PPP Loan Risk Management
So you got your loan. Read this and stay out of jail.
Former tax day. PPP loan approvals are at $349B.
You have your SBA approval number in hand. You’re waiting for the funds to hit your account.
The funds hit. Now what?
I’m sure you’ve read the 800+ page, $2.3 trillion CARES Act—which includes the Paycheck Protection Program (PPP). Right?
You’ve received the reward. Super sweet loan proceeds in the midst of a 100-year virus crisis.
You now need to focus on maximizing your PPP loan into PPP loan forgiveness under the law.
In seeking PPP loan forgiveness, you need to realize that there is a very real risk, a threat of criminal penalties for misrepresentation and false certifications under the Small Business Act.
Risk management through this means that you must implement compliance measures. NOW. Actually, before funds are received or disbursed.
First, note that the loan proceeds must be used within eight weeks of receiving the loan.
In addition, you should establish good practices and procedures to streamline your application process for PPP loan forgiveness.
To do this, keep in mind that there are PPP landmine provisions that can reduce the amount of loan forgiveness:
- If you spend less than 75% of the loan on payroll costs.
- If your FTE employees are less than the base period upon which the loan was based.
- If you reduced employee salary or wages to less than 75% of the base salary or wages of such employee during the prior quarter.
Here’s a checklist to consider practicing to manage your risk of time in a federal jail:
BEFORE RECEIVING THE FUNDS
- Talk to your lender about timing the loan to help maximize your ability to spend funds on payroll. PPP rules require lenders to fund the loan within 10 days after approval by the SBA.
- Consider rehiring employees you laid off to maximize loan forgiveness. Crunch the numbers on this. It may not be the best financial decision for your business. But, even if employees are not working you can use funds to pay them in order to maximize loan forgiveness.
- Keep in mind that FTEs for the applicable test period is February 15, 2019 through June 30, 2019 or (unless you are a seasonal employer) January 1, 2020 through February 29, 2020.
- Calculate the total base salary or wages of each employee for the last full quarter before the date you receive the loan.
after receiving the FUNDS
- Keep the PPP loan proceeds in a separate bank account to avoid co-mingling with other funds. This is the easiest way to be able to prove how you used the funds.
- The eight-week period beginning on the date of origination of the loan is the “covered period” under PPP for purposes of getting the loan forgiven.
- If you want the entire loan amount forgiven you must spend the entire during this “covered period” under the PPP.
- However, don’t worry. If you can’t spend it all during these 8 weeks, it’s not that bad. You have up to 24 months to repay the loan at 1% interest with a six-month payment deferral. Pretty sweet deal.
- Send a note of thanks to Secretary Mnuchin, President Trump, the House and Senate! (Oh, and tell Trump to lay off Fauci!!)
PAYROLL AND EXPENSES AFTER THE LOAN CLOSES
- DON’T allow your payroll provider to auto debit from the account they have on file.
- DO GIVE your payroll provider the new account information so they can auto debit the payroll expenses from the account.
- MAKE SURE your payroll provider has complete instructions and follows them.
- MAKE SURE you spend at least 75% of the loan proceeds on “payroll costs” as the PPP requires. IF YOU DON’T, it will affect your loan forgiveness (note: PPP loan proceeds can only be used up to the pro-rata equivalent of $100,000 annually in compensation. Any compensation beyond this amount is not eligible for PPP funds and is not forgivable.)
- Use funds ONLY for eligible payroll costs and other authorized expenses under CARES, such as rent, mortgage interest or utilities (max of 25% of loan). Keep cost invoices matched up with records of such payments from the PPP account in a separate PPP file.
- DO NOT not use any PPP funds for paying paid leave benefits under the Families First Coronavirus Response Act.
- DO keep track of the FTE average that you will need to meet to maximize forgiveness. (FTEs are compared to the test period described above).
- DO constantly track your FTE monthly average during the eight week “covered period” – you will need to meet your average for the applicable test period described above to maximize your loan forgiveness.
- REVIEW all employee compensation to make sure you do not reduce any pay beyond 25% of the base amount described above; doing so reduces eligibility for loan forgiveness.
- This is cool: PPP funds can be used towards severance payments, so think about how you might be able to help one or more of your employees who are in a life crisis or other stressful transition (don’t forget though: it can affect your FTE count, so run the numbers).
SPENDING THE FED’S CHEDDAR
- KEEP good records how funds were spent, as they are being spent.
- MONITOR spending of the funds.
- COMPLETE your application for forgiveness.
- SUBMIT it to your lender.
- You’re safe. No jail time. (Unless you lie, of course.)
- IF the full loan amount is not forgiven, then do your cash flow analysis and decide whether to pay off the balance now or over 24months. (It boils down to cash flow, projections, other debt you might have, etc. Suggestion: pay off smaller debts first with max payments, with minimum payments on all other debts. Then use those payments to snowball the other debts until you are debt free. If you squeeze the pennies and eat bean and rice, you can probably be debt free in 24 months!)
MORE GOOD IDEAS AND FINAL THINGS TO KEEP IN MIND
- Check in with your lender on a regular basis. Confirm the type and form of the loan forgiveness application. Get additional guidance on what your lender will require for documentation.
- Monitor or have someone monitor the SBA’s website for updates on loan forgiveness. See if there are any new changes to interim rules on how forgiveness will be calculated.
- CARES and its PPP is an amoeba. It’s changing, often with actual or apparent contradictions between the CARES Act and the SBA’s or Treasury Department’s implementations of it. interpretations of it.
If you have any questions or would like to discuss your situation further, visit me at https://www.davidsimsjdphd.com/ or email me at firstname.lastname@example.org.
Remember, we Help.
David Sims, JD PhD AIF®