So you got your PPP loan … Now what?
Half the battle was getting your piece of the $349 billion package of forgivable small-business loans, known as the Paycheck Protection Program (PPP). Now that you have the funds, what’s next?
First of all – If you’re an eligible employer who is reading this, and has NOT yet applied through your banker for a PPP loan, please read my earlier post on the CARES Act.
Start the Clock – Mark the date on your calendar when you received your loan. That date begins an eight-week measurement period, which (in part) dictates how much of your loan gets forgiven. For example, if your funds arrived April 6, then your measurement period is April 6 to June 1.
Fill the Bucket – During the measurement period, you will want to accumulate credits toward forgiveness. These credits are obtained by paying payroll costs (up to an annualized $100K, but potentially limited for owners), mortgage interest (whether secured by real estate or a vehicle), real estate rent, utilities, and refinancing an EIDL loan.
Think of it this way: If you have a $50,000 loan, then you can fill a bucket with up to $50,000 in credits. That’s the optimal result.
At least 75% of the bucket needs to be filled with payroll costs. Any payments for interest, rent, or utilities must be toward obligations that were in place prior to February 15, 2020 (i.e., you can’t sign a new lease and use these payments toward forgiveness).
For greater detail about calculating the forgiveness credits, read my earlier post on the CARES Act.
Avoid the Dings – The first stage of the forgiveness analysis is what I call “filling the bucket.” But even if your bucket is full, you can miss out on 100% forgiveness under two different provisions of the CARES Act.
- The CARES Act will ding you, on a dollar-for-dollar basis, for any employee whose pay is diminished during the measurement period by more than 25%, when compared to pre-crisis levels.
- You will be dinged if your employee headcount during the measurement period does not match your pre-crisis headcount. The headcount penalty is more severe, especially for small employers, because it is not done on a dollar-for-dollar basis. Rather, your headcount ratio will be multiplied by your forgiveness amount. If you bring back only 75% of the workers, then you lose 25% of your forgiveness.
**However, either of these “dings” will be overlooked if you have restored your employee salaries and headcount by June 30, 2020.**
For greater detail about calculating the “dings,” read my earlier post on the CARES Act.
Keep Your Records – Start thinking forward to the day when you apply for forgiveness. The CARES Act requires these items to be included in the application:
- documentation verifying the number of full-time equivalent employees on payroll, during both the selected pre-crisis period and the measurement period, including
- payroll tax filings reported to the IRS; and
- state income, payroll, and unemployment insurance filings;
- documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on mortgage interest, rent, and utilities; and
- a certification from an authorized person that:
- the documentation is true and correct, and
- the amount for which forgiveness is requested was used to retain employees or pay mortgage interest, rent, or utilities.
Lender Makes the Decision – After receiving your application for forgiveness, your lender will have 60 days to make a determination as to forgiveness. During this time (and, in fact, during the 6-month period after the loan is originated), there will be no payments due.
If It’s Not All Forgiven – Many employers will not be in a position to rehire employees as soon as they receive the loan. It might not be until May that business picks back up, and rehiring makes sense. For these employers, filling 100% of the bucket might not be feasible. In that instance, it’s not all bad news.
Any part of the loan that is unforgiven will accrue interest at a rate of 1% and will have a 2-year maturity date. For those employers who don’t need that cash, it can be repaid at any time without penalty. I suspect most employers will hang onto the excess cash, considering it to be a loan with better terms than any commercial line of credit.
Frequently Asked Questions – (I’ll be adding to this section periodically)
- Do I need a separately segregated bank account for my PPP loan? The law does not require this, but there is potentially an advantage with staying organized for your application. Cash is, of course, fungible–so you can prove up your application without taking this extra step.
- I don’t have work for people to do; should I bring them back anyhow? The CARES Act is a giant incentive for employers to keep people on the payroll. If there are long-term projects that can be done, now would be a great time for that. But if you already furloughed employees, it’s OK to miss out on 100% forgiveness (for reasons stated above). Here is the result to avoid: (1) missing out on full forgiveness, and (2) getting dinged on the forgiveness you’re otherwise entitled to. Aim to be full-go by June 30, 2020.
- I’m struggling with the decision whether to apply for a PPP loan. I have uncertainty, but I’m not on the immediate brink of failure. What do I do? If you can truthfully make the certifications on the application, then Congress intended the PPP program for you. Understanding there are no bright-line tests within the certifications, there is a lot of gray area. On the one hand, business owners should advocate for their enterprise and their employees, and capture every bit of government assistance to which they are entitled. On the other hand, here is a competing argument from a blog post:
If you have a strong balance sheet, have recently raised money, or have some certainty around a near-term capital raise, we think you should reconsider applying. Although things are chaotic at the moment and it might be possible to take advantage of a lack of controls in the system, that doesn’t mean we should necessarily do so. Imagine for a moment that three years from now, the WSJ or FBI does a deep forensic analysis on the small businesses that received loans during the crisis. Would you feel good about the details of your situation being revealed in that process?
Conclusion – Cavitch clients and prospective clients may contact me via email ([email protected]) with specific questions on applicability.