The mad dash is over and you have your Paycheck Protection Program (PPP) loan funds! Congratulations, because for many of us – that was no small feat depending on where you bank.
That stressful adrenaline rush is subsiding. And you are moving on to make tons of important decisions on how to keep your employees and customers safe as the economy reopens. Your critical safety precautions are literally a matter of life and death for the community so it is easy to forget multiple steps you should take to preserve the likelihood this loan will be forgiven come July.
Here are some tips that might save you some future challenges when it comes to turning your PPP loan into a grant.
Segregate those loan dollars – “Segregate” is a fancy way of saying keep the PPP loan funds in a savings account or somewhere where you can easily see this cash infusion. If it turns out that some of your loan isn’t forgiven, you want to make sure you kept the unspent portion where it won’t accidentally be spent on inventory or something not eligible for forgiveness. A business savings account is a fine choice but leaving it in your business checking account is a dangerous way to have indigestion later.
Track your loan draws – As you use the PPP loan to fund payroll and other eligible items, keep track on paper or in a spreadsheet of when and how much you used. This tracking will help you later justify that you did use the loan funds on forgivable activities. Another great metric is to track your “burn” rate. PPP loan proceeds are supposed to carry your business for eight weeks. Take your total loan amount and divide by eight. For example, if your PPP was for $10,000, that would be $1,250 per week. Are you drawing funds at that amount per week or have you been using your PPP funds too quickly or slowly? Adjust accordingly so you can legitimately evidence that these funds were used over the 8 weeks on eligible activities.
Not rehiring back everyone? – When you accepted your PPP loan, you did under the pretense that you would use most of the PPP to pay your staff. A rather arbitrary formula states you can’t spend more than 25% of the PPP loan on non-payroll expenses. This 25% cap can be used for rent, mortgage, utilities, and interest on pre-existing loans. The vast majority of your PPP loan is supposed to be for payroll. There are a ton of reasons that you did not bring back the whole staff, including lack of work and some employees are earning more on unemployment. The goal of the program was to keep employees (re-)hired, even if they were just sitting at home watching Netflix. If you did not do that (for a bunch of legitimate reasons), there is likely zero chance your entire PPP loan will be forgiven. Gulp! But that will all work out because you did not spend all of your PPP loan either! (Remember the suggestion above to keep the funds in a separate account?)
Do I have to hire back the same people? – No, the Treasury and Small Business Administration (SBA) totally understand that there will be turnover during this tumultuous time. As of June 30th, the SBA and the Treasury needs to know how many employees work at your company and how that compares to the information shared during the application process. If that overall number is decreased, your forgiveness will be reduced accordingly but it does not have to be the same exact people that were furloughed or worked in March. Hire whoever you need and get them on your payroll!
Should I just use PPP as a loan and skip forgiveness? – I get this question A LOT and the answer is almost always “No!” For a bunch of good reasons, my clients are not allowed or are unable/unwilling to justify full staffing during the eight weeks after their PPP loan hit their bank account. So, now they have “excess” money. Meanwhile, they have been putting off buying a new truck or some new kitchen equipment. Now they are thinking about using their PPP loan to make that purchase. I get it! The money is already in the bank and the interest rate is only 1 percent. But the important thing is the unforgiven portion of the PPP loan must be repaid within two years. Most vehicles and equipment can normally be financed over five years (sixty months). Let us take that $10,000 from earlier and do some math. If that becomes a loan paid over two years, the payment is $421 per month. That same loan amount over five years at a 5% interest rate is much lower at $189 per month. Of course, securing that five-year loan is a whole additional process but managing additional monthly obligations are critical at a time with lower revenue.
I have spent a lot of time reading all the regulations of the Paycheck Protection Program to only assist existing clients. Go ahead and pick my brain! Have a complicated question or just want to make sure you are on track? Feel free to give me a call at 216.543.0114 or shoot me an email at email@example.com
Brian Friedman is the President of Plan F Solutions. www.Planfsolutions.com