 Steps to Follow in Filling in PPP Loan Forgiveness Form PPP Loan Forgiveness |
| The following expenses incurred or paid by the borrower during the 24 weeks following loan origination are eligible for forgiveness: Payroll Expenses:
Non-Payroll Expenses:
Note: For an independent contractor or sole proprietor, you must have claimed or be entitled to claim a deduction for these expenses on your 2019 Form 1040 Schedule C in order to claim them as expenses eligible for PPP loan forgiveness in 2020. |
- The time period to use funds is extended to 24 weeks from 8 weeks.
- The deadline to rehire workers is pushed back to December 31, 2020 (instead of June 30, 2020). The loan amount and salaries are still calculated using the original method.
- Additional exceptions have been added to the rehire requirements. If an employer can’t hire all employees back, the business can still receive forgiveness if it:
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- The repayment term is extended to 5 years for new loans approved on or after June 5, 2020. In the event loans or portions of them are not forgiven, a business will now have five years at 1% interest to repay the loan. Further, the first payment will be deferred for six months after the SBA makes a determination on forgiveness.
- If you received a loan before June 5, contact your lender to see if you are able to extend your repayment term.
Filling Out the PPP
Loan Forgiveness Form
The following steps correspond to the PPP Loan Forgiveness Form.
Step 1: Determine total payroll costs in the 8 or 24 week covered period
Note: Ask your accountant, tax preparer or loan advisor about the wage limit of $15,385.00 for each employee
Add the total cash wages paid to all employees(limited to $15,385.00) and then add in:
a. Employer pension contribution
b. Employer health insurance premiums paid
c. Employer paid state and local taxes assessed on compensation
Step 2: Take the total from Step 1 and divide by .60
This determines the maximum amount of the PPP loan that will be forgiven.
Compare the amount of hte PPP loan received with the maximum amount that will be forgiven.
If the maximum amount under the 60% test is equal to or greater than the PPP loan, there is no reduction.
If the maximum amount under hte 60% test is less than the PPP loan, the difference will not be forgiven and will have to be repaid.
Step 3: determine eligible non-payroll costs
Add the total rent, interest, and utilities paid in the 8 or 24 week covered period
take the maximum a mount of hte PPP loan that can be forgiven, From Step 2, and multiply that by .40.
Compare the total of rent, interest, and utilities that were paid in the 8 or 24 week period to determine if the total is at least 40% of hte maximum PPP loan amount that is eligible for forgiveness.
If the total rent, interest, and utilities exceeds 40%, limit the amount that will be transferred to the form to 40%. This is the Step 3 total.
If the total rent, interest and utilities is less than 40% of hte maximum PPP loan amount that is eligible for forgiveness, enter the total on the form. This will increase the amount of hte PPP loan that will have to be repaid. This is the Step 3 total
Step: 4 Add the amounts determines in Step 2 and Step 3.
This is the total amount for Step 4:
Step 2 max amount of PPP loan eligible for forgiveness
Plus
Step 3 Non-payroll costs maxed at 40%
Equals
Steps 4 Total
Step 5: Determine if there was a salary reduction
a. For each employee, determine if their salary or wages were reduced by more than 40% during the covered period as compared to the salary or wages that were received during hte period of January 1, 2020 to March 31, 2020.
b. Do not include any employee whose wages were reduced due to a reduction in full-time employment. If an employee previously worked as a full-time employee and their hours were reduced by half, the reduction of salary or wages by more than 25% does not apply. (This reduction is taken into account in Step 6.)
c. For each employee, take 75% of their regular wages in the period of January 1, 2020 to March 31, 2020, before the reduction in wages, and then subtract the wages paid in the covered period. This is the amount of reduction in wages for that employee.
d. Convert the amount of reduction in wages calculated in c. above to the 8 or 24 week covered period. For example, if the employee is paid monthly, multiply the monthly reduction by 12 to get the annual amount, divide by 52 to get the weekly amount and then multiply by 8 or 24. If the employee is paid weekly, simply multiply the weekly reduction by 8 or 24.
e. But there is a savings clause. There is no reduction in wages if the employee's average salary or wage amount paid between February 15, 2020 and April 26, 2020 is less than the wages or salary paid on February 15, 2020 and the reduction is salary or wages in the covered period is restored to the wages or salary amount as of June 30, 2020.
f. Add up the reductions for all employees determined in d. above for whom the savings clause in e. above does not apply.
g. The Step 5 amount is the Step 4 total less f., the total reduction for all employees.
