PPP Forgiveness – What Is a Business To Do?

We have seen firsthand how the cash infusion from the Paycheck Protection Program, or PPP, has kept companies afloat since the pandemic struck. However, as just about every business has experienced, the goalposts on the program have been constantly moving, and as we sit today, there are far more questions than answers, particularly around forgiveness. So, what should a business with a PPP loan be doing right now? 

A Little Context

  • Coverage Period - The PPP Flexibility Act was passed in May and increased the coverage period with which businesses could spend qualified PPP loan funds and still be eligible for forgiveness. So, for the vast majority of businesses, the period through which they will be evaluating forgiveness will be 24 weeks from when they received their PPP loan, and for early recipients, that timeline is fast approaching. And there is no requirement to wait the 24 weeks if all the funds are spent.
  • Bank Applications - A majority of banks are still holding off on accepting forgiveness applications pending further guidance. Some banks are accepting applications while others are notifying customers of simply what to prepare.
  • SBA Status – As of right now, the SBA forgiveness portal is open, but based on our understanding, applications are just sitting in the queue and none are currently being processed for forgiveness.
  • Additional Legislation – A broader COVID relief package continues to stall in Washington. However, there has been bipartisan support for additional changes to the PPP, including automatic forgiveness below a dollar threshold (thought to be $150,000), as well as further streamlining of forgiveness for businesses with loans under $2 million. Discussions continue and forms of this legislation could still pass separate from a larger bill.
  • There is no requirement to make payments on the loan until the SBA issues a decision on forgiveness of the loan.

Actions You Can Take
As we sit, there is still a good bit of uncertainty, however, there are steps to take until the dust settles.

  • Be Patient – The goal is as much forgiveness as possible. There are some cases where an answer on forgiveness is needed ASAP, for example in the case of a business sale. But for the vast majority of companies, there is very little downside to waiting. Best case scenario, the forgiveness process becomes easier to qualify for. Even if no change, waiting will prevent the intensive effort to compile every piece of information, complete applications, etc. when requirements could change. Few businesses find themselves with tons of spare time – resources are likely better spent elsewhere.
  • Your Lender – Talk to them. Understand where they are at in the process. Many inboxes are full of different educational resources. These can provide good info, but remember, as with initial loan applications, loan forgiveness is being administered through your bank. Their requirements are the ones that will ultimately matter. You may have been receiving updates from them already but reach out to your lender and find out their approach. It may allow you to start preparing some information to get out ahead of things. It is also an opportunity to ask questions about your specific situation. They may not have all the answers yet, so check in periodically. They are one of your best sources of information. Be cautious to take action based on what other businesses are doing – their lender, and situation could be far different.
  • Be prepared with basic forgiveness calculations and supporting information. The PPP guidelines do require that records be maintained even after forgiveness is granted. Most payroll companies have canned reports related to PPP that can be pulled. Have a copy of your lease agreement, mortgage statements and other documentation handy. This should not require a material amount of effort, and then once more guidance is obtained, fine tuning can occur.
  • When it does come time to submit, make the submission as easy as possible to understand. Spell things out clearly, provide the required documentation – the volume of applications for forgiveness will likely be high. Once you do understand exactly what is needed, make it as easy as possible to grant forgiveness.

Just like with the original PPP loans, it is in the best interest of the bank for their clients to achieve forgiveness. The process is still very fluid. Both banks and the SBA itself do not have the resources to manage through an extensive forgiveness process. As such, it would seem more changes to simplify the process are coming. What we do not know is what and when. While not easy, an educated waiting game is likely the smartest, least disruptive course of action.  

















Two Details Your Lender Is Asking About, and You Should Too

There are a lot of words to describe the current economic environment, uncertain is one of them. And while many companies may not be seeking new financing in the near term, there are a number of reasons a business owner and its lender will be having conversations soon if not already – 1) a renewal of an existing loan 2) terms were modified as a result of COVID-19 impact 3) quarterly or annual covenant or other performance requirements.

There are consistent themes emerging with lenders, so it is best to be prepared for the questions being asked, but it is just as critical in managing the business itself. While an overall assessment of the business is always key, there are two key lines of questioning where visibility is essential – monthly trending and liquidity.

Monthly Trends
The Lender
The value of timely, reliable monthly data is never more critical than in times of significant disruption. Lenders are diving in deep and scrutinizing monthly trends to understand what the impact of COVID-19 had on their customers. Results from one month to the next can provide key data that could lessen cause for concern from a lending perspective. They are not assuming just because numbers were great prior, that this will revert automatically. They are looking to see an upward trend after the economy has begun to re-open, and that the short-term trends can be explained by what is going on in the business.

