UPDATE April 7, 2020: The U.S. Department of the Treasury maintains a website with the latest Paycheck Protection Program (PPP) Loan Application, guidance, and Frequently Asked Questions (FAQs).
The CARES Act Stimulus bill was approved by the Senate and House today and is expected to be quickly signed by President Trump. Many of my clients are small businesses (<500 employees) that should consider using this stimulus to help weather these uncertain times. Here’s my first impression of how one portion of the bill – the Paycheck Protection Program (PPP) – could help a small business.
NOTE: I am not an accountant or an attorney, and I have not reviewed the final version of the bill. Below are my first impressions of the program.
How Much Can I Borrow?
The primary purpose of the Paycheck Protection Program of the stimulus bill is to provide small businesses a loan to fund payroll, rent, mortgage, and utility expenses. Below is a Profit & Loss Statement in the Simple Numbers format of a fictitious services company (an industry I know well.)
Here’s the step-by-step calculation to calculate your loan amount:
- Start by calculating your payroll costs (wages, commission, paid leave, benefits, and state or local taxes) for the past 12-months.
- For the loan calculation, the cap for any compensation is $100,000 annually. Remove payroll costs that exceed $100,000.
- Divide the remaining payroll costs by 12 to determine your average monthly payroll costs.
- Now multiply that amount times 2.5.
- The result is the amount eligible for a Payroll Protection Program loan.
- The maximum amount of the loan is $10M.
The Benefit of the Loan
The key benefit of the program is the loan will be forgiven if you use the money for payroll costs (except employees paid $100,000 annually), interest on secured debt obligations, rent, or utilities, for the eight weeks following the origination of the loan. The amount of forgiveness for the loan will be reduced if you reduce your workforce during the eight-week period or reduce wages or salaries more than 25% during the eight-week period. An important note is that it appears the funds can be used to hire and pay new team members.
As you can see in my example, the services company earned $200,000 in Net Income on $2,000,000 in revenue during the past 12 months. The amount of the loan eligible for forgiveness is $232,750. An amount significantly higher than the net income of the company during normal times.
If the loan is not fully forgiven due to changes in staffing or wages during the eight-week period, the balance is carried forward as an ongoing loan with a maximum term of 10 years with a maximum of 4% interest. Principal and interest will continue to be deferred, for a total of 6 months to a year after disbursement of the loan.
How Do I Apply for a Paycheck Protection Program Loan
The Paycheck Protection Program will be administered through the SBA Loan program. The majority of banks are SBA-certified lenders. Contact your bank representative to get the process started. The deadline to apply is June 30, 2020.
There is no requirement that the loans be personally guaranteed by the borrower.
If You’re Interested, Get in Line Now
Based on 3.3 million Americans filing for unemployment last week, I expect a lot of businesses will apply for this stimulus. While the bill includes almost $400 billion for small businesses, it has been estimated that if every eligible business applied, it would only cover 50% of those businesses. Assume that the money will run out and apply soon if you’re interested. Call your banker today and get your financials ready to apply.
Here is the SBA checklist for documentation needed for a loan: https://www.sba.gov/sites/default/files/oed_files/7a_Checklist.pdf
The best articles and resources I’ve found so far to help understand this bill are the following:
- And. for general financial Crisis Management, see Greg Crabtree’s Simple Numbers site.
And don’t hesitate to contact me if you have questions about strategic or leadership decisions during this time of uncertainty, firstname.lastname@example.org or 210-845-2782.