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PPP Loans: Getting Through the Chaos of the Pandemic-Lending Program for Small Businesses

One thing is for sure with the Paycheck Protection Program (PPP): It’s been chaotic. The banks were overwhelmed with applications for the first round of $349 billion. A lack of clear information about the process and requirements led to mixed messages for the small businesses and startups that sought funding, along with long wait times and lots of frustration when the money dried up in just two weeks. And some large companies are finding out the hard way that they shouldn’t have applied for a PPP loan in the first place.

As companies apply for the second round of funding—an additional $310 billion was made available by Congress on April 24—for these SBA loans, some of the initial problems are getting ironed out, but questions persist. I’ve picked up on a lot of answers while helping clients determine their eligibility and loan amounts, comparing notes with my networking peers, and attending seminars on this topic (virtually of course).

In a recent virtual hours session for RoseRyan, I talked about how those companies that did manage to get over the application hurdle felt tremendous relief—one CEO I know said this financing will help save his business. It also comes with favorable terms as PPP loans are designed to help small businesses and nonprofits secure financing to help them survive the coronavirus-related mandated closures happening nationwide and prevent as many layoffs as possible. The terms include:

  • To the extent that 75% of the proceeds are used for payroll expenses and the balance is used for other eligible expenses during the eight-week period following the receipt of funds, the loan can be forgiven.
  • Unlike other SBA loans, PPP loans do not require a personal guarantee by the owner.
  • The interest rate is just 1 percent and the company has two years to repay any portion of the loan that is not forgiven.

Best Practices for PPP Loans

Since this program is so new, the ideal approach for applying for and meeting the terms of a PPP loan will evolve, but as of today, these are the best practices I’ve found to be true:

Have a plan for how you’ll use the funds.

Everything is moving so quickly that your instinct may have been to apply for the loan and hope for the best. But this has put companies in the awkward position of not knowing what to do next. Should you start hiring back employees without knowing whether you’ll have to let some of them go in two months if the pandemic persists? Or what if you make a wrong move and put the forgiveness in jeopardy? Going over the options with outside experts who understand companies like yours and your exact situation can help you make the right decisions up-front and over the course of the loan period.

Document, document, document.

Keep good records throughout the application and use of funds process, from calculating your full-time-equivalent employees; documenting how you came up with your numbers; and tracking how the funds are used and how the forgiveness requirements are calculated.

Proceed with care.

While companies need to make a number of certifications when they apply for a PPP loan, two in particular have caused confusion and hand-wringing:

  • Affiliation: Some VC-backed startups find they don’t qualify because of the SBA’s affiliation rules. As they come up with a count of their employees under the loan’s interpretations, they may need to include not only who works for the startup, but who works for their VC firm and its portfolio companies. If that’s more than 500 people, then they don’t qualify for a PPP loan—that’s the bottom line.
  • Economic uncertainty: You also need to certify that “current economic uncertainty makes this loan request necessary to support ongoing operations.” A RoseRyan client seeing business expand during this pandemic determined, with our help, that they did not meet this requirement and decided not to pursue the loan. For companies that do, document why. Reasons could include: you would have to lay off employees without this loan, you’re having trouble keeping up with costs because clients have slowed payment terms, or your sales pipeline withered. Do a cash forecast documenting your needs for the loan.

Apply and use as if you’ll be audited.

U.S. Treasury Secretary Steven Mnuchin has said PPP loans over $2 million will be subject to audits, but I think those who borrow less should be ready to face scrutiny, too. This is why all the documentation matters.

Open a new bank account.

Once you receive the loan, consider setting up a separate bank account. When it comes time to pay for eligible expenses, you can transfer the loan money to your operating banking account. This provides a clean separation for your new funding. Document these withdrawals and what they’re used for.

Pay careful attention to your expenses during the eight-week window.

While you’re probably being careful with costs right now anyway, create a budget of expected costs and then track accordingly. You want to make sure that you track and document all the eligible expenses to maximize loan forgiveness.

File for forgiveness quickly.

When the eight-week period ends, work directly with your lender to show them how you’ve met the forgiveness requirements. They have 60 days to notify you whether they agree, and will send you a letter of reprieve. Your accounting team should record the amount of forgiven debt under “other income” and not as operating income.

The PPP process has been incredibly quick and fluid, requiring companies to be patient as they await word about their application and further clarifications and guidance about the program. For instance, we know that the forgiveness amount will not be taxed by the IRS. However, despite the IRS’s stance that the expenses relating to the loan forgiveness will not be deductible, members of Congress have stated that this was not their intent and may pass legislation to counter the IRS’s position. It’s also not clear whether California will follow along with the federal law or whether the forgiveness will be taxed at the state level.

To keep on top of the details, lean on the expertise of those who have followed the details of the program since the beginning and fully know the unique needs of small businesses.

RoseRyan Chair and Founder Kathy Ryan guides the overall mission, strategy, direction and investment decisions of our finance and accounting consulting firm. She has been recognized as a thought leader and innovator, building upon her extensive CEO and CFO experience at her own firm and guiding a variety of Silicon Valley startups through various challenges and opportunities. As a consultant CFO, Kathy worked closely with companies applying for the first round of PPP funding before the program ran out of the initial $349 billion in 13 days.