Knowledge and Insights

Paycheck Protection Program (PPP) Loan Forgiveness Implementation Guide

The PPP Loan Program Evolution

Owners of numerous small businesses, including those who are self-employed, applied for potentially forgivable loans under the Paycheck Protection Program (PPP) created as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act. This program was designed to incentivize employers to maintain payroll and employee headcount throughout the COVID-19 crisis.  Specifically, the three goals are to keep workforce off of unemployment or reduce unemployment by June 30, supporting the economy, and retain or reclaim workforce to be “at the ready” for returning to operations.

If you had the good fortune of getting approved for funding at this point, brace yourself for what might be the most important eight weeks of record keeping your business has yet to endure; that’s assuming you want your PPP funding (or a qualifying portion thereof) to convert from a loan to a forgivable grant. The time expended to appropriately plan out your cash flow and develop an audit trail over these next eight weeks could very well be the most valuable hours spent on your business in 2020.  To maximize your opportunity for loan forgiveness under the PPP, it’s critical that you track some very specific metrics and expenses.  You must also maintain documentation to support these metrics and expenses in order to successfully apply for loan forgiveness with your PPP Lender and the Small Business Administration (SBA) at the end of the 8-week period.

Being proactive provides you with the best opportunity to know what you’ll owe at the end of the eight-week period, and hopefully that amount will be $0. Remaining amounts left unforgiven will have to be repaid in two years at an interest rate of 1%. You may prepay the loan at any time prior to the two years without prepayment penalty.  Your first loan payment will not be due until 6 months from the disbursement date of the loan.

While official guidance from the SBA with respect to how to spend PPP funds and how to calculate the workforce and payroll information needed to maximize your loan forgiveness has been dribbling out over the last 4 weeks, some important information and clarification is still lacking at this time.  In the meantime, Mercadien recognizes that guidance is needed NOW to assist small businesses with getting their houses in order to maximize loan forgiveness.  The following sections of this implementation guide discuss the questions business owners must address to be able to do so.  We dive into all four questions while keeping cash flow management at the forefront as a business best practice.  As of the date of this publication, information is still needed to clarify how we apply certain concepts embedded in the forgiveness calculations.  Mercadien will update the guide as the information is released and clarified.

Cash Flow Management & Why It’s Important

You are likely to find yourself overwhelmed and anxious when thinking about how to move your business forward during these turbulent economic times.  Your first line of defense is to put yourself in a position of strength.  What does this mean?  Take all of the information that you have in hand and use it to your advantage.  Depending on the geographic location of your business, you may need to consider things differently than your friends and colleagues.  Taking advice from others may be helpful, but always evaluate the source.  Does the other person understand your business? Do they have a similar workforce?  Do they have the same compliance requirements?  We mention this here because we have spent so much of the last few weeks clarifying the information that our small business clients have “heard” from their friends.  Let’s start fresh here and examine the basics.

Your Budget – hopefully you have created an annual budget for your business to help you identify your fixed and variable expenses of operating the business, and to project the revenue that will be available to cover those expenses, compensate you for your services, and provide a fair return on your investment.  If you haven’t done a budget, don’t worry- you can still do what’s necessary to manage your way through this. If you have done a budget, get that spreadsheet out and use it as an outline for calculating cash flow over the next 12-18 weeks.  If not, open a new spreadsheet and let’s get started.

List your revenue and expenses that you will collect and have to pay over the next 12 weeks.  Start with your fixed expenses like rent, utilities, mortgage and loan payments.  Note when they are actually due so you can start to see what you need if the business was running normally.  Then layer in the payroll expenses, supplies, marketing and other variable expenses.  Next, calculate the revenue you expect to “collect” each week for the next 12 weeks.  So, for example if you have a fee for service business, where you charge for each sale and your sales are now down due to the quarantine, project out your sales assuming that the state you are in starts operating on June 1 (or some other date).  If you bill for your services at the end of each month and you collect those bills in a 30- or 45-day collection cycle, build the collections based on your cycle.  Factor in that the public may be slow to come out to seek your goods and services so build in a ramp up period.  Also factor in slower collection cycles if that is a possibility for you.

Read the full guide here –

Disclaimer: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought. It is possible that if additional information from the SBA, Treasury Department and/or your lender is forthcoming, our observations and comments noted herein could be materially different. This guide was published on May 8, 2020, therefore its contents may be subject to change.