EDITED BY GEORGE W. HIGHTOWER
Normally, we choose to pontificate about cannabis when writing. But in light of the Coronavirus Chaos, last week David returned to his professional roots and sketched out a roadmap with basic strategies for small business owners hoping to survive the current economic calamity. This may not be as thrilling as the twisted ins and outs of the legalized cannabis industry, but we hope it serves as an important message to small and medium-sized business owners. This article builds upon last week’s DigBoston piece, “How small biz can survive the coronavirus storm and thrive in crisis,” so get some caffeine and saddle up for the sequel.
I have always loved small business. Long before entrepreneurship was cool, it was one of my undergrad concentrations at Northeastern University (Class of ’82). When I returned to school in my mid-40s to earn an MBA (’05), I harnessed my energies and earned acceptance to the top-ranked entrepreneurship school in the country—Babson College. From 1982 to 2004, I earned a decent living by financing equipment over a wide array of industries for small-to-midsize companies.
Those are the same firms struggling to survive today. When one lives in that world for so long, it is easy to create a connection to the entrepreneurial spirit of main street business. It’s that deeply cherished link that drives my passion with this current series of articles. Cannabis is full of intrigue and surprises, but this topic is way more important.
On Friday, March 27, President Trump signed into law the final version of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). It is the third in a series of coronavirus bills and likely not the last, but so far it is the biggest and most misinterpreted. Some of the misunderstanding comes from the fact the bill went through several quick revisions that changed key features. We’ll help clear up some of the confusion, explain several important features, provide multiple ominous warnings, and finally point you to resources if you want to do a deep dive.
First, the warnings
If you’ve seen every variation of someone’s close relative who has $50 million in Nigeria and is only turning to you to get the money out because you’re a trusted confidant, you ain’t seen nuthin’ yet. Desperation often brings normal and rational people to a place where they throw good judgment out the window. The scammers will be coming in thick and heavy on the wings of this Trumpian-inspired economic salvation dream.
From a small business perspective, the centerpiece of the CARES Act is the Paycheck Protection Program [PPP]—loans administered by the United States Small Business Administration [SBA], and made by lenders [most often small-to-medium banks] that have passed muster with the SBA (all approved lenders are listed on the SBA website). So, when a telemarketer calls or emails to sell you an SBA loan, be sure to write down the domain and confirm that they are listed on sba.gov.
In pre-Covid times, the SBA provided a partial guarantee of the loan after which the bank did all the heavy lifting: underwriting (industry speak for the credit investigation), providing the cash, and servicing the loan. For PPP loans, the SBA provides a 100% guarantee. Instead of having to review the applicant’s business credit (which takes time even in our digital era), the bank’s focus is on assuring the applicant qualifies for the program: There are no personal guarantees or collateral required; the ability to repay in a timely fashion is not a factor in determining eligibility for the loan; the main risk to borrowers comes from lying or misrepresenting on the loan application.
The SBA has 30 days to get the PPP kick started, and they’re already sprinting. For disaster loans, there is no application fee, no commitment fee, and no up-front payment. You need not write a downpayment check to get one of these loans, and no one really has that special relationship to get you through the back door. If someone calls and wants your credit card for some assistance or information, hang up.
You can apply through June 30, 2020. If you have an existing Economic Injury Disaster Loan—abbreviated EIDL [pronounced “IDLE,” like a car at a stoplight], it can be rolled forward into a PPP loan. The draft application is out and posted. Review it thoroughly and gather the information you will need to apply—basically payroll records and health insurance invoices.
Soon after I woke up last Saturday morning, I jumped down the Google rabbit hole of the “CARES Act,” and two hours later realized I was reading the US Senate’s draft, not the final version. If you want to read the actual bill, find the correct version, which is over 880 pages long.
Individuals in Congress, often legislative aides who are subject-matter experts in certain areas, craft these things and only focus on the areas where they are most dialed in. If you come across someone who claims to understand the whole bill but does not work as a tax attorney or a CPA with a specialty in taxation, assume they’re full of shit. Each chapter is complex and it is unlikely that as a small business owner you will find someone who has read, let alone memorized, the whole thing. How many people have the mental chops to absorb a brand new 880-page technical novel in less than a week?
If you prefer summaries, know that you will likely miss a lot of the specialized nuances. I watched a 60-minute presentation that included discussions by the deputy associate administrator of the Office of Capital Access of the SBA and the deputy democratic staff director at the US Senate Committee on Small Business & Entrepreneurship. Their overriding advice is to avoid scammers and only trust information from dot-gov online resources. Do yourself a favor—finish reading this article, and then come back to watch the interview beginning at the five-minute mark. Please bear in mind that some of their guidance has already been changed. The program is currently very fluid.
Below we summarize some important features of these programs. Underlying all this information is a simple truth—the United States of America has been experiencing its lengthiest economic expansion on record, ever. We have not gone this long without a recession before, and there is a Trumpian belief that the economy might bounce back like Lazarus if we can just keep things in a state of suspended animation. If business owners keep paying employees and maintain their health insurance, we will get through this with a few scratches but generally unscarred. To keep from adding crushing debt across the small business sector, many of these government disaster loans are forgiven under certain circumstances (primarily when dispersed to maintain employment headcount and wages—don’t panic if you have already laid off staff). Here is how it will work, with much of the following information lifted directly from the latest SBA documents.