Step 6. Determine if there was a reduction in full-time employees
a. Determine if you meet the savings clause on June 30. Compare full-time employees between February 15 and April 26, 2020 to the full-time employees on February 15, 2020. If the number of full time employees is restored by June 30, 2020, there is no reduction in full time employees and hte PPP loan amount eligible for forgiveness is hte amount determine in Step 5.
b. If you don't meet the safe harbor in a. above, determine the average full-time employees in the covered period and divide that by the average full-time employees in either the period of January 1 to February 29 or February 15 to June 30.
Then multiple that by the amount determined in Step 5. This is the amount of the PPP loan that is eligible to be forgiven.
Step 1: Determine total payroll costs in the 8 or 24 week covered period
Note: Ask your accountant, tax preparer or loan advisor about the wage limit of $15,385.00 for each employee
Add the total cash wages paid to all employees(limited to $15,385.00) and then add in:
a. Employer pension contribution
b. Employer health insurance premiums paid
c. Employer paid state and local taxes assessed on compensation
Step 2: Take the total from Step 1 and divide by .60
This determines the maximum amount of the PPP loan that will be forgiven.
Compare the amount of hte PPP loan received with the maximum amount that will be forgiven.
If the maximum amount under the 60% test is equal to or greater than the PPP loan, there is no reduction.
If the maximum amount under hte 60% test is less than the PPP loan, the difference will not be forgiven and will have to be repaid.
Step 3: determine eligible non-payroll costs
Add the total rent, interest, and utilities paid in the 8 or 24 week covered period
take the maximum a mount of hte PPP loan that can be forgiven, From Step 2, and multiply that by .40.
Compare the total of rent, interest, and utilities that were paid in the 8 or 24 week period to determine if the total is at least 40% of hte maximum PPP loan amount that is eligible for forgiveness.
If the total rent, interest, and utilities exceeds 40%, limit the amount that will be transferred to the form to 40%. This is the Step 3 total.
If the total rent, interest and utilities is less than 40% of hte maximum PPP loan amount that is eligible for forgiveness, enter the total on the form. This will increase the amount of hte PPP loan that will have to be repaid. This is the Step 3 total
Step: 4 Add the amounts determines in Step 2 and Step 3.
This is the total amount for Step 4:
Step 2 max amount of PPP loan eligible for forgiveness
Plus
Step 3 Non-payroll costs maxed at 40%
Equals
Steps 4 Total
Step 5: Determine if there was a salary reduction
a. For each employee, determine if their salary or wages were reduced by more than 40% during the covered period as compared to the salary or wages that were received during hte period of January 1, 2020 to March 31, 2020.
b. Do not include any employee whose wages were reduced due to a reduction in full-time employment. If an employee previously worked as a full-time employee and their hours were reduced by half, the reduction of salary or wages by more than 25% does not apply. (This reduction is taken into account in Step 6.)
c. For each employee, take 75% of their regular wages in the period of January 1, 2020 to March 31, 2020, before the reduction in wages, and then subtract the wages paid in the covered period. This is the amount of reduction in wages for that employee.
d. Convert the amount of reduction in wages calculated in c. above to the 8 or 24 week covered period. For example, if the employee is paid monthly, multiply the monthly reduction by 12 to get the annual amount, divide by 52 to get the weekly amount and then multiply by 8 or 24. If the employee is paid weekly, simply multiply the weekly reduction by 8 or 24.
e. But there is a savings clause. There is no reduction in wages if the employee's average salary or wage amount paid between February 15, 2020 and April 26, 2020 is less than the wages or salary paid on February 15, 2020 and the reduction is salary or wages in the covered period is restored to the wages or salary amount as of June 30, 2020.
f. Add up the reductions for all employees determined in d. above for whom the savings clause in e. above does not apply.
g. The Step 5 amount is the Step 4 total less f., the total reduction for all employees.