Isolating the noise is essential as well. Lenders are partnering with their customers in a very active way, but they are still very mindful of risk. You may be in an industry with a gloomy near-term outlook, yet your business could be an outlier in a positive way. Disruption could create an opportunity to gain market share or purchase failing competitors for pennies. Being able to present a picture to the lender that demonstrates this strength could not only make the lender feel more comfortable, it could even result in additional financing if needed, being easier to obtain.

Lenders are asking questions around this to manage their risk and assess how much debt the company can support.

The Business Owner
For business owners, this detailed look at trends is crucial to make decisions. So first and foremost, every reasonable effort needs to be made to ensure that timely, accurate monthly data is available.

Do the trends make sense? Did payroll come back and not revenue as expected or was there any expected lag and revenue came back a month later. Are margins doing what they should be? The worst thing that can happen is to not have explanations for movement in numbers. With the world changing so quickly, having information to make quick, informed decisions is paramount. And this means your financials need to be accurate enough to form reasonable conclusions.

What is your business telling you versus the headlines? While lenders want to peer through the noise from a risk perspective, you want the same clarity to identify signs of an opportunity or challenges. Do the trends show that customers are buying where it may make sense to add more payroll? Or are results not yet there sustainably and cash needs to be conserved for another month or two. And just because the industry overall or even competitors are moving one way, your business may be telling you something different through its performance.

The Lender
The other key area lenders are seeking clarity on is liquidity. What is the company’s cash position now and in the future? For a lender, this is simple – can my borrower repay the loan they have? And one step further – can they do so today, tomorrow and 6 to 12 months from now. Of course the further out a projection goes, by nature, it will be less accurate. However, lenders are absolutely expecting some sort of cash flow forecast out 90 to 180 days and even a full year. Even a solid attempt at this will go a long way in providing confidence to your lender that you are monitoring cash and being proactive.

You are likely to be asked about some of the details behind expected cash flow as well. Are customers paying on time? How much of your payables are deferred save cash in the near term? How does cash change as the market improves?

The Business Owner
Cash is the lifeblood of your business. What does your runway look like? How do you know? What impact does it have for you if a key customer pays late? Do you have enough cash to add staff in 60 days? PPP money is likely spent, what is happening to your cash balances in the future as a result? How much cushion do you have? Businesses that cannot answer these questions are at risk of running out of cash without even knowing it.

Understand your options. Having a cash flow forecast on paper allows a management team to evaluate what happens if a key assumption does move around. If a key customer pays late and creates a $100,000 cash shortfall, what options could you move around to make that up? And remember, cash flow is about timing, so it could be accelerating other receivables, deferring payments to vendors, or waiting to hire until that customer pays its invoice. It is much easier to avoid a car accident when you can see out your car window up ahead and react. Looking forward into your cash flow is no different. And evaluating possible scenarios on paper adds confidence to decision making, even during chaotic times.

The bottom line is that businesses will be asked by a lender to provide this information at some point. By being proactive, you will be prepared, but more importantly, a deep look in these two areas on a regular basis could guide essential decisions that could avoid potential pitfalls, increase profits, and protect the business long term.

The Most Important Three Feet Businesses Face

One of my favorite quotes is from Royal Robbins, a pioneer of American rock climbing, who said, “When it’s been a long day of climbing, and I feel like I can’t go any farther, I concentrate on the next three feet. And then the next three feet; and then the next three feet. Pretty soon, I’m at the top.”

Conditions in the marketplace are extremely challenging.  For many companies and their leadership teams, it feels like they are out on a ledge, on a mountain too tall to climb, with visibility so bad, one has no idea which route to take. 

Things are changing so rapidly in the business landscape, yet it  seems every day brings more questions than answers.  Right now, we are all asking, “What will re-opening look like?  What will customers do?  How and when do we re-hire?  When will the economy rebound?”  We just do not know the answers yet.                

In the face of that uncertainty, management teams can move their businesses forward by focusing on a  few key things:

1. Focus on what you can control.

This is first and foremost.  There are a lot of things out of our control, but we can control movement, momentum, and action forward just like Royal Robbins.  What do the next three feet look like for your organization?

2. Create and monitor a “picture” of your customer.

They have almost certainly changed.  Assess their current state and carefully watch for changes over time.  How healthy are they?  Can they buy?  Will they buy – just because you have a great deal to offer perhaps, will the customer take it at any price?  How do you best reach them with what you have to offer?

