“The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands in times of challenge and controversy”
– Martin Luther King, Jr.
From the words of Dr. King, we have entered a time of extreme challenge and uncertainty, with obstacles around every corner. The most important tool to have right now is knowledge.
President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27. The legislation provides approximately $2.2 trillion of fiscal stimulus, including a $350 billion bank loan program for businesses referred to as the Paycheck Protection Program. The PPP is a forgivable loan to small businesses to pay their employees during the COVID-19 crisis. All loan terms will be the same for everyone.
The loan amounts will be forgiven so long as:
- The loan proceeds are used to cover payroll costs and most mortgage interest, rent, and utility costs over the eight week period after the loan is made; and
- Employee and compensation levels are maintained
Payroll costs are capped at $100,000 on an annualized basis for each employee. It is anticipated that not more than 25% of the forgiven amount may be for nonpayroll costs. Loan payments will be deferred for six months.
Maximum Loan Amount:
2.5 times the average monthly payroll costs or $10 million, whichever is less
Eligible Payroll Costs Include:
- Salary, wages, commission, or similar compensation
- Payment of cash tip or equivalent
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Payment for group health care benefits, including insurance premiums
- Payment of any retirement benefit
- Payment of state or local taxes assessed on the compensation of employees
Eligible Costs Exclude:
- Compensation for any employee in excess of an annual salary over $100,000, prorated for the covered period (You can include their compensation up to a $100,000 cap)
- Taxes imposed or withheld under Chapters 21, 22, or 24 of the IRS Code during the covered period
- Compensation for any employee whose principal residence is outside the United States
- Qualified sick and/or family leave wages for which a credit is allowed under Families First Coronavirus Response Act
When can I apply?
Starting April 3, 2020, small business and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing Small Business Administration (SBA) lenders.
Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
Where can I apply?
You can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult your local lender as to whether they are participating.
Who can apply?
All businesses – including nonprofits, veterans organizations, tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.
What do I need to apply?
You will need to complete the Paycheck Protection Program loan application and submit the application with the required documentation to an approved lender that is available to process your application by June 30,2020.
Disaster Loans (EIDL):
The SBA disaster loans are the primary form of federal assistance for the repair and rebuilding of nonfarm, private sector disaster losses. The disaster loan program is the only form of SBA assistance not limited to small businesses.
The EIDL can provide up to $2 million of financial assistance (actual loan amounts are based on amount of economic injury) to small businesses or private, nonprofit organizations that suffer substantial economic injury as a result of the declared disaster, regardless of whether the applicant sustained physical damage.
An EIDL can help you meet necessary financial obligations that your business could have met had the disaster not occurred. It provides relief from economic injury caused directly by the disaster and permits you to maintain a reasonable working capital position during the period affected by the disaster.
Weathering the Storm: Small Business Best Practices
Given the importance of cash flow in times like this, companies should immediately develop a treasury plan for cash management as part of their overall business risk and continuity plans.
- Rent: See if you can negotiate a lower monthly rent
- Marketing: Reduce your marketing cost and leverage social media platforms
- Inventory Management: Try to negotiate a better deal from current suppliers or find alternative sources who can provide the same service or product at a lower price
- Use this approach to cut costs and reduce outgoing cash flow so you don’t have to cut employees
Try shifting your focus from the income statement to the balance sheet. Payables, receivables and inventory are key right now. Reducing your variable costs is often a quicker way to immediately reduce your cash outflows than focusing on your fixed costs. There is a best-case scenario, a worst-case scenario, and everything that falls in between. You cannot avoid the outcome, but you can prepare yourself for it. Run various scenarios through your cash flow projections. Revenue will take a big hit during this time and payments will be slower. As such, if you have devised a protocol for all possible outcomes, you’ll be ready to let it take motion when the time comes.
Our doors are always open to lend a helping hand during these times. Please reach out for a consultation to address your tax, advisory, accounting, or payroll needs.