3 Strategies if Considering Getting a Paycheck Protection Program Loan
If you are an entrepreneur and business owner, the Covid-19 pandemic situation in 2020 has you thinking, “How in the hell can my business make it through this?” The Covid-19 pandemic has affected many entrepreneurs and business owners in ways like never before, at least in most of our lifetime! It isn’t like this type of situation or other disaster has not happened before while wreaking havoc on productivity and business profits. The main difference from the past and present day, is that today your business has access to resources that could potentially help you see your way through this unprecedented phenomenon. The key to survival is a better use of resources readily available.
What do you want your business to accomplish given the state of this pandemic? Do you want to stay in business permanently? Would you like to keep your employees working and safe? Is it important to you to keep up with your business expenses as well as your personal ones? I would assume you are hopeful of not folding and shutting down like so many businesses have done already! Through proper financial planning and forecasting, your business should be able to navigate more confidently and weather this disruptive disaster.
I hope to share some recent information on the Paycheck Protect Program Loan Flexibility Act and a few planning ideas with regards to some of the most recent changes to The Coronavirus Aid, Relief, and Economic Security Act, or simply The CARES Act, originally published March 27, 2020. Whether your business has applied or considering to apply for the Paycheck Protection Program Loan, the following ideas could help your business be more effective and help it get through as best as possible.
The PPP loan amounts can vary due to an established payroll calculating methodology. The SBA.gov statistics show that 65.7% of the PPP loans have been under $50,000, which make up a significant portion of the loans. Close to 3 million small businesses make up these loans. A clear take away from these statistics is that a bulk of these loans went to small businesses with payroll expenses of about $20,000 per month. Whether you have applied or are considering applying, you should make the most of this opportunity by maximizing it for the greater economy, the livelihood of your business, and those it supports. As of June 20, 2020 the available approximation amount to borrow is $128,355,981,685. Plenty of opportunity still exists for success through The Paycheck Protection Program along with proper planning for your business to succeed. Below are 3 strategies to consider if taking the PPP loan.
Labor Cost Forgiveness to 60%- On June 5, 2020, President Trump signed into law updates to the PPP loan, through The Paycheck Protection Program Flexibility Act. The changes came about due to concerns that businesses might not be in a position to qualify for the intended purpose to have the loan more easily qualify for forgiveness. As a result of the new change, the portion of payroll costs of the loan funds, that could potentially qualify for forgiveness, went from 75% to 60%. Additionally, other qualifying expenses increased the portion of funds that could be used for mortgage, rent or utility payments to 40%. The goal has always been to help your business qualify to have as much as possible forgiven. This change can help you better forecast and budget out a plan that can help you plan more effectively, given . Strategy- How do you plan on monitoring your budget? Hopefully not winging it! Traditional accounting is generally backwards looking and doesn’t help you forecast with planning for sales and expenses. Most business owners are brilliant with conceptualizing within their mind, but without utilizing a proper system, how can one budget and plan effectively? I personally like using LivePlan for clients I advise as well as my own business. LivePlan allows for integration from most accounting software, such as Zero or QuickBooks.
24 weeks to spend loan money- Another important change has to do with the length of time that you have to spend the money. Originally, the loan required businesses to spend the loan funds within a period of eight weeks from when the funds were received. The new loan provision update extended the period to use the funds to 24 weeks. This can significantly help businesses, as not all businesses were ready to start operations right away. Another factor is there have been businesses that have had to close due to employees testing positive for the Covid-19 virus. This update can help many businesses that were not ready to open or had delays to reopen. Strategy- Understanding your time period and budgeting is not only critical to achieve loan forgiveness, but to be in a position to successfully pull ahead during whatever the transition might look like. Understanding potential risks or unexpected interruptions that could occur and allow for contingencies. This can help you be strategic and allow for the best utilization of the loan money to achieve loan forgiveness. What if your business had to shut down for a few weeks due to an employee getting the virus? This updated PPP Flexibility Act extended period can help mitigate the time needed to ramp back up and use the money accordingly.
Loan Payment Term- In terms of most business loans, businesses take on debt and it will be reflected on the business balance sheet. Through the PPP loan and recent PPP Flexibility Act update, there is an opportunity to potentially wipe out this debt while keeping your business afloat and sustainable. The last update with the PPP Flexibility Act I wanted to mention is the payment term. This has been extended to five years if it was issued after June 5th of 2020 instead of the previous two years (loans issued prior to June 5th, 2020). There hasn’t been a change to the current low interest rate of 1%. The most desired payment would obviously be complete forgiveness, but there may be cases where things don’t pan out for full forgiveness, which causes the loan to have to be paid back. Strategy - Revisit your business plan and goals. Being in business isn’t for the faint of heart, so be more deliberate in your business goals. Don’t let your business be another to shut down due to the coronavirus. You hear everyday of some businesses you really liked closing its doors after decades of being in business. The reality is that the businesses were probably in poor financial health. For some of these businesses that decided to close, after all the blood, sweat and tears, they walk away with less than they put in. Really drill down on what you want your business to look like during this re-opening period, from an operational and managerial perspective. Personally, I believe the business plan has to be flexible and adaptable given there are so many uncertain factors.
After getting your loan and putting the money to work, start the loan forgiveness process as soon as possible to hopefully get all or as much off your balance sheet. The SBA has updated the Forgiveness application as of June 16th, 2020. Need business advisory help? Envisionvest helps businesses with financial planning solutions using the latest financial technology to improve performance. Schedule a quick chat today.