Small Business & Startups

COVID-19 Small Business Resources & PPP Loan Updates

By July 20, 2020 No Comments

coronavirus small business guide

Updated 7/15/2020

Table of Contents

If you’re running a business during the outbreak of COVID-19, here’s your first step: Remember, you’re an entrepreneur. Triage time is over; it’s time to start being intentional and “next stepping” your business issues. 

We learned a lot from the last recession, and while this one is different, breaking down some of the issues with what we learned in the 2000s is an excellent place to start. As always, we are focusing on the business side of the house with this coronavirus small business guide, so we’ll leave the health advice to the CDC and WHO.

What is the Update on the CARES Act Programs that Get You Money?

Updates

The PPP Flexibility Act was passed because we needed another acronym PPPFA during this global shutdown. It eases quite a few of the rules on forgiveness, here are the highlights.

Covered Period 

The most significant change we saw was extending the 8 week covered period to a 24 week period. This is basically a move to covert the loans to grants. This move in conjunction with the new EZ Forgiveness Form will make the forgiveness process much simpler than first feared.

Allowable Costs 

Companies are now allowed to use up to 40% of the loan proceeds on rent, utilities, and mortgage interest which should assist most of the highly affected businesses affected by the shutdown. 

Employee Re-Hiring Date

Eligibility for forgiveness originally meant being able to re-hire to earlier levels of full-time equivalent headcount by June 30, 2020 but that date was pushed back to December 31, 2020.

Loan Maturity Date

Loans not forgiven will now be due in 5 years instead of 2 years; however, there is uncertainty if all loans are eligible for the 5 year term or just loans issued after the PPPFA. Hopefully your loan is forgiven and it is a mute point.

Loan Payment Date

Instead of making payments after month 6, the PPPFA now allows for the first payment to be made either 10 months after the covered period or when the business is notified about forgiveness.

Employer Payroll Tax Deferral

Businesses can now defer payroll taxes even if they received a PPP Loan.

Business Owner Compensation

Business owner compensation limits have been increased to 2.5 months (2.5/12) of 2019 net profit (up to $20,833) for the 24-week covered period.

For Lucky PPP Recipients,  Focus Should Shift to the Forgiveness Calculations

If you received funds, according to the Cares Act your 8 week clock started on that day you received a funding installment. In simple terms, if you use the loan to fund payroll (for employees only and at least 75% of the proceeds) or use it to pay your rent, then 8 weeks of those costs are eligible to be removed from your loan principal balance. The clear message here is that the Treasury Department wants to incentivize small businesses to continue operating during this time and are willing to go to lengths never seen before to do so.

Based on the way banks calculated loan availability, we expect massive inconsistency in how each of the banks handle loan forgiveness.  

So we are recommending two things:

  1. Talk to an expert, we are offering our CFO’s time for free.
  2. Stay in constant contact with your banker. If the application process is any indication, we are shortly going to see bank-specific forgiveness guidance.
  3. Start to gather information. It is important to gather payroll data, health care bills, 401(k) matching data, rent, and utilities. All of these can contribute to forgiveness.
Download Forgiveness Calculator

And here is a video to walk you through how to use the calculator and some basics.

Is PPP Forgiveness Taxable?

The original wording in the CARES Act states “Canceled indebtedness under this section shall be excluded from gross income” so it seems that Congress’ intent may have been to make PPP forgiveness non-taxable to small businesses. We dive into this more in this post. Not going to lie… we were pretty surprised to see that loans would be forgiven AND it wouldn’t be taxable as this essentially creates a double benefit, but who’s going to argue. Then on April 30th, the IRS issued guidance taking that double benefit away by not allowing businesses to claim business expense deductions related to PPP loans forgiven. Ugh, why does the IRS always have to rain on our parade? For more information on this topic check out our post on it.

Here’s what you should know:

  1. This would mean that the PPP Loan is not a grant like previously believed.
  2. This fight isn’t over. Congress may step in and reverse the IRS’s guidance and accounting industry groups like the AICPA are also challenging the IRS’s position saying this doesn’t go along with the intent of the CARES Act.

