicants include: 

  • Small businesses – less than 500 employees or that match SBA small business size standards
  • Non-profits 
  • Veterans organizations
  • Tribal businesses 
  • Sole proprietors
  • Independent contractors
  • Self-employed with regular trade or businesses

3. Purpose: To retain workers and maintain payroll or make mortgage, lease, utility and interest payments on other debt obligations.

4. Key benefit: Partial or total loan forgiveness. 

5. How to Apply: Contact your local bank or credit union or find a local lender with SBA Lender Match Tool. 

6. No cost to apply.

7. No obligation to accept the loan.

8. No personal guarantee required.


1. Loan Amount: The lesser of the following, up to 2.5x the borrower’s total average monthly payroll cost or up to $10,000,000.

2. Fixed interest rate of 1% from money borrowed between February 15, 2020, and June 30, 2020.

3. Loan payments, including principal, interest, and fees, can be deferred for six months to one year, from the origination of the loan.

4. Maximum loan term of two years, determined on a case-by-case basis.

5. 100% government guarantee of the loan through December 31, 2020; reverts to 75% guarantee for loans above $150,000 and 85% for loans equal to or less than $150,000.

6. Loan may be eligible for partial or total forgiveness. Forgiveness is based on the use of loan funds, employee retention, and compensation. You may see a decrease in forgivable totals if:

  • Loan funds are used for non-forgivable expenses.
  • Employees are laid off.
  • Employee wages are cut by more than 25%.


1. Verify the financial uncertainty of your business due to the current economic conditions that make the loan request necessary.

2. Use of funds: retain workers and maintain payroll or make mortgage interest, lease, and utility payments.


1. No collateral or personal guarantee is required for the loan.

Required Forms and Documents

The Payroll Protection Program is new and the government is figuring out the exact process for applications. For now, we know you’ll need to provide:

1. Profit and Loss Statement from your last fiscal year

2. Payroll costs for the last fiscal year

3. Projected payroll and associated costs for 2020

What do the Paycheck Protection Loans mean for your small business?

The Paycheck Protection Loans are meant to expand on the COVID-19 SBA Disaster Loans already available to small businesses. While the Disaster Loans cover a variety of operational costs, including inventory and other costs of goods, the overall goal of the Paycheck Protection Loans is to help businesses maintain payroll and cover related debt obligations and necessary expenses. 

As a huge added benefit for small businesses, some or all of the loan may be forgiven. This forgiveness incentive must be applied for after you receive the loan and will be based on your payroll, rent, and other interest payments prior to receiving the loan funds. You will need to keep track and provide documentation as to how you used the loan funds. For more details, click here to learn more about loan forgiveness.

What can you use the Paycheck Protection Loan for?

The name can be slightly misleading as the loan is meant to cover operating costs such as:

  • Employee salaries, commissions or other compensation
  • Other payroll costs – ie. costs of remote tools, employee equipment, etc.
  • Healthcare insurance premiums
  • Paid sick, medical and family leave
  • Rent
  • Interest payments on mortgages
  • Interest on debt issued before February 15, 2020
  • Utilities
  • Refinancing SBA loans issued between January 31, 2020, and the date you take out the Paycheck Protection Loan

All of these are valid uses of loan funds, but not all will be viable for loan forgiveness. Keep this in mind when forecasting and budgeting the use of loan funds.

Do you qualify for a Paycheck Protection Loan?

Typically eligibility for SBA Loans, including the Disaster Relief Loans, depends on your business size, location, and ability to repay. However, the purpose of the Paycheck Protection loans is to simplify the process and get financial aid into the hands of as many business owners as possible. That being said, all lenders and loan programs have unique requirements, and the following are the core eligibility criteria to keep in mind.

  • Your business must have been operating before February 15, 2020: You also must have had employees on staff that you paid salaries and payroll taxes for before this time.
  • Your business has 500 or fewer employees: The total amount of employees includes full-time, part-time and those on irregular or on-call status.
  • (Or) Your business falls under a certain size standard*: The number of employees or average annual receipts falls within the small business size standard for your industry or state.
  • Your credit history is good: It’s not guaranteed that your credit history will be reviewed for this loan application, but typically your credit history must meet SBA standards.
  • No pending loan applications: You cannot have an outstanding application for a loan duplicative of the purpose and amounts applied for.
  • The loan request is seen as necessary: A well-outlined payroll forecast combined with a compelling reasoning for how current economic conditions make the sustainability of these costs unattainable.

