Episode #44 of the Cultivating Business Growth podcast is a special release episode with updates for business owners regarding the Paycheck Protection Program (PPP) Loan and the forgiveness associated. Our last podcast covering the PPP Loan was recorded back in April and we are here, recording on July 7th, to share news you need to know regarding further revisions that were passed in the last week.
What we cover in this episode:
- 4:06 – Review – What is the PPP Loan?
- 5:50 – Challenges with the PPP Loan
- 8:29 – PPP changes implemented
- 13:15 – Unanswered questions
- 15:30 – Additional assistance
Review – What is the PPP Loan?
The PPP is a loan funded by the federal government and is part of the stimulus plan that passed in order to help small businesses get through the difficult economic time stemming from the effects of the COVID-19 pandemic. Essentially, the loan’s intention is to quickly provide funds and opportunity for forgiveness, which is what small businesses need. It is a loan backed by the SBA that is offered by certain banks. Loan amounts are calculated using two and a half times the average payroll of the business, based on 2019 figures. The primary purpose of these funds is to cover the business payroll, mortgage interest, rent, and utilities. Until recent changes, businesses who received the PPP Loan were required to spend 75 percent of the funds on payroll. No collateral was required and there was no personal guarantee.
The forgiveness period was eight weeks and loan forgiveness could potentially be adjusted depending on the amount of people the business was able to bring back to work by June 30, 2020. For example, if a business brought back 100 percent of their employees by the deadline, that business would get 100 percent forgiveness. If they brought back 9 out of 10 people, they’d get 90 percent of the loan forgiven.
Challenges with the PPP Loan
Initially, the PPP Loan was, and still is, a great opportunity for businesses to receive funding, with no interest associated with it, they weren’t required to repay. However, after the stimulus plan was passed and businesses applied and received PPP Loans they quickly started recognizing challenges associated. Business owners were required to spend the money they received within 8 weeks of it being deposited into their bank. When they received these funds, many companies weren’t up and running yet, or they were open and were not fully staffed. Regardless, their 8 week clock started ticking once that money hit their account.
Additionally, businesses recognized the difficulty in tracking the funds. They needed to keep track of when they were closed, how many staff members were back to work once they reopened, how much money was going to rent and utilities, etc.
Some businesses like restaurants that were closed down for a month or two and received the loan wanted to use the money to keep their businesses afloat. But, using the money to pay employees not to work ended up just funneling money out of the business, which didn’t help the business stay afloat at all.
Another challenge with the loan was due to the workings of it. The loan provided two and a half months of payroll, but in reality businesses only had two months to actually spend it. With that, businesses recognized they were going to owe funds back to the government or were going to have to take the extra money as a loan.
PPP changes implemented
The good news about the PPP Loan is that businesses are benefiting from the funds they are receiving and some businesses are reopening. Even better news is that challenges with the PPP Loan were apparent rather quickly, businesses spoke up about these challenges, our government acted, and changes were implemented.
Update #1
The PPP Flexibility Act (PPPFA) was signed into law on June 5, 2020. This extended the forgiveness period to 24 weeks or December 31, 2020, whichever comes first. This allows businesses more flexibility around when they spend the money. If they need more time to ramp up their payroll and bring people back to work slowly, they can.
Businesses were given the opportunity to stick to the original 8 week deadline if they wanted. For many businesses that didn’t make much sense, but some small businesses that were able to remain completely operational, with a fully staffed payroll, may have spent their money.
Update #2
As mentioned previously, eligible forgivable expenses were initially extremely limited with 75 percent needing to go toward payroll. With the updated PPPFA, those restrictions were reduced. Now, only 60 percent of the funds has to be allocated to payroll.
Update #3
The timeframe for measuring FTEs and comparing those numbers to pre-COVID 19 numbers was extended until December 31, 2020. That’s an additional 6 months for businesses to be fully operating! Also pertaining to FTEs, some safe harbors were put in place to avoid businesses being punished. For example, let’s say there was a business with 10 employees and all 10 employees were offered their jobs back as the business reopened. Nine of the 10 decided they wanted to return to work, but one of the employees was close to retirement and decided he didn’t want to return. Instead, he’d rather retire. Since only 9 of the 10 employees would be returning, this would reduce the number of FTEs compared to pre-COVID 19 and in turn reduce the amount of forgiveness offered. Now, there are safe harbors built into the forgiveness calculation. As the business owner is offering everyone their position back, that will count toward their forgiveness. This additional flexibility can provide small businesses as much potential as possible to be forgiven.
Update #4
The maturity date has been extended from 2 to 5 years after the forgiveness period and deferment of the first payment is now extended. Initially, the first payment was due 6 months after you received the money. Now, it’s going to be extended to the date that your borrower’s loan is forgiven.
Unanswered questions
COVID-19 created an emergency situation for many that did not exclude small businesses. Our government acted quickly and passed a stimulus plan to help. As you can see, the initial PPP loan needed some revisions and there are still some questions that remain unanswered. Right now, we are still unsure how the accounting will be handled for these loans. We know it will impact the profit and loss statement as other income for the amount of forgiveness or reduction in expenses for the payroll or other allowable expenses that were paid with the PPP funds. We are still awaiting guidance on how to account for this.
Additional assistance
Extension of PPP Loan application – New deadline 08/08/2020
Applications were supposed to cease as of June 30, 2020, but we are here to share more good news! The PPP Loan application deadline has been extended until August 8, 2020. This is the most recent update which was just passed over the 4th of July weekend. Some businesses previously decided not to apply for the funds because they didn’t understand all the rules, have enough time, or have guidance they needed to move forward with the application. people to help them out. There is $130 billion left in funding, so the government is providing small businesses another chance to go through the process and get these funds if they need them.
Forgiveness
If you haven’t benefited from the PPP Loan but need help in order to stay in business, we hope you will reach out to a CPA, business advisor, or someone knowledgeable about the stimulus plan. The PPP Loan is forgivable money and your business is worth it! Don’t get lost in the weeds; it’s not as painful as it sounds. There is an application process, you pull payroll data and provide some information about your business, and then you get funding. There is money left and it’s there for businesses that need it!
SBA EIDL (Economic Injury Disaster Loan)
Originally, the miscommunication was that you could not get both the PPP Loan and an EIDL loan. It was thought you had to choose one or the other. The government has cleared that up and you can get both, but you have to be careful to ensure that you are spending the money on different expenses. The tracking of these funds is extremely important. While the PPP Loan can help out with payroll, businesses have many other operational expenses, which is where the EIDL loan cna come in. The interest rates are 3.75% for businesses and 2.75% for non-profits with terms up to 30 years. Your first payment is not due until one year after the loan origination. You do have to put your business assets up for collateral, but there is no personal guarantee unless the loan is for greater than $200,000.
Conclusion
In April, the federal government passed a stimulus plan to help small businesses get through the difficult economic time stemming from the effects of the COVID-19 pandemic. This plan included the PPP Loan, which was intended to quickly provide funds and opportunity for forgiveness. Since it’s rapid implementation, challenges for small business owners have been identified. These challenges required updates and in June the PPPFA was signed into law. Since then, additional changes have been implemented in order to best assist small businesses during this unprecedented time. Small businesses are an important part of our economy and the need to keep them funded has been identified. As of today, funds are still available! Take action now; your business’ success may depend on it.
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