We’ve heard some business owners ask whether they should give back their PPP loan due to this and just lay people off and let them claim unemployment. Each business’ situation is different and each should consult with their accounting team, but we’re of the general position that this issue should not cause anyone to return PPP funds.

What if you were unlucky and didn’t get the PPP or EIDL?

The SBA isn’t the only source of funding during the COVID-19 crisis.  A multitude of government and private sources have emerged to help small businesses with funding needs. Our tech stack partner, Gusto, has created a fantastic list of funding sources by state that they are updating on a continual basis.  There are 2 tabs in the spreadsheet, so make sure to check out the Private Resources tab.

The Tax Credit You May Not Be Aware Of

The Employee Retention Credit (“ERC”) is part of the CARES Act, but has not made much news mostly because the PPP loan has stolen the spotlight.  But you should expect that to change as the ERC will most likely be the best option for businesses who were not able to get a PPP or EIDL loan.  Here’s what you need to know about the ERC:

  1. Up to a $5,000 credit per employee is available.
  2. Credit is applied toward your quarterly payroll taxes and excess credits are paid to you in cash.
  3. Credit is calculated as 50% of an employee’s qualified wages. 
  4. You have to show that you’ve had a 50% decline in gross receipts compared to the same quarter last year or that your business had a full or partial suspension due to government order.

If you’ve received assistance from another portion of the CARES Act (like the PPP or EIDL ) you’ll likely be ineligible for the ERC.

What should I watch out for?

Fraud Cases Are Up

While it’s unfortunate but probably shouldn’t be of surprise, scammers are jumping all over these SBA loans as a way to try and take advantage of small businesses.  We’ve already seen spoofed emails and fake robo calls claiming to need more information for loans that may be in process.  Keep your guard up and keep these things in mind: 

  • The SBA will not call you, so if someone claiming to be from the SBA does call it’s probably a scam.
  • Never give bank logins, credentials, or account numbers to anyone. Your bank already has this information and should never ask for it again.
  • Beware of those telling you they can expedite your loan and avoid anyone charging you for up front fees.  An approved SBA lender will not do either of these.

Keep your employees on their toes and talk to them about how hackers are taking advantage of employees during a time like this. Our friends at Curricula built a phishing simulation software to run a free test with your employees and learn how to defend against the hackers.

What do I do about taxes?

If you think you are getting a refund, file now! Cash is king, so get that in the doors.

If you are a c-corporation with losses in 2019, ask your tax advisor about the new tax carryback rules passed in the Cares Act. It could mean cash today for taxes you paid in the past.  

Ways For Businesses To Save Money During This Time

Improve Your Collections

Adverse economic conditions always negatively impact your ability to collect payments from customers. Some customers are legitimately going to experience financial distress, and their ability to pay you will become impaired. Others will use an economic downturn as a means to slow-pay you out of fear or extreme conservatism. If you carry customer Accounts Receivable, please do the following now:

  • Get clarity. Make sure your Accounts Receivable Aging is accurate and make sure you are reviewing it weekly (at the very least).
  • Escalate sooner. You should have a standard collections process in place to follow up with clients using messaging and actions that escalate as their Accounts Receivable balance grows older. Go ahead and move clients a step ahead in your escalation process so that you are taking action sooner than you would have during more favorable economic conditions.
  • Get customers to communicate. When you see a client slowing their payments, get them talking. You need to get a response from them on how (and when) they are going to pay. If they do not communicate back or you get an unfavorable response, take immediate action. This might mean discontinuing work or developing an agreed-upon payment plan with the client.

Manage Cash Flow

Even though the SBA lending programs have absorbed most everyone’s focus, you can’t be distracted from knowing exactly what your cash position is and what it will be in the coming months.  There are plenty of Excel and Google Sheet cash forecast templates available, but there are also some pretty good tools out there that are relatively inexpensive. We like Helm and CashFlowTool.