*Note that if your business provides accommodation and food services with more than one location and more than 500 total employees, the criteria is waived as long as there are less than 500 employees per location.

How much can you borrow under the Paycheck Protection Plan?

The maximum amount you’ll be able to borrow is $10 million but the actual amount you qualify for is fully based on your average total monthly payroll costs during the year prior, multiplied by 2.5. Viable payroll costs for employers include:

  • Salaries, wages, and commission
  • Cash tips 
  • Vacation, family, medical or sick leave payments
  • Group health benefit insurance premiums
  • Retirement benefits 
  • Allowance for dismissal or separation
  • State and local taxes based on employee compensation 
  • Employee costs – ie. cost of remote tools, equipment, transportation, etc.

For sole proprietors, independent contractors, and self-employed individuals — you’ll account for the sum of payments for compensation that is a wage, commission, income, net earnings, or similar compensation up to $100,000 over one year. This will be counted as prorated for the covered period.

Excluded Payroll Cost

Not all payroll costs are valid under the Paycheck Protection Program. While it’s a limited list, you may want to review your payroll costs to confirm none of your expenses fall under the following criteria:

  • Individual employee compensation in excess of $100,000 for an annual salary. 
  • Payroll taxes, railroad retirement taxes, and income taxes.
  • Any compensation given to an employee whose primary place of residence is located outside of the United States.
  • Qualified sick leave wages under section 7001 or qualified family leave wages under section 7003 of the Families First Coronavirus Response Act for which a credit is allowed.

How to calculate your total average monthly payroll costs

If you’ve been actively maintaining your books and keeping your accounting system up to date, there’s a good chance you’ll have last year’s total monthly payroll costs already available. For those that don’t, verify your valid and invalid payroll costs and follow this simple equation.

Sum of included payroll costs – sum of excluded payroll costs = Total payroll costs

Then take that total and multiply it by 2.5 to see what you qualify for. If it’s below the $10 million loan maximum, that’s the amount you’ll be able to borrow, but if it’s above $10 million, you’ll only be able to borrow the maximum.

Payroll expenses special cases

  • Businesses not operational in 2019: If you started a business in 2020, you still qualify for the Paycheck Protection Program as long as your business was in operation before February 15. To find out what you can borrow, use the average total monthly costs for January and February of 2020 and multiply by 2.5.
  • Seasonal Employers: If you have a business that runs seasonally, you still qualify for the Paycheck Protection Program. Your maximum loan value will be based on the 12-week period beginning February 15, 2019, or March 1, 2019, and ending June 30, 2019. Multiply this average by 2.5 and you have the amount you can borrow.

When can you apply for the Paycheck Protection Loan?

Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders. Starting April 10, 2020, independent contractors and self-employed individuals can then apply.

Paycheck Protection Loan Application Checklist

Due to these loans being supplied by a diverse array of lenders, the specific documents and forms required to apply aren’t fully laid out at this time. However, there are still a handful of documents you can pull from your accounting system, your business plan, and your financial forecast to prepare for your application.

For those without a financial forecast or that have an outdated business plan, now is the perfect time to put one together. Doing so will make compiling business information for this and any future loan applications that much easier, while also giving you insight into the best ways to leverage loan funds.

Here’s what you need to prepare before applying for a Paycheck Protection Loan

*Note: Official requirements have not been made clear at this time. We will update this list as soon as the SBA releases the official list of required documents and forms.

  • Profit and Loss Statement: Also known as an Income Statement, you’ll need to produce a statement that shows monthly detail for at least the last 6 months and summarizes the past 1 to 3 years.
  • 2019 payroll costs: A detailed rundown of payroll and employee costs from the past year.
  • Projected payroll and associated costs: Adjusted budgets and forecasts for the remainder of 2020, specifically focused on maintaining payroll and other associated employee costs.

How to apply for loan forgiveness

As mentioned before, the major benefit of this loan program is the possibility of having some or all of your loan forgiven. Now, this process is not automatic and requires you to apply for loan forgiveness at a later date with documentation that verifies the number of employees, pay rates and payments toward applicable interest and operational expenses.

Documents Necessary to Apply for Loan Forgiveness include:

1. Payroll documents: Payroll tax filings submitted to the IRS and state filings for income, unemployment insurance, and payroll.