3. Map out the desired journey, with detours.

There is no better time to have a clear plan, even though obstacles seem to constantly appear.  No different than scaling that mountain when bad weather arises, you might have to take another route up, you might have to take an intentional pause, or possibly even go back down a bit.  The key is planning ahead of time on the available options – have contingency plans throughout.  It is highly unlikely the route will go exactly according to Plan A, but thinking ahead of time of possible options will make it much easier to nimbly shift when the storm comes, and also much easier for the team to follow.

4. Have a cash flow plan.

An essential piece of that plan is cash flow.  It needs to be on paper and go out at least the next 2 to 3 months.  The goal is not to get it perfect; it is more of a compass to help with direction in making decisions.  It will change frequently, and it needs to be reviewed as much as multiple times per week.  When is cash likely to come in? (Be very conservative).  Lay out the key buckets of expenses in the business.  And make sure there is an understanding of any deferred expenses such as rent, loan payments, etc., that may have accumulated during the last few months.  A great best practice is to compare forecast to actual – this can really help fine tune the process.

5. Seek guidance from key strategic partners.

Having the right banker, CPA, lawyer and other strategic resources has arguably never been so important.  They can provide you with key insight and resources, can help you strengthen your planning, and provide context on the broader market.  You should not be alone in these uncertain times, and these partners are there to help you navigate.  If they are not of help right now, find ones that will be.  You will need them to reach the summit.

The journey is not going to be easy, but the opportunities will be abundant as the market rebounds.  Even in this time of uncertainty, companies can take proactive steps to not only survive, but to thrive as well, even if just three feet at a time.

Practical Tips for Managing the PPP

The Payroll Protection Program (PPP) has provided a lifeline to assist businesses through the economic confines caused by the COVID-19 pandemic.  For many small businesses, confusion has been constant with respect to loan status, forgiveness and how to manage the loans once they are funded.  There is a good bit of blanket guidance that has been put out by the SBA, accounting firms and law firms, but final details surrounding the program are still a moving target.  Thus, the average business owner may well find themselves wondering what to do to manage the PPP funds for their individual business. 

First, some quick background

  • The program was rolled out quickly – speed to market meant a sacrifice of perfection in rollout – lenders were not equipped to handle the rush of applications.
  • The process has been managed bank by bank – it operates a little differently across the spectrum.  We have seen many sets of information requests, calculation forms, submittal processes and loan documents.  We expect forgiveness to operate the same way.
  • Rules and guidelines have changed depending on when submissions were made – in other words, the very first to submit applications may have been operating under slightly different guidelines.

The takeaway from this is that what has happened to a neighbor’s company may be very different from what happens to yours.

What to do?

  • Talk to your banker – They will be the best source of information on how each individual bank is handling forgiveness of the loans.
  • Don’t assume anything – Forgiveness guidelines are fluid, some bank docs don’t even reference forgiveness in their loan docs, some are more specific.  While there are general guidelines such as the 75% payroll, 25% other uses limit, there is gray area on how certain expenses will be defined for forgiveness.
  • Keep good records – We certainly recommend setting up a separate bank account for PPP funds for ease.  Regardless, track the uses of the money.  Just like the rush to apply for funds, there will be a rush of forgiveness requests.  You will be well served to make it easy on your bank to understand what happened.  Be prepared with payroll reports, check copies, etc.
  • Be conservative initially – Don’t spend all the money early.  If the money is gone and then you find out a portion is not forgivable, that could be a problem.  Better to be cautious initially until guidelines are clearer.
  • Avoid non-conforming uses – There are companies that will use this money for other purposes, even if temporary.  That is a big risk.  Even if everything can be trued up within the 8 weeks, it could cause forgiveness issues or worse as many of these loans will be audited.  Fines are able to be levied as well.   
  • Don’t place forgiveness above a business decision – The goal of the program is to help restart businesses and keep workers employed, however, there is still a business decision element here.  Especially given the uncertainties around what “re-opening” will look like, be thoughtful about how to spend the money.  Paying a portion of the workforce to sit idle for weeks may not make sense.   Thus, having a portion of the loan not be forgivable may make broader business sense.

The bottom line is to be intentional with decisions.  Plan as though there will not be another lifeline on the horizon.  Used properly, these PPP loans can be a great bridge to help companies navigate toward a rebound in the economy.  Just beware the missteps that could make a tough situation even worse. 

Contact Us

480.247.0955 or growboldly@fintrepidsolutions.com
17015 N. Scottsdale Road, Suite 235
Scottsdale, AZ 85255