Senate Bailout & Small Businesses

Covid 19 Macroeconomics & Your Small Business
March 22, 2020
Paycheck Protection Program – Interim Final Rule
April 3, 2020

Senate Bailout & Small Businesses

Written on 3/26/2020

Edited 3/29/20 based on changes made to legal text

Edited 4/01/20 based on changes made to legal text

Decisions to Make

Here’s the full text of the CARES ACT:

UPDATED full text of the CARES ACT:

Your decision will have to be… let people collect rich unemployment benefits OR try to get the "Paycheck Protection Program" (PPP) loan, or what combination makes the most sense given your business and balance sheet.

Care Act business interruption loans: (may want to scroll down to the “Brass Tax” section first)

The small business loans through this Act (i.e. Payroll Protection Program Loan or "PPP" Loan) is 2.5 times your monthly "payroll costs". "Payroll costs" include all wages (which include payments made to 1099's and for self employment income), tip, paid time off (vacation, etc..), severance pay, benefits (health insurance, 401K, etc... anything covered under ERISA), and state & local payroll related taxes. "Wages / Compensation" in excess of 100K for the prior year is omitted in the "Payroll costs" calculation. These are the categories... you can calculate your maximum loan amount in one of 2 ways:

1. Take the one year prior to when you apply for the loan (legal text says "issuance" but that's a moving target)... calculate all "Payroll Costs" as described above.,.. then divide that by 12... and multiply that by 2.5.
2. IF you were not in business last year, ...sum total "Payroll Costs" between 1/1/20 and 2/29/20 and then divide by 2... then multiply by 2.5

You can use the PPP loan for "Payroll Costs" (same as described above), mortgage interest, rent costs, utilities, and interest on other prior debt obligations. This loan repayment can be deferred for up to one year, so you don’t have to start repaying the loan for up to a year. Any money used for the purposes I just mentioned will be FORGIVEN under these circumstances:

1. For the 8 weeks following RECEIPT of the loan proceeds, you must maintain the same number of full time equivalent employees & overall payroll as you did for the preceding year from when you APPLIED for the loan (Legal text says "preceding year from when you received the loan", further guidance pending).
2. Must NOT decrease total payroll or total hours worked by more than 25% from the date the loan is RECEIVED over the subsequent 8 weeks from receipt of the loan in comparison to the year before you applied (or received, unclear guidance) for the PPP loan.
3. IF the total number of employees / payroll decreases by more than 25%, the amount of loan forgiveness is REDUCED TO ZERO!!!
4. This 75% ratio is a TRIGGER!. If you spend at least 75% of the loan towards PAYROLL COSTS, the entire loan is forgiven. IF NOT, if at 74% or lower, you receive NO FORGIVENESS.
5. No funds can be used for anything OTHER than the specified purposes. If funds are used for purposes not listed, the ENTIRE loan will NOT be forgiven.

The original text in the ACT was different, but based on practical execution and guidance released by the SBA, you must take GREAT CARE to ensure that for the 8 weeks following receipt of a Payroll Protection Program re-hire & maintain both "hours works" and "total payroll" to at least 75% of what it was for the year preceding the RECEIPT of the loan.

There appear to be various grants and such tucked away in there as well, so you may want to be in touch with your trade association resources to scout specific programs related to your industry or minority business classification.

Brass tax:

The US government is giving you 2.5X monthly "Payroll Costs" ….to float you for the next 8 weeks! The loan terms are a 10 year term at a 4% interest rate or 2 year with a 0.5% interest rate with repayment deferral of up to one year. There is paperwork associated with taking this loan you’ll have to do. Worst case is you apply for this loan and keep everyone staffed for 8 weeks. Fast forward until June and business has not picked up… so you have to lay everyone off again! You've lost 8 weeks of government funded payroll to stay open / re-open BEFORE you should have (keep this in mind when weighing against the “Unemployment” option below). Essentially, you want to "time" the RECEIPT of this loan! You ideally want to receive the loan WHEN YOU ARE READY TO RE-OPEN so that for the following 8 weeks from receipt of the loan, you are maximizing the value of the loan forgiveness. Since forgiveness is based on using the funds for payroll, during the 8 weeks following receipt of the loan, timing the receipt of the loan is crucial, difficult, and risky as the funds may run out. However, receiving the loan proceeds while you are mandated to be closed does no one any good either since you're wasting a potentially valuable resource (i.e. the PPP loan forgiveness).

