May 24, 2020

Paycheck Protection Program (PPP)

Description of the core change(s) brought by this policy instrument

The Paycheck Protection Program (PPP) provides forgivable Small Business Administration (SBA) emergency '7(a) loans' of up to $10 million to small businesses with 500 or fewer employees including sole proprietorships, independent contractors, and self-employed persons affected by COVID-19.

The loan has a fixed interest rate of 1%, and can be used for payroll (no more than $100,000 annual salary per employee) as well as benefits (including paid sick leave and insurance premiums) and taxes on compensation. Up to 25% of the loan may be used by the business to cover mortgage interest, rent, utilities and interest on pre-existing loans.

As originally conceived, the PPP loan could be fully forgiven if at least 75% is used for payroll and the rest used for mortgage interest, rent, and utilities (see subsequent modifications in the "policy timeline" section below).

Payments could be deferred for six months, no collateral required, and the loan will not carry any fees. The PPP loan matures in 2 years.

Please list the implementing agencies

The U.S. Small Business Administration (SBA). 

Entrepreneurs can apply for this loan through any of about 800 existing SBA 7(a) lenders or through any participating federally insured depository institution, federally insured credit union, and Farm Credit System institution. A downloadable sample copy of the loan application is available from the SBA.

Lifecycle of target firms for this policy instrument
Existing SMEs
Start-up firms
If you marked "start-up" and/or "scale-up" firms, please provide the specific definitions used

In addition to meeting the size requirement (500 or fewer employees for most companies), applicants must show that their business has been negatively impacted by the coronavirus. 

Support offered
Direct Financial Support
Level of intervention
Barrier(s) addressed with this policy tool
Access to Capital
Policy timeline

March 27, 2020: PPP created by the passage of the CARES Act.

April 3, 2020: Processing of PPP applications began. 

May 15, 2020: The U.S. Treasury and Small Business Administration released an 11-page loan forgiveness application with instructions on how to complete it, making critical clarifications.

May 23, 2020:  The SBA had approved nearly 4.5 million PPP loans.

June 5, 2020Congress passed the Paycheck Protection Flexibility Act of 2020 and the President signed it immediately. The new law enhances the PPP by increasing the time small businesses can use funds and receive forgiveness from 8 weeks to 24 weeks, and by reducing the payroll cost rule from 75% to 60%. Subsequently, the Treasury Department and the SBA released an interim final rule that codified the legislative changes to the program.

June 30, 2020:  Congress voted to extend the PPP application deadline until August 8, 2020, just within hours remaining before the original June 30 cutoff date.

Stated goal/metrics of the policy instrument

The Paycheck Protection Program is a business loan program established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help certain businesses, self-employed workers, sole proprietors, certain nonprofit organizations, and tribal businesses continue paying their workers.

Evidence of results

The CARES Act signed into law at the end of March 2020 set aside $349 billion in PPP loans. When the initial funding for the program ran out in two weeks, Congress added an additional $310 billion to the program in April.

The program has proven popular for small businesses, but there have been lingering questions about PPP loan accessibility for VC-backed startups, as well as concerns about the program’s loan forgiveness requirements (see below). 

The SBA said mid-June that approximately $130 billion in available PPP loans remain unclaimed, which can be at least partially attributed to confusion about the rule’s requirements.

Challenges, criticisms and lessons

PPP loans are designed to help small businesses keep employees on their payrolls during the COVID-19 pandemic, but the program has been plagued by confusion and concerns about accessibility and loan forgiveness requirements.

Difficulty navigating the policy

A survey by the National Federation of Independent Business (NFIB) found that nearly 75% of small business borrowers find the terms and conditions of the PPP loan difficult to understand, with 22% finding them very difficult.

"Resolving the rampant confusion around the SBA emergency loans should be a top concern for policymakers," wrote Siena Harlin, Policy and Communications Associate at J-PAL, offering evidence-based ways to improve the program, such as:

  • Offering professional help can increase the successful completion of applications.
  • Active outreach to eligible businesses may motivate more applications.
  • Simplifying program information and applications may increase responsiveness.

Debate over the forgiveness component

According to, the forgiveness component of PPP is what encouraged many small-business owners to take out PPP loans. 

Under the original legislation, PPP borrowers could have their loans forgiven, but only for expenses incurred during the first 8 weeks after the loan was issued. For many businesses, 8 weeks was not enough time. Therefore, bipartisan legislation provided small businesses with greater flexibility in the use of PPP loans with bill enacted into law in on June 5, 2020, by increasing the amount of time that recipients of PPP loans have to spend the emergency funding. Under the new law, the 8-week period was extended to 24 weeks or December 31, 2020, whichever is first. 

In addition, the new law reduced the payroll cost requirement to 60% of the loan amount, such that small business owners will be eligible to have more of their PPP funds forgiven in cases where they had higher rent or mortgage payments.

Possible government scrutiny and negative repercussions

The safe-harbor window for companies that may have made themselves vulnerable to unwanted scrutiny from the U.S. Department of Treasury continually widened.  Businesses that decide that it was a mistake to apply for and receive a PPP loan, had until mid May to return the money and "be deemed by SBA to have made the required certification in good faith," avoiding possible government scrutiny and negative repercussions.

In addition, a broad presumption of good faith was ultimately extended to recipients of loans under that $2 million threshold. 

Nevertheless, publicly traded entities of all sizes, including those whose PPP loans have ranged between $1 and $2 million, have continued to send their remittances back to the SBA.

It was unclear, however, exactly how quickly and expansively the sum total of returned funds would be redistributed to businesses on the waiting list.

Startups did not benefit as much as small businesses from PPP

Most advocates suggest that PPP failed to help startups, arguing that they need more targeted support to survive the pandemic’s economic downturn. Engine, for example, drafted a series of startup-oriented COVID-19 relief proposals—including ideas about government equity investments, more targeted forgivable loan programs, tax credits, and grant opportunities—for Congressional offices to use in further legislative negotiations. 

The need for further support

On June 30, 2020, the Center for American Entrepreneurship, the Economic Innovation Group and a coalition of 23 other leading business advocacy groups issued a letter to Congressional leaders calling for a new phase of federal liquidity relief to address the continued challenges facing small businesses due to Covid19.

Geographic scope