PPP, EIDL, ABC, XYZ.....?????
Do you ever feel like you are walking across the desert trying to figure out what the Paycheck Protection Program(PPP) and Economic Injury Disaster Loan (EIDL) mean, how the regulations change or effect your business and what to do to make those programs work for you. Trust me you are not alone FitPro friends, the regulations are a moving target that are updated frequently. Forgiveness, repayment, and other creative accounting will likely play a role in how your business continues to grow in the future.
There is no doubt that these programs saved American Small Business, including gyms and fitness studios. The PPP allowed many businesses to keep their employees working either during the shut down, if an essential business or with working from home, or now as businesses begin the process of reopening in the new normal. There is likely little doubt that your business should have applied for the PPP if you qualified. Hopefully you worked with your financial advisor and accountant to make smart, well documented choices with your funds. The real question becomes now how do you get forgiveness and when should you reply. My real answer is I don't know. And it's not for lack of trying. The regulations continue to change and move as the days go by. There is a variety of guidance and changes that comes out every few weeks that will significantly impact how and when you file for forgiveness and what will be forgiven.
There is some clarity about Owner Compensation Replacement where sole proprietors with no employees will have a portion of their PPP forgiven without. showing of payroll, the calculation of the same seems to be causing some concern for the banking industry, but the regulations are pretty clear about this. The timing has changed as well as there is now an option for 8 weeks or 24 weeks for use of funds. This will allow companies to stretch funds and use it when it makes sense and not feel like they are making business choices as a direct response to loan forgiveness that may not ultimately be beneficial. The unknown is what changes may be made to make forgiveness easier and take less effort from the business owner. The goal with the PPP is to secure forgiveness. Stay tuned as those regulations change and are updated as we move through the upcoming Congressional setting.
The EIDL is a different loan structure with its own set of intricacies. The EIDL is a loan that is not subject to forgiveness. The interest rate is at a historic low and the loan is attractive for that and many other reasons. It is also something that a business should have accessed if they were able to try to bridge the gap in these uncertain times. The use of this loan is much more broad and allows for capital improvements, overhead, production, etc. The EIDL is backed with a personal guarantee if the loan is above $200,000. TheSBA has released a prohibited use list which includes dividend payments, physical expansion and acquisition of fixed assets, and payment of other government backed loans. The term working capital can be broad and include many different uses. The timeline to utilize the funds is also limited to the time of the disaster or when the disaster impact no longer effects the applicant. In today's crisis, it appears the disaster could last long term and the funds can continue to be utilized. Repayment of this loan would begin after 1 year of receipt. It can be discharged in bankruptcy, but I would caution utilizing this as a means for repayment or to avoid repayment as the case may be, because it would cause you to lose your business, which is the opposite of what you should be hoping to accomplish with the loan in the first place. There is also some uncertainty in the effects of filing bankruptcy and what may flow from that filing in terms of taking and using a loan you were not paying back or unable to pay back.
All in all, the PPP and EIDL are good choices for business owners struggling and each have their own purposes. The real takeaway from both is that there should be careful use of the funds and there should be documentation to support such use when you are able, certainly for the PPP loan. Don't be too hard on yourself as the regulations continue to change and are unsettled. The crisis created not only a new normal for us but also unprecedented access to programs from the federal government that they may not know how to fully utilize given the current crisis and the speed with which they needed to turn these programs live to get cash in hands. Feel free to reach out to the office to discuss further and I will bring in my financial expert for added support as necessary. Stayed tuned for next week when we tackle the proper entity types and pivoting in this new normal when you have an EIDL and the impacts of those choices.