Deal With Rent Expenses

Rent is likely your second largest expense after payroll, and using the new SBA loan to help cover it is only one option. If you don’t go the route of an SBA loan what else can you do to offset expenses?  What do you do when you’re paying for an office or retail space that you can’t even use? Can I make changes to my existing lease contract? Acuity spoke with our friends and clients, Transcend, real estate experts, about the steps they recommend taking: 

  • Talk to your real estate broker and ask them to thoroughly review your lease contract for existing provisions that may help you during this downturn.
  • Ask your broker to recommend a strategy for approaching your landlord with concessions for both parties.  This could be rent relief or deferment in the short-term for you, but extending the overall lease term or adding a higher lease rate later for the landlord. Remember, your landlord has a business to maintain, too, so treating them as a partner in this will yield better results for both of you. 

Pay Your Payroll Taxes Later

Another aspect of the economic relief bill that may help small businesses is the ability to defer current year payroll taxes to 2021 and 2022. 

Here are some key points:  

  • Payroll taxes include the employer and employee portion: Each pays 6.2% toward Social Security and 1.45% toward Medicare.
  • While deferring payroll taxes may provide cash today, consider carefully whether paying those taxes later might come back to bite you. This is a deferral and not waiver of those taxes.
  • Payroll processors aren’t quite ready for this, so talk to yours to see when it might be available.

What Should I Know Now?

Focus on the break-even point. 

Time to get familiar with your fixed costs. Start with your headcount, add your rent, and any other fixed costs (software subscriptions, regular bills, etc.). 

Split the costs into three buckets: essential, nice-to-have, and first-to-go. 

Now determine what revenues and margins you need to be able to sustain the essential and nice-to-have scenarios. 

Now think through the leading indicators for those scenarios. Information is power right now for entrepreneurs, so start really thinking about how to see one month ahead in your business.

Alternatives to laying people off

Have you thought about a part-time option from your employees’ perspective? 

Likely, you’ve now moved your team to remote working or will do so soon. With the realities of remote work, your team may have additional unforeseen responsibilities, like supervising children that cannot go to school or assisting elderly family members. Have a conversation with your team this week about what this change means to their work schedule.

A couple of questions to follow-up with: Do they even want their work hours to stay the same? Will they need to scale back due to other responsibilities now?

Understanding what is best for your team might mean moving some to a part-time role that allows them to manage their new situation best. 

Have you thought about partial pay reduction versus layoffs? 

I have learned a ton from my father over the years who has been through a few more of these cycles than I have. During one recession, he needed to cut payroll by 20%. He actually got the team he was planning to retain (the 80%) together, and he told them what the choice was, we can fire the people not in the room or everyone take a pay cut. He was overwhelmed with the team’s response. They unanimously wanted to take the pay cuts, and no one ended up getting laid off. They also really appreciated the transparency and having input on the choice.   

If you are going down this road, I would encourage you to do pay cuts in tiers vs. an across the board. Consider something like:

Salary Pay Cut
>$100,000 30-40% 
$60,000 – $100,000 20%
$40,000 – $ 60,000 10%
<$40,000 0% 

Employees get it — these are tough times. My dad ended up only needing 60 days back then, and then everyone’s salary went back to normal. Who knows how long this new normal will last, but I bet your employees are ready to stick it out with you.

I’ve Exhausted All My Options How Should I Do Layoffs?

Check and recheck your break even calculation above and most importantly only cut once

What your business can do to help

Do what you can to help others. 

While we believe the above items are helpful to all small businesses, it is likely that you’ll still have specific financial questions about your own company. Our entire CFO team has allocated time to support you right now, so please take advantage of the free Acuity CFO Office Hours. Please remember that there is no charge for these office hours, and we would be honored to help. 

We can also take over from a full-time staff person that you had to let go. We are all hunkering down, so if you need to understand what a part-time or interim solution might look like, let us help you figure that out. Schedule a call, and let us help with those two things right now.

CFO Office Hours

I know the byline says Matthew May, but at this point please know our whole team is contributing to this blog post. Special thanks to Janet Mulroy, Derrick Williams, Graham Wood, and Kenji who is drafting all our clients weekly communications (I steal the good parts).   

Archive

We are starting this Archive section since are we updating this post frequently in case we need to retain some information for you all who are referring back here for updates:

PPP and EIDL Open … For Now?

An additional $310 billion for the Paycheck Protection Program (PPP), $50 billion for Emergency Economic Injury Disaster Loan (EIDL), and $10 billion for EIDL grants will be available for a short time. 

Here are some tips from the first round of funding on getting your application in:

  • There are massive inconsistencies in how each of the banks handle the PPP loan. But almost all require a depository account, so open an account at a bank participating in the PPP immediately
  • Once you have a bank you know is participating in the PPP, stay in constant contact with your banker. They need to know you and your business by name and you need to demand both a clear understanding of how their PPP program works and where you stand within it. You obviously can and should treat them with respect, but this may be your business’s life on the line. Make them work for you and be sure that they’re going to get you into the application process.
  • The math for determining your PPP loan amount was supposed to be simple… 2.5 times your average monthly payroll. Unfortunately, there was confusion from the SBA about what could be included in payroll. Just use your payroll company’s average payroll calculation.  All of the big reputable payroll companies have improved these reports dramatically over the past weeks, and they’ll end up being the simplest source documentation for proof of the calculation. Banks can’t handle complexity so simplify as much as possible. 
  • Combine all loan docs into one PDF.  Because this situation is so fluid, having all of your loan documents combined into one PDF package that you can easily and quickly access may be important. Hopefully your bank doesn’t drop the ball on this application process, but if they do and you need to apply elsewhere it’ll be good to have all documents in one place. This package should include a completed SBA Form 2484 and your average payroll calculation with support.
  • Don’t forget about the EIDL loan . So much attention went to the PPP loan these last weeks that many may be overlooking the EIDL loan that is available to apply for directly from the SBA. While it doesn’t have the same forgiveness provisions as the PPP, it has a longer term, the funds can be used more broadly.
  • Don’t forget about the EIDL grant, there’s an immediate $10k available when eligibility is proven. 

We are generally recommending that you apply for payroll relief through the PPP and everything else through the EIDL loan program. But because of the fluidity of the rules changing and the case by case nuances, we are opening up our CFOs for free 30 minute consultations to help with your specific use case. 

Talk to a CFO About SBA Options

Here is a tip from the first round of funding after you get your application in:

If you have already filed, ask your banker if you have an eTrans #, if you have one you should have funds allocated to your loan (usually 10 days to fund from application approval).

Marco Rubio PPP Tweet

No wonder frustration reigned when everyone had hoped to be celebrating these loans.  For an interesting insider’s take on the PPPs goals and challenges, have a look at Senator Marco Rubio’s PPP tweet thread on the day after the program launch.

PPP Affiliate Rules

We discussed this on a recent episode of Acuity’s “Drink While You Think” with two of our CFOs who work in the startup space. As of last week, it seemed the answer was “Yes” as we were hearing from numerous startups, venture capitalists, and lawyers who work in the space that startups should apply. The Treasury Department made an update to their “affiliate rules” that likely would make the PPP much more difficult to attain for startups.  If you’re a startup, here are the steps we recommend:

    1. Unless Your Investors Say Otherwise, Prepare To Apply For The Loan.  It’s best to get in line for the loan.  If your Board and management team determine that you can’t, drop out of the loan process, but get prepared to be on the starting line.
    2. Talk With Your Board and Investors.  Expect more debate and, hopefully, clarification on this topic in coming days.  While politicians and lawyers will try to hash out the “Affiliation Rules” under the SBA and it’s various interpretations, the practical application of this is how much control do your investors wield. When they have a majority percentage ownership, that’s easy to determine as control.  But when minority investors hold Board positions that may give them the ability to block corporate actions, they may also infer control. Talk with investors, your counsel, and try to understand where there may be control issues.  When you sign up for the PPP loan, you are having to certify that you are eligible for the program and that carries a serious obligation, so make sure everyone is comfortable with that.

Here are the potential gotchas to watch out for:

  • Are the 20% owners going to be willing to share information and disclose affiliates to the SBA? 
  • Is having a 20% owner going to make you ineligible if their affiliates collectively have >500 employees?
  • Are investors going to waive control rights central to the affiliate rules.
  • Is the treasury or congress going to interpret VC and PE backed companies as ineligible by default and make examples of them? 

COVID-19 RELIEF

How does PPP loan forgiveness work?

We have a calculator for that.

Access your Paycheck Protection Forgiveness Calculator for free right here: