Our Thoughts on the Paycheck Protection Program Loan (PPPL)
Before applying for any loan, we suggest that any business owner put together a cash flow projection for the next 6 months assuming that their current revenue will persist. Then sum up your variable and fixed costs and subtract them from your revenue. Finally, take the cash you have in the bank and see how long you can cover the resulting losses. This will give you a good idea of the area(s) where you most desperately need cash. If it is payroll, then the PPPL is your best bet. If it is another ongoing cost such as a lease, rent, debt or supplier contracts, we suggest first having a conversation with the counterparty to see if the terms can be adjusted. Regardless of whether or not the terms are adjusted, your next step is to look at an Economic Income Disaster Loan (EIDL) or EIDL Advance through the SBA, employee retention credit, payroll tax deferral and/or using the amended net operating loss (NOL) or Excess Business Loss (EBL) rules to restate taxes from 2018, 2019 or 2020 and thus potentially receive a refund after your 2020 taxes are filed.
PPPL Pros: Opportunity for partial or full loan forgiveness, generous loan terms, time between now and the June 30 deadline to restore staff and salary levels and more lenient test of distress than through other disaster relief programs
PPPL Cons: This is a newly created program and the demand for payroll help will be very high. There have already been issues with the application process. Further, since the loans are available through banks and not the SBA, we have already heard that different banks have different requirements for a business to receive the loan. For example, some banks require you to have an outstanding loan or credit card in order to process your application while other banks will not process your application unless you have had a deposit account with them for a specific period of time. Bottom line, call you bank first and if you are denied or your bank is not an approved SBA lender, go to the SBA website for a list of approved banks.
What is a PPL Loan? A business owner can take out a maximum loan of 2.5 times their monthly payroll cost over the 12 months prior to the loan issuance (excluding compensation over $100,000). The loan can then be used for the following expenses: payroll costs (including benefits), rent, mortgage interest and/or utilities. This is an attractive option for business owners because it combines the ability for forgiveness with generous loan terms (2 years at 1% with at least a 6 month delay until the start of the loan).
How do I apply for the loan? Loans can be applied for through approved SBA lenders. There is a short, two page loan application and a list of required documents to submit. From our conversations with bankers, the list will most likely vary from institution to institution but we encourage business owners to collect the following:
1. 2019 IRS Quarterly and Annual Payroll Tax Reports (940, 941, 944);
2. Detailed payroll reports for each pay period over the last 12 months and for calendar year 2019 that includes each employee and a breakdown of their wages (e.g., payroll taxes, vacation/sick pay, etc.);
3. 2019 1099's for all independent contractors who otherwise could be employees of the business;
4. Documentation showing the total for all group health insurance premiums paid by the business;
5. Documentation showing the total for all retirement plan contributions paid by the business;
6. Most recent rent, mortgage and/or utility bills;
7. Profit and loss statement for the prior 12 months; and
8. All formation documents (e.g., Articles of Incorporation, Operating Agreement, Corporate Charter, etc.).
How do I show economic distress? For business owners this will entail showing that your business was either shut down by government order (e.g., any non-essential business), your revenue last quarter was lower than it was in the same quarter of 2019 and/or you anticipate revenue to decrease due to a government order or slowing demand for your products or services. There is no set definition for economic impairment (e.g., 50% decrease in revenue versus the same quarter in 2019) so we believe the banks will be lenient with their interpretation of distress so they can get money flowing to small businesses and their employees as quickly as possible.How do I receive loan forgiveness? In order for the loan to be completely forgiven, the business owner must spend the entire loan amount during the eight-week period following receipt of the loan on one or a combination of the following expenses: payroll costs (except for compensation over $100,000), rent, utilities and/or mortgage interest. It is important to note that based on updated regulations as of Friday, April 3, it is required that at least 75% of the loan goes toward payroll expenses. Further, your full-time headcount (including equivalents) must be the same on June 30 as it was on February 15 and no employee with compensation under $100,000 can have their compensation cut by more than 25% when compared to the most recent quarter. However, business owners have until June 30 to restore their full-time headcount (including equivalents) and any salary reductions made between February 15 and April 26. Therefore, if the owner did have to adjust their staff, the loan can be used to help them meet the loan forgiveness requirements while also keeping employees on the payroll.
What should I do now? Our advice to business owners is to contact your banker immediately so that you can find out the latest information about the application and supporting documentation. While the temptation of loan forgiveness is enticing, the Paycheck Protection Program Loan is for help with short-term payroll needs. If a business has longer-term working capital needs, they may be better off applying for an Economic Injury Disaster Loan (EIDL). EIDL's are up to $2 million, carry an interest rate of no more than 3.75% (2.75% for non-profits) and can have terms as long as 30 years. Further, due to the impact of the coronavirus on the economy, business owners can also apply for an EIDL advance of up to $10,000, which is given in the form of a grant.