Step 6. Determine if there was a reduction in full-time employees
a. Determine if you meet the savings clause on June 30. Compare full-time employees between February 15 and April 26, 2020 to the full-time employees on February 15, 2020. If the number of full time employees is restored by June 30, 2020, there is no reduction in full time employees and hte PPP loan amount eligible for forgiveness is hte amount determine in Step 5.
b. If you don't meet the safe harbor in a. above, determine the average full-time employees in the covered period and divide that by the average full-time employees in either the period of January 1 to February 29 or February 15 to June 30.
Then multiple that by the amount determined in Step 5. This is the amount of the PPP loan that is eligible to be forgiven.
Simple? - Not So Much
We are helping clients navigate the uncertainty due to ever changing rules surrounding hte PPP loan program. Our accounting staff is prepared to answer your questions about your PPP loan and assist you in the submission of your forgiveness application.
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Business Finance | 3 Min read
Common Sense Changes TO PPP Loan Program Are Coming
Bi-Partisanship Is Not Dead Yet
In a stunning display of bi-partisanship, the Senate approved the House's Bill yesterday for a PPP Loan Program revision, called the Paycheck Protection Flexibility Act, which provides more flexibility to business and should ease businesses' burdens and concerns about utilizing the program. The Bill will now go to President Donald Trump, who is expected to sign it.
The revisions represent common sense fixes to a well intentioned business relief program that has been over burdened by confusion and recently underutilized by the very businesses it was intended to help through the crisis.
The revisions represent common sense fixes to a well intentioned business relief program that has been over burdened by confusion and recently underutilized by the very businesses it was intended to help through the crisis.
Summary Of PPP Loan Program Revisions
The Journal of Accountancy provides and excellent summary of the revisions compiled by AICPA:
- Current PPP borrowers can choose to extend the eight-week period to 24 weeks, or they can keep the original eight-week period. New PPP borrowers will have a 24-week covered period, but the covered period can’t extend beyond Dec. 31, 2020. This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.
- Under the language in the House bill, the payroll expenditure requirement drops to 60% from 75% but is now a cliff, meaning that borrowers must spend at least 60% on payroll or none of the loan will be forgiven. Currently, a borrower is required to reduce the amount eligible for forgiveness if less than 75% of eligible funds are used for payroll costs, but forgiveness isn’t eliminated if the 75% threshold isn’t met. Rep. Chip Roy (Texas), who co-sponsored the bill in the House, said in a House speech that the bill intended the sliding scale to remain in effect at 60%. Senators Marco Rubio and Susan Collins indicated that technical tweaks could be made to the bill to restore the sliding scale.
- Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by Dec. 31, a change from the previous deadline of June 30.
- The legislation includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. The new bill allows borrowers to adjust because they could not find qualified employees or were unable to restore business operations to Feb. 15, 2020, levels due to COVID-19 related operating restrictions.
- Borrowers now have five years to repay the loan instead of two. The interest rate remains at 1%.
- The bill allows businesses that took a PPP loan to also delay payment of their payroll taxes, which was prohibited under the CARES Act.
PPP Loan Program Background
The PPP Loan Program launched in early April with $349 billion in funding. I previously commented on the the initial demand exhausting available funds in less than two weeks as well Congress provided an additional $310 billion in funding in an April 21 vote. I also wrote about waning demand from business due to concerns about obtaining of loan forgiveness under the program’s rules advising our clients to wait and see how Congress addressed the uncertainty.
When dealing with the government, especially in this current atmosphere of dysfunction, a wait and see approach sometimes pays off. The current revisions from a common sense bi-partisan bill might actually fulfill the original intent of hte PPP Loan Program and help many struggling businesses survive the current crisis and keep paying their employees. A little hope is something we could all use right now.
When dealing with the government, especially in this current atmosphere of dysfunction, a wait and see approach sometimes pays off. The current revisions from a common sense bi-partisan bill might actually fulfill the original intent of hte PPP Loan Program and help many struggling businesses survive the current crisis and keep paying their employees. A little hope is something we could all use right now.
Private Investors Have An Abundance of Cash and Want to Invest
Business Finance | 3 Min Read
Warren Buffett famously said, “Be fearful when others are greedy, and be greedy only when others are fearful.” After the Federal government's rescue of the economy avoided a complete collapse of the capital markets during the last Great Recession there was an abundance of greedy investor capital looking for devalued businesses to invest in or acquire outright. New research from the JP Morgan Chase Institute finds that many small businesses are living month to month, and the median small business has only enough cash in the bank to last 27 days without additional funds. "It is well known that small businesses are a critical driver of economic growth, but the consistency of their growth is in question if they're living month to month," Diana Farrell, president and CEO of the JP Morgan Chase Institute, said in a statement. Now, it's becoming apparent that the amount of cash sitting on the sidelines waiting for the right moment is even larger than the last time. The targets will be your stressed business that may be running out of cash.
While we still do not know the depths our economy may go to during this "Great Social Distancing" we do know that the government will do whatever is necessary to avoid depression like economics and provide an opportunity for a swift recovery. At least that is the intent otherwise 22 million unemployed Americans and counting don't go back to work. We end up with 10% plus persistent unemployment, an enormous national debt and a stagnated economy creating the real possibility of sovereign debt default or a currency devaluation event (but this is another topic).
Whether the current stimulus package will succeed or not is yet to be seen but there is enough support for a vaccine within a year and therapeutic treatment before that to create optimism for a faster than normal recovery from the depths of the current crisis. Now is the time to engineer your financial plan for the recovery using income models based on the best case of rapid recovery, the worst case of extended recovery and something in the middle that resembles a start stop approach to the recovery of economic activity. The intermittent activity model accounts for the likelihood of waves of social distancing that might occur until a widely available vaccine or therapeutic drug is available.
A key part of the financial plan is a supportable stock valuation model that will be the basis for any negotiation with a private investor. Valuation is the determining factor of percentage ownership you have to give up to get the capital you need to support your recovery business model. Additionally, private investors want a clear picture of how they get their capital back with a multiple of yield over a given period of time. You must have a viable exit strategy built into your financial model which tracks the valuation adjustment over time as your business recovers and grows. The realization event for the new valuation may be a merger, sale or IPO.
Private capital is available to rescue your company and support a relaunch but don't be taken advantage of by a lack of preparation.
Questions to Ask
While we still do not know the depths our economy may go to during this "Great Social Distancing" we do know that the government will do whatever is necessary to avoid depression like economics and provide an opportunity for a swift recovery. At least that is the intent otherwise 22 million unemployed Americans and counting don't go back to work. We end up with 10% plus persistent unemployment, an enormous national debt and a stagnated economy creating the real possibility of sovereign debt default or a currency devaluation event (but this is another topic).
Whether the current stimulus package will succeed or not is yet to be seen but there is enough support for a vaccine within a year and therapeutic treatment before that to create optimism for a faster than normal recovery from the depths of the current crisis. Now is the time to engineer your financial plan for the recovery using income models based on the best case of rapid recovery, the worst case of extended recovery and something in the middle that resembles a start stop approach to the recovery of economic activity. The intermittent activity model accounts for the likelihood of waves of social distancing that might occur until a widely available vaccine or therapeutic drug is available.
A key part of the financial plan is a supportable stock valuation model that will be the basis for any negotiation with a private investor. Valuation is the determining factor of percentage ownership you have