Pushing past PPP: Looming impacts for small businesses
It has become increasingly important for small businesses to reassess what they can do to preserve operations.
As the economy inches towards a rebound from the pandemic, small businesses are still struggling to stay afloat. Over the past few weeks, more than 8,700 small businesses from across the nation wrote into congress, all with a unified and urgent concern, stating they are quickly running out of the resources and time needed to keep their businesses alive.
Frequently referred to as the heartbeat of the American economy, small businesses are still experiencing the devastating effects of COVID-19. Two out of three small businesses have exhausted their resources, revealing they only had enough cash for just three months of expenses. While many owners believe it will take more than six months to fully recover, others are on the brink of closing their doors for good.
The Paycheck Protection Program (PPP), created on March 27, 2020, and backed by the Small Business Administration (SBA), is a forgivable Federal loan program created through The CARES Act that ran through August 8, 2020. The loan was established to assist small businesses nationwide who were adversely impacted. The PPP loan goal was to provide resources needed to maintain payroll, bring back furloughed or laid off employees and cover eligible business expenses.
Related: Do small businesses need another round of PPP loans?
The Paycheck Protection Program Flexibility Act (PPPFA) was signed into law on June 05, 2020, providing much-needed reform of the PPP such as changes to the 75/25 rule. Previously at least 75% had to be used on payroll cost and no more than 25% on business continuity expenses. Since its inception, PPPFA switched to a 60/40 rule to give more wiggle room for business continuity.
As we head into a new quarter and look even further ahead into the start of 2021, it has become increasingly important for small businesses to reassess what they can do to preserve their business operations, now and for the year ahead, even with uncertainty in the atmosphere. Here are a few critical aspects for small business leaders to consider:
Advocate for your business
Contact your local government official and congressional representatives urging them to pass a bill that allows small business owners to deduct business expenses paid with PPP funds to help with the financial strain the pandemic has created. The PPP loan intends to help get businesses through this, not provide an added layer of tax penalties that put small business owners at a deficit during this difficult time. Find resources with industry-specific associations or groups who can advocate on your behalf.
Cash reserves are crucial to your business continuity
Much of the business world initially presumed the pandemic would be “short-lived ” operating under the premise that having 2.5 times their 2019 monthly average payroll costs would be enough. Unfortunately, it was not enough. COVID-19 was proof every business needs a “ rainy day fund” that goes beyond the typical 2-3 month emergency fund. What leaders have learned is that extreme safeguards must be in place to mitigate risks. Currently, many businesses have exhausted their PPP loans, with 30% of owners saying without additional government funds, they will drain all of their cash reserves by year-end.
When it comes to PPP loan forgiveness or taking on additional loans, the adage holds clear, “don’t bite off more than you can chew,” and well, if you do, chew slowly. As your business continues to grow and evolve, so should your savings and calculations around expenses. Forgetting to update this information on a quarterly and yearly basis can, unfortunately, expose you to risks you didn’t intend to take.
Understand the rules of engagement
The Paycheck Protection Program provided loans to businesses to cover eight or twenty-four weeks of payroll and expenses. The loans are forgivable if borrowers devote at least 60% of the proceeds to payroll costs and no more than 40% to business continuity expenses. Even if a business falls short of full PPP fund utilization, partial forgiveness may be an option as long as the funds used met the 60/40 rule.
There are two questions business owners must ask themselves:
- Do I qualify for loan forgiveness?
- Do I have all of the documentation to apply for loan forgiveness?
Business owners who chose the forgivable loan option via the Paycheck Protection Program still struggle to understand whether certain business expenses covered with the funds used are deductible, even if they haven’t yet applied for forgiveness. Unfortunately, the choice may come down to deciding whether to deduct expenses or pay more in taxes. With critical tax deadlines approaching, it’s imperative owners stop and assess where they are and what decisions will be best for their business as they head into Q4. Reevaluating will determine if companies sink or swim.
Servicing your debt load
PPP loans were used as a safety net for many businesses across the nation. Companies are struggling now that they’ve exhausted their funds. With whispers of a second-round of stimulus support currently in play, taking on new debt without understanding how the new loan works and what the repayment parameters are, is something many businesses will want to cautiously pursue.
Looking ahead
Despite reopenings, many employees will continue working remotely. Take for instance Google’s extended work from home policy. Now extended until summer 2021, this major move from one of the world’s largest companies initiated a trickle-down effect to businesses large and small. This move also signals two very important things: 1) embracing remote work gives companies access to a larger talent pool, and 2) permanent work from home solutions and hybrid work models that were once a “work perk” are being heavily considered for the future.
Many businesses are between a rock and a hard place with deciding on taking on more debt, closing their doors temporarily or for good. While some companies are considering additional resources such as utilizing a PEO ( businesses utilizing this service are 60% less likely to have permanently closed) other companies have to do what makes the most sense, and the decision is not easy.
Taking an in-depth assessment into the resources available from your local, state, and federal governments, assessing future costs, and determining your business’s current state will help you decide the next steps for the next quarter and the new year – even if we’re still in the thick of COVID-19 well beyond we ever imagined.
John McFarland is senior vice president of client development, VensureHR.
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