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SMALL BUSINESSES FACING BEST CASE, WORST CASE SCENARIOS

Published on July 29, 2020


This week a Republican coronavirus stimulus package called the HEALS ACT introduced a “Continuing Small Business Recovery and Paycheck Protection Program” to provide “Second Draw Loans” for businesses meeting certain criteria setting up best-case, worst-case scenarios for cash strapped small businesses.

The proposed legislation would give small, struggling businesses the option to take out an additional Paycheck Protection Program (PPP) loan, from the $190 billion Congress would provide.

The (PPP) extension period is set to expire August 8. Sen. Rubio said passing the bill through the Democrat-controlled House is “not going to be easy” and it might take up to three weeks.

Eligibility for a 2nd loan is restricted to those businesses with fewer than 300 employees and revenue declines of 50% or more.

·       Second Draw Loan: The business must demonstrate revenues decreased by 50% or more due to the crisis (in the 1st or 2nd quarters of 2020, versus the 1st or 2nd quarters of 2019).

·      Loan Amount: Borrowers for the second (PPP) loan would receive 2.5 times their average monthly payroll costs for the previous year up to $2 million. However, the sum of the two loans can not be more than $10 million.

·       Loan Allocation: A second loan needs to be used 60/40 on payroll and non-payroll expenses, and costs covered by the loan would now also include personal protective equipment (PPE), property damage costs, software, HR, accounting needs, and expenses for cloud computing incurred before January 1, 2021.

·       Covered Period for Forgiveness: The Senate proposal extends the covered period to allow the borrower to elect a covered period between 8 weeks after origination or one ending December 31, 2020.

·       Simplified Application: For loans under $150,000. Borrowers are not required to submit to the lender documentation required by section 1106(e) of the CARES Act, but must attest to a good faith effort to comply with the (PPP) loan requirements, retain relevant records for three years, and may complete and submit demographic information.

o  For loans between $150,000 and $2 million. Borrowers are not required to submit to the lender documentation required by section 1106(e) of the CARES Act, but must complete the certification required by that section, retain relevant records and worksheets for three years, and may complete and submit demographic information.

·       Loan Forgiveness: Businesses borrowing a 2nd (PPP) loan would be eligible for loan forgiveness equal to the sum of their payroll costs, mortgage, rent, utility payments, operations expenditures, property damage costs (due to rioters, protesters), supplier costs, and worker protection expenses incurred through 2020. The 60/40 split between payroll and non-payroll for forgiveness still applies.

·       Automated Loan Forgiveness: For loans under $150,000.

·       Taxability of PPP Forgiveness: Proceeds are tax-free, but expenses are currently not deductible. There is current bipartisan support for allowing expenses to be deducted.

According to a May 2020 report by the Small Business Association’s Office of Advocacy, employers who had 20 to 49 employees suffered the largest percentage of job losses, with employment declining 21.5%. By comparison, businesses with 1,000 or more employees saw a decline of 13.3%.

The importance of additional stimulus for COVID-19 impacted small businesses cannot be understated, as the proposed legislation also earmarks $25 billion for small businesses with fewer than 10 employees to ensure adequate liquidity to this most impacted group.

Now, more than ever, is the time to review the balance sheet, income statement, and cash flow forecast for a best-case scenario and a worst-case scenario.

Expanding the team of advisors to include a fractional, interim, or project-based CFO will create alpha, added value and return on investment, resulting in both stabilizing the current financial health of the company and fortifying long term growth strategies and projections.

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