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How Does PPP Loan Forgiveness Work for Small Businesses?

December 14, 2020
Written by Mary Kate Miller
December 14, 2020 | Written by Mary Kate Miller

This is a contributed article from Mary Kate Miller, a writer at Lendio.

The Paycheck Protection Program (PPP) was created under the CARES Act to provide a financial lifeline to small businesses during the COVID-19 pandemic. Small businesses and nonprofits were able to apply for loans that matched up to 2.5 months worth of their payroll-related expenses. These funds helped more than 4 million small businesses keep the lights on and stay connected to their communities and their customers. 

The best part of a PPP loan? It’s potentially forgivable. If you meet the forgiveness criteria (outlined below), your PPP loan may function more like a grant. Given how new the loans are and the myriad changes that have been enacted since the program’s rollout, many borrowers are scratching their heads and wondering, “How does PPP loan forgiveness even work?” Here’s everything you need to know. 

How Does PPP Loan Forgiveness Work?

Borrowers who received a PPP loan may be eligible for loan forgiveness on funds used for allowed uses during the covered period or the alternative covered period. Up to 100% of the loan may be forgiven if a borrower meets the loan criteria.

To qualify for loan forgiveness, you must track how the funds were used. This is an important step, as it will allow you to accurately report eligible spending to the Small Business Association  (SBA). Borrowers must complete and submit the SBA’s loan forgiveness application. If your forgiveness application is denied, you may have the opportunity to resubmit. If your loan is deemed ineligible for forgiveness, you will be responsible for repaying the loan.

How Do the Covered Period and Alternative Payroll Covered Period Work?

The covered period refers to the 24-week period following the disbursement of loan funds. This is an extension of the original 8-week designation Congress set when they first established the PPP. Because of this change, borrowers who received a loan prior to June 5, 2020, can opt to use an 8-week period if they choose. Expenses incurred after the 24- (or 8-) week period or after December 31, 2020—whichever comes first—are not eligible for forgiveness. 

Borrowers may also choose to use an alternative payroll covered period. An alternative payroll covered period can sound intimidating, but it’s really just added flexibility to help you get the most out of your payroll forgiveness period. Essentially, if you received your PPP funds out of sync with your payroll periods, the alternative payroll covered period allows you to shift your eligible forgiveness period to match your payroll periods. 

It makes a lot more sense when you see it in practice. Here’s a great example from the SBA: “A borrower received its loan before June 5, 2020, and elects to use a 24-week covered period. The borrower’s covered period runs from Monday, April 20 through Sunday, October 4. However, the borrower will not make the corresponding payroll payment until the next regular payroll date of Friday, October 9. Under these circumstances, the borrower incurred payroll costs paid on October 9 because the cost was incurred during the covered period and payment was made on the first regular payroll date after the Covered Period.” 

What Expenses Can Be Forgiven?

According to an SBA interim final rule on May 20, 2020, expenses eligible for loan forgiveness include:

  • Payroll costs incurred during the covered period or the alternative payroll covered period
  • Mortgage interest payments made during the covered period (payments on the mortgage principal are ineligible)
  • Utility payments for service provided during the covered period (service needs to have started prior to February 15, 2020, to qualify)
  • Rent payments during the covered period

It’s important to note that costs like payments toward the mortgage interest principal do not qualify for loan forgiveness, although mortgage interest payments do qualify. Other costs related to keeping the lights on and your people employed are covered. 

To set yourself up for success, it’s highly advisable that you track each expense appropriately. Using bookkeeping software, for example, will put you in a better position than simply tracking expenses on a spreadsheet, but if nothing else, you should have a spreadsheet. It’ll be harder to qualify for forgiveness if you’re submitting a handwritten list of expenses. 

You can use a PPP loan forgiveness estimator to get a sense of what your forgiveness may be before you apply. 

How Do I Apply for Loan Forgiveness?

Applications need to be submitted to the SBA to be considered for loan forgiveness. This process will be managed by your lender. Borrowers should complete the SBA application and submit it to their lender. You may also want to check with your lender to see if they have a specific process for completing the application. 

Generally speaking, this is how borrowers should approach loan forgiveness:

  • Track all potentially forgivable expenses. 
  • Fill out the SBA’s loan forgiveness application.
  • You will then apply for forgiveness by submitting the application through your lender.
  • The lender will then submit the forgiveness application to the SBA.

While the SBA has released a PDF of the loan forgiveness application, it’s recommended that you check with your lender before filling it out. Your lender may have an electronic form that’s easier to fill out and submit.

What If My Loan Isn’t Forgiven?

If your forgiveness application is not approved, your lender may ask you for additional documentation or you may have to repay the loan. If you are required to repay, the loan will accrue 1% interest with a loan term of 2 or 5 years. As far as business loans go, it’s pretty much the lowest cost of capital...ever.

Can I Repay the Loan Early?

Yes. Unlike some other business loans, you can repay a PPP loan early at any time without incurring any penalties or additional costs. 


If you received a PPP loan, you may be eligible for forgiveness on allowed expenses incurred over the covered period. Effectively tracking expenses will increase your chances of being approved for forgiveness. Once you’ve reached the end of the covered period, you can complete the SBA’s loan forgiveness application, which is then submitted to your lender. If you’re not approved, you’ll be required to repay the loan. The good news? With 1% interest, PPP is likely the lowest-cost financing you’ll ever encounter. 

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