On the May 7, 2020 SobelCo webinar, panelists Logan Fisher (Bressler Amery & Ross) and Jeff Berger (Golenbock, Eisenman, Assor, Bell and Peskoe) and Ken Bagner (SobelCo) were joined by SobelCo’s Brad Muniz who continues in his role as moderator for the firm’s weekly webinar series.

This week the lack of guidance from the Small Business Administration’s (SBA) has captured the business community’s attention, as most everyone is now focused on gaining further understanding regarding the ‘forgiveness’ portion and ‘need’ determination of its Payroll Protection Program (PPP).

The webinar opened with the reminder that the goal of PPP was to ensure employee retention. The government’s intent in creating this program was to award companies the cash they needed to keep their people employed.  Likewise, business owners who applied for PPP with this mind expected to demonstrate their good faith determination that they both (1)needed the loan and (2) would be committed to using 75% of the loan proceeds on payroll and other permissible costs as per the PPP guidelines. Businesses will be asked again by their lending bank to affirm that they filed their loan application based on necessity, and, in addition, those who received over $2 million will also be audited by the Internal Revenue Service (IRS).   

In order to support their application, business owners are being warned to preserve all documentation regarding PPP. This means recording all details concerning the decision making process. Meticulous care should be invested in capturing, in writing, notes of the current circumstances, including budgets and projections. These are needed to support the case that applying for the loan was the best option for the company, regardless of other liquid assets or sources of financing – and explain WHY. In addition, other documents will be requested, such as rental contracts, bank statements, all invoices, utility bills, receipts for mortgage interest, complete payroll records and more that together lend credibility to the application and ultimately the use of the loan.

Forgiveness is one of the most attractive components to the PPP loan process, but up until now there has been very little clarity around how that forgiveness will be calculated and awarded.  In spite of consulting with CPAs, attorneys or the professionals at the various payroll companies regarding calculations, much remains unclear.

As a result of the current unsettled environment, the panelists offered an alternative suggestion. They offered the idea that smart business owners should be making decisions based on short and long term growth and sustainability strategies, instead of formulating plans for hiring and re-hiring employees solely on the basis of applying for forgiveness under PPP. The advisors recommended that business owners make prudent decisions in these coming weeks, drawing on some of their available capital to re-invest in the business’ infrastructure, marketing campaigns, or other endeavors that will help the company grow once recovery begins. While businesses are waiting to see what the SBA offers in its next announcement, this is a good time to gain an edge on competitors by looking ahead to the next six months and beyond.  

The panelists discussed how essential it is for every business owner to be prepared.   With the help of the company’s professional service providers, the management team can create financial models based on critical assumptions. These could include an estimate of when the business may be able to re-open; how large is the reserve fund; how much cash will be required to sustain the business until it draws close to a return to normal; how fast is the burn rate? The answers to these and other core questions can produce the data necessary to plot out a potential plan for the future that is grounded in realistic metrics. 

As a reminder: For those business owners who also applied for, and received, additional loans – such as EIDL and Main Street – these cannot be used for the same purpose as the PPP proceeds. However, the money can be used to refinance other existing debt and possibly for other operating expenditures.