Paycheck Protection Program (PPP) loans, available through June 30, 2020
The program provides cash-flow assistance through 100% federally guaranteed loans to small-business and non-profit employers who maintain their payroll during this emergency. If employers keep up their payroll, in effect helping workers remain employed, then small businesses and our overall economy will bounce back quicker after the crisis.
PPP has a host of attractive features, such as forgiveness of up to eight weeks of payroll based on employee retention and salary levels, no SBA fees, and at least six months of deferral of any repayment (with maximum deferrals of up to a year). Small businesses and other eligible entities will be able to apply if they were harmed by COVID-19 between February 15, 2020 and June 30, 2020. One of the most interesting facets of the program is that it is retroactive to February 15, 2020, to help bring back workers who were laid off back onto the payrolls.
How is the loan size determined?
Depending on your business’s situation, the loan size will be calculated in different ways (see below). The maximum loan size is always $10 million.
- If you were in business February 15, 2019 to June 30, 2019: Your maximum loan is equal to 250 percent of your average monthly payroll costs during that time period. If your business relied on seasonal workers, you can opt to choose March 1, 2019 as your start date.
- If you were not in business between February 15, 2019 – June 30, 2019: Your maximum loan is equal to 250 percent of your average monthly payroll costs between January 1, 2020 and February 29, 2020.
- If you took out an Economic Injury Disaster Loan (EIDL) between February 15, 2020 and June 30, 2020: You can refinance that EIDL into a PPP loan and the outstanding loan balance will automatically roll over into the payroll sum.
What costs are eligible for payroll?
- Compensation (salary, wage, commission, or similar compensation; payment of cash tips or equivalent)
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation (severance pay)
- Payment required for the provisions of group healthcare benefits, including insurance premiums
- Payment of any retirement benefit
- Payment of state or local tax assessed on the compensation of employees (state payroll and unemployment taxes)
What costs are not eligible for payroll?
- Employee/owner compensation over $100,000 (highly paid employees are not excluded, just the part of their wages over $100,000)
- Taxes imposed or withheld under chapters 21, 22, and 24 of the IRS code. Federal payroll taxes are often 7.65% of your base payroll. These are the taxes that cover the employer’s contribution to Social Security and Medicare—PPP allows the government to defer payment.
- Compensation of employees whose principal place of residence is outside of the US.
- Qualified sick and family leave for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act … basically, no double dipping. If the government gave you a credit somewhere else, you will not get benefits for the same thing here.
What are allowable uses of loan proceeds?
- Payroll costs
- Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, as well as insurance premiums
- Employee salaries, commissions, or similar compensations (subject to the $100,000 cap)
- Payments of interest on any mortgage obligation (interest-only, not principal)
- Rent (including rent under a lease agreement)
- Utilities (electricity, gas, water, transportation, telephone, or internet access)
- Interest on any other debt obligations that were incurred before the February 15, 2020
- Also, 75% of the proceeds can only be spent on payroll and benefits, a maximum of 25% is available for rent, utilities, and interest
How is the forgiveness amount calculated?
Forgiveness is equal to the sum of the following costs paid during your eight-week period between February 15, 2020, and June 30, 2020. The covered period starts when you receive program funds. Forgiven costs are “payroll costs plus any payment of interest on any covered mortgage obligation” (not principal “plus any payment on any covered rent obligation plus and (sic) any covered utility payment.” The forgiveness is subject “to the previous year or time period, proportionate to maintaining employees and wages (excluding compensation over $100,000).”
If your business is presently closed or reduced by government order
The forgiveness period runs for the eight weeks following the loan. If your business is closed by a government order, or is a restaurant with carry-out only service, you may want to apply quickly. However, you may want to wait to take the funds until you are ready to start back up in full steamed business mode. What doesn’t get spent in the first eight weeks is not forgiven and you are limited as to what you can spend these monies for. It is called a Paycheck Protection Program loan for a reason.
How is the unforgiven portion of the loan paid back?
This is a moving target. On Friday March 27, the deputy democratic staff director at the US Senate Committee on Small Business & Entrepreneurship said loan terms will not exceed 10 years with interest rates from 2.75% for nonprofits to 3.75% for small businesses (rates cannot exceed 4.0%). The recent Treasury guidance states that the interest rate will be 0.5%; interest is deferred for six months, and the loan is repaid over the following 18 months. This is all a moving target.
Generally, employers with fewer than 500 employees or the standard SBA headcount cap for your specific industry are eligible. Accommodation and food service businesses that employ not more than 500 employees per physical location at the time of disbursal shall be eligible to receive a covered loan. Employees include full-time, part-time, and 1099-ers. Individuals who operate under a sole proprietorship, as an independent contractor, and self-employed individuals are also generally eligible for PPP loans. Want to find the exact SBA employment size standard to qualify as a small business? First find your North American Industry Classification System code. Then visit the SBA and find your code in the SBA table.
I already sent staff home; am I no longer eligible?
The goal of this program is to maintain employment as close to pre-COVID levels as possible. Miraculously, you’re still welcome to apply and do not have to bring staff back until you receive the loan funds. You do not have to fulfill all previous employee positions immediately, but that could impact the amount eventually forgiven. If you held onto staff but cut wages, you do not have to restore wages until you receive the loan. There are a few other governing factors, but for brevity that’s the basics.
If you’re interested in one of these loans, please invest 20 minutes reading up on them. There’s also a US Chamber of Commerce summary, and you can ping me at [email protected] and I will do my best to assist in a timely fashion.