2. Verification of costs eligible for forgiveness: Mortgage statements, rent receipts, utility payments, etc.

3. Certification: A statement that verifies the legitimacy of the attached documents and how the business used the funds.

These documents must cover the entire period from February 15, 2020, to June 30, 2020. Depending on your lender, they may request additional documentation to verify the use of loan funds. You’ll receive word if you qualify for forgiveness or not from your lender within 60 days. 

What costs qualify for loan forgiveness?

Your SBA approved lender will forgive up to 100% of the amount spent on the following costs over the 8-week period from the origination of the loan.

  • Employee salaries, commissions or compensation
  • Other payroll costs, including additional salaries for tipped workers
  • Rent
  • Interest payments on mortgages
  • Utilities

Due to the purpose of this program, if you end up laying off employees or reducing wages, the amount of forgiveness you’re eligible for will decrease.

How much loan forgiveness will you receive?

Even with effective planning, you may find yourself having to cut wages or lay off employees to maintain your business through the crisis. To figure out how much loan forgiveness you may receive despite changes in your workforce, follow these steps:

1. Total Eligible Expenses: Add all eligible expenses from within the 24-week period from the origination of the loan.

2. Actual Employee Total: Find the average number of employees you employed during this time. 

3. Predicted Employee Total: Find the average number of employees you intended to employ per month in this same time period. This is the value you used when applying for the loan.

4. Divide the predicted employee total by the actual employee total to get a percent.

5. Multiply that percent by the total eligible expenses. 

For example: If you applied for a loan and stated that you would employ 10 people, but then had to lay off 2 people 1-month after receiving loan funds, you’d need to take the average of those two months. 

(10 + 8)/2 = 9

Then take the number of employees you intended to employ (10 employees) and divide by the average you found to get a percentage. 

9/10 = .9

Based on this you’d only be eligible to have 90% of your loan forgiven if you used the loan to cover eligible expenses. While this may not be an exact value, due to a number of other factors, this should provide you with a reasonable estimate of what you can expect to be forgiven. 

Additionally, if you decrease employee wages by more than 25%, your total loan forgiveness will decrease by that percentage. If you find yourself considering wage cuts, remember that salaries over $100,000 are exempt from payroll protection and this decrease. 

These reductions can also be avoided if you rehire or increase employee pay, back to normal levels by December 31, 2020, for any changes made between February 15, 2020, and April 26, 2020.

Tax provisions and Additions to SBA Disaster Loans

While the Paycheck Protection Program is a great opportunity for small businesses to retain employees and extend their cash runway, the CARES Act also brought about several other benefits. This includes the additions to the Economic Injury Disaster Loans and SBA loan subsidies, as well as a number of tax credits and deferments.

You can find out more about the additions to the SBA Economic Injury Disaster Loans here. We recommend that you connect with your financial advisor or accountant to find out how the Employee Retainment tax credit, Payroll Tax Deferment and a number of other tax incentives may benefit your business. If you need a business accountant or advisor, take a look at our directory.

How forecasting can help you get the most out of your loan

As you go through the process of applying for a Paycheck Protection Loan, the best thing you can do is to actively forecast potential scenarios around how you will use the loan funds. Not only will this benefit your application, but it will assure that you’ll know exactly what to do with the funds.

You’ll want to run different forecasts for the best case, worst case, and current scenario based on how much you qualify for, potential future sales, and costs. Decide where and how much you will allocate to operating costs that qualify for reimbursement and identify other expenses that can be eliminated in the meantime. By looking ahead you can assure that you use the loan effectively, maintain your workforce, and revitalize the cash flow and runway of your business.

If the idea of applying for loans and forecasting at the same time feels overwhelming, you may consider trying out LivePlan. You can ditch the complex spreadsheets and equations for a streamlined dashboard with simple forecasting. Easily run multiple forecasting scenarios and quickly compare to your actual results from your accounting system to make smart, data-driven adjustments on the fly.

See why now is the perfect time to revisit your budget and forecast and how this living business planning tool was developed during the last economic recession to help small businesses like yours.

Additional COVID-19 Planning Resources

Stay up to date with the latest business and financial planning resources from LivePlan. Articles, free tools, and webinar recordings are available and regularly updated to help you and your business survive and thrive throughout the coronavirus pandemic.

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Noah Parsons
Noah Parsons
Noah is currently the COO at Palo Alto Software, makers of the online business plan app LivePlan.
Posted in Loans & Funding

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