Here's the unemployment option:

There is a very rich unemployment benefit! It is your CURRENT state system PLUS an automatic $600 per week benefit automatically on top of that! The automatic boost of $600 will last for 4 months. That was a big point and I can see why. For some employees, they would make more on unemployment than they would during full employment. Unemployment insurance is also extended to “gig economy” workers (i.e. freelancers). Each state is different, but "back of the napkin" math shows that unemployment will be the better option for any employee making less than $50-65K per year (depending on your state system) for at least the next 4 months. Also the one week waiting period that most states have can be waived and reimbursed by the Federal government IF your state applies to do so. I'm not sure why a state would decline this free money but some state governors rejected Medicaid expansion money back in 2009.

Unemployment (in most states) does require an “available and willing and able to work” requirement. So if your company is working on a limited basis (ex. Open 2 days a week out of 5 or limited hours), employees still have to show up or they are violating the available willing and able to work requirement which makes them ineligible for unemployment.

Some states also allow employees to have some part time earnings and NOT have that reduce their unemployment benefit. So there is also that incentive to continue working. Please check with your state system (many states seem to have a “call us and we’ll tell you” policy).

Course of Action:

Apply for the PPP loan if you’ve had a “business interruption” (I think we all qualify) and apply with as long a loan forbearance as you can (i.e. delay repayment). Keep in mind the timing of the PPP loan! You must use the PPP loan for payroll during the 8 weeks following RECEIPT of the funds in order for the loan to be forgiven / waived. That’s free money but you have a narrow 8 week window to get those funds into a separate account and use it to pay for payroll.

I wouldn't recommend using the loan as the basis to re-hire employees or not. Use it as a "payroll discount" when you decide it is time to re-open for business. This may require you to WAIT to apply for the PPP loan. Think of the "loan" as a GRANT application, not a loan. However, you MUST TIME this loan so that you receive the money when you are ready to re-open!

You should have ALREADY applied to the SBA Emergency Injury Disaster Loan (EIDL). This loan has a $10K grant that is automatically forgiven AND you can have both the PPP loan & the EIDL loan. However, you must use them for DIFFERENT purposes. Apply for the EIDL loan but if you receive it, put that money into a separate bank account and do NOT use this for payroll. Use these funds for things you will NOT be using the PPP loan for. Try to use the PPP loan entirely on PAYROLL!

For some businesses, unemployment is a really solid option if you have relatively low rent / mortgage costs and low re-occurring debt. You'll have to decide how to maneuver here over the next 3 months based on your situation. In an ideal world, you have enough cash to cover fixed rent & debt servicing costs that you'll keep everyone on "bonus" unemployment for 16 weeks exhausting that benefit.... while simultaneously planning to RECEIVE the PPP loan on the exact day you plan to re-start business operations! Then use the PPP loan proceeds on PAYROLL in order to have the PPP loan forgiven. Finally you'll use and EIDL loan proceeds on rent / mortgage, debt servicing, or anything you did NOT use the PPP loan towards.

There should be a lot more coming out but just wanted to give you some of the major parts so you can plan accordingly.

Other Considerations

Details matter... the law says one thing, but how these things get executed and happen in reality is up to the SBA & the departments involved. I don't expect this money to move very quickly... but the Gov't is saying it will move quickly.

PPP Loans can be used for:
(A) payroll support, including paid sick, medical, or family leave, and costs related to the continuation of group health care benefits during those periods of leave;
(B) employee salaries;
(C) mortgage payments;
(D) rent (including rent under a lease agreement);
(E) utilities; and
(F) any other debt obligations that were incurred before the covered period.

If you work in an industry with tipping (i.e. restaurants)… there is an exception to increase wages & forgiveness for those employees. I’m not going to dive into that formula, but yes… you can pay a bit more to try to fully indemnify tipped employees while closed.

EIDL Loans can be used for everything the PPP loan can be, plus the following:
(A) Working capital to continue business operations;
(B) Necessary expenditures to alleviate the specific economic injury suffered;
(C) Increased supply costs;
(D) replaying debt that cannot be otherwise repaid due to revenue losses;

You should still apply for these loans even if you feel you don’t need them or feel like your credit isn’t excellent. The loans are backed by the US government, therefore the US government is your co-signer and they have the best credit score on the planet. Keep in mind the TIMING of the the PPP loan in order to receive loan forgiveness, as well as how you intend to use the PPP loan proceeds vs the EIDL loan proceeds. I recommend keeping it simple: Use the PPP loan for payroll & benefits, use the EIDL loan for rent, mortgage, utilities, paying off other higher interest debts, or just keep it around to bolster the balance sheet.

Also keep in mind the MATH of the COVID-19 Virus: Best case scenario is a 0.2% fatality rate. COVID 19 is so super infectious that everyone in the country will get it. There are 327 million people in the USA. If best case… a fatality rate of 0.2%... that is 744,000 people dead…BEST CASE. That is why this is being done; In order to buy time to develop proper medical infrastructure and medical interventions. Please take the grants, loans, & unemployment if you qualify if it will put you at ease to not rush to open your doors for business.