After the initial rush of PPP applications, banks are making their way through backlogs and the first applicants are starting to learn they have been approved. As we discussed previously, there are two calculations related to this program – 1) the amount you qualify for and 2) the amount eligible for forgiveness. Much like the first question, we are still waiting on additional guidance by the SBA related to the loan forgiveness feature. This is required to be provided by the SBA no later than April 26th, so some practices may find themselves in a situation where they are required to take receipt of the funds before the rules have been clarified. Below you will find initial information if you find yourself in this situation.
Step 1: Can you delay the funds?
Once you learn you have been approved for the loan, speak to your banker (if you have not already done so) to determine if there is any way you can defer the funds until a later date. All banks are handling their internal PPP loan application processes slightly differently due to their own internal rules and delayed SBA guidance, so unfortunately in almost all cases you will not be able to. However, the best practice would be to ask if this is a possibility.
Step 2: Can you open an additional checking account?
It may be beneficial to open a second business checking account at the bank where you received your loan (or use one you already have access to). From this account you can pay for your qualified expenses over the next 8-week period so there is a clear paper trail as to what you have used the funds for. Please note, this is not required, only a best practice, as it may make it easier for you to track the funds. Some banks are also not offering to do so at this time as many of their resources have been redirected into processing loans.
Step 3: How will you spend the funds?
This is the most important question, but unfortunately the piece that still has the most unanswered questions. The earlier you receive the funds the more difficult this consideration becomes as there will most likely be a period when you have receipt of the funds (thus starting your 8 week period) but are not yet able to run at full capacity. Specific strategies will be available when we have additional guidance, but in the meantime, there are two important points to think about -
1. Forgiveness Amount: As we have discussed before, to be eligible for forgiveness, 75% of the loan proceeds can be used for payroll costs and 25% can be used for other qualified expenditures (rent, interest, utilities). You will also have to show that you have re-hired employees to previously compensation levels by the June 30th deadline, otherwise the amount eligible for forgiveness is reduced. You will not be penalized for a reduction in staff/compensation between 2/15 – 4/26.
2. Unemployment: Many of your employees, as well as perhaps yourself, may be earning equivalent amounts of unemployment benefits. This means that unless there is a business need to be working, there may be no immediate difference to you by either A) allowing them to stay on unemployment, or B) hiring them back and using the PPP proceeds to pay them (assuming you qualify for forgiveness). To add to this consideration, if you rehire your employees, but they either do not feel comfortable returning to work yet or are making more on unemployment and would prefer not to, you will be required to report this to your unemployment office and their benefits will stop – possibly creating personnel issues with your staff.
If you find yourself in a position where you take hold of the funds prior to 4/26, you may want to consider holding off on rehiring your employees until additional guidance is available. Your employees will continue to earn unemployment benefits and you will not be penalized for a reduction in staff through this date. This, however, may lead to step 4.
Step 4: What happens if there are excess funds that are not forgiven?
Ideally, all practices will be able to use 100% of their loan for costs that are eligible for forgiveness. Unfortunately, due to how the program is structured and the uncertainty of when practices will be able to open again, obtaining 100% forgiveness most likely will not be the case - especially if you are required to take the funds early in the process. Regardless, we recommend that you do the best you can to use the largest portion of your proceeds for qualified purposes that meet your business needs. If there are excess funds, they can be returned without prepayment penalty, or at worst, become a 1% loan with a two-year payback period without collateral or personal guarantees. These terms are much more favorable for short term cash needs than you most likely will see with your existing line of credit.
Fine Print
The details we are waiting on from the SBA has to do with what expenses qualify for forgiveness and how this process will work. These will most likely be addressed in further guidance which is why there is confusion. A few common questions (but not all) that are still unanswered are listed below -
- Are there related party issues arising from rent payments? (meaning that if you own the building and you pay yourself rent, is the amount forgiven your monthly rent payment, or is it limited to the interest on your mortgage payment which is commonly seen in the tax code)
- Are payroll costs in excess of $100k limited in the amount that is forgiven in the same manner as the loan calculation? (meaning, since the loan amount limited salaries to $100k, would the amount eligible for forgiveness also be limited to $100k)
- What specifically does it mean by the wording “costs incurred, and payments made” within the 8-week period. (meaning, if you think about your payroll, your staff earns wages – cost incurred – but are paid several days afterwards – payments made. Do both parts need to occur within the 8-week period)?
With this being said, the decision of what actions to take when you receive your loan proceeds will depend heavily on when you are required to take the funds, your specific staff/ business needs and when you believe you will be able to reopen. As with most aspects of this new program, it is ever evolving as we will continue to monitor new developments. Our thoughts are with you and your family during this time.