New government loan program for small business lends a hand, promises some forgiveness
This editorial opinion from the WBJ Editorial Board will appear in the March 30 print edition.
“I’m from the government, and I’m here to help.”
Former President Ronald Reagan made this saying famous by calling those the nine most terrifying words in the English language. His point: Who would ever get suckered into believing it?
If you’ve spent a lifetime thinking the government is the enemy, you might as well stop reading right here, but if you’re interested, there are incentives for small businesses to help subsidize their payrolls, healthcare costs, and support cash flow over the next 90 days of this coronavirus nightmare.
Governments in several other countries have with great speed put in large relief packages to prop up their workers and their sagging economies. Our leaders in Washington, D.C. are finally following suit, but in their typical dysfunction fashion. As of this moment, the $2-trillion dollar legislation is sitting on the table in the House after passing the U.S. Senate unanimously, and it appears inevitable President Donald Trump will sign the bill into law shortly. We can’t blame anyone who is skeptical, but please try to get past that to learn more about what’s in the bill for you and your employees. Maybe it makes sense for you.
The Keeping Workers Paid and Employment Act section helps businesses with 500 or fewer employees (which includes nonprofits, sole proprietorships, etc.) by providing $367 billion of funding to subsidize employers who maintain their payroll and avoid layoffs, as well as funding to help pay payroll costs through June 30. There are adjusted levels of qualified funding for companies who have had some layoffs or have fewer employees than a year ago. At this stage, the horses are out of the barn on the layoff front, so the package provides some accommodation for employers who run the numbers and see a win bringing at least some of those folks back on the payroll. Why would an employer bring back staff they just laid off to lower overhead if it’s only going to put them deeper in a financial hole? Likely, they would not. But if paying for a good chunk of those salaries is helpful, maybe it makes sense. These loans are 100% backed by the federal government, and an early reading indicates they do not require any personal guarantees. The details are still coming out as we write this, but it appears if you borrow funds under this program for the full qualifying period, a good chunk of it will be forgiven. There are currently differing interpretations of what qualifies for forgiveness, so we’re going to have to all dig into the details of the legislation before declaring how all the parts work, as this will require further study for every business to see if it is a fit for your circumstances. If your business is shut down and you can’t make any sales, keeping employees on the payroll, even at a reduced rate may not make sense.
So, what is the catch to these loans? The requirements are not onerous. There is a maximum loan amount of $10 million, and the government won’t loan for any portion of any individual salaries exceeding $100,000 a year. Ok, if you’ve got a bunch of high earners and sign up for this program, they are going to make less, or you’re payroll subsidy will be less, but it will still more than unemployment would pay. But most folks aren’t making that kind of money, so you’d be fully qualified for anyone under that $100,000 level as long as you maintain their regular salary, or close to it.
This legislation allows you to get the funds to cover payroll and healthcare expenses for 2.5 times your average monthly payroll of last year. So if you have been spending about $50,000 on those expenses each month, you can qualify for about $125,000 in a loan.
As long as you keep accurate records and don’t cut corners, the vast majority (based on our current reading of the Senate version of the bill) of those loan amounts spent during those next eight weeks as directed will be forgiven, a period that can run to June 30. The government picks up their part of the tab on this as long as you maintain a steady number of employees making their regular paycheck for this period. Is that enough of an incentive to have you not pull the trigger on further layoffs? Maybe, maybe not. But dig into the offering to understand what this potential funding means to your business and employees first.
This program will be administered through our local banks and credit unions, and potentially other lenders as well. What can you do today to get ready? A simple list includes a run of your last 12 months of payroll, and a view of what you paid staff during the same March 1 - June 30 period in 2019. You should call your banker or accountant and ask for their help in gaining a deeper understanding of this program and they can help you evaluate the incentives for your situation. They’ll just be getting up to speed too, but push hard to get clear answers.
The government is trying to avoid a catastrophic level of layoffs that may take years for our country to recover from. If you are a small business hurting for cash, make learning about this program, its risks and rewards, a top priority. It’s not a solution for everyone, but it may help a lot of us survive. Stay tuned, we'll be sending updates on this small business loan program as the details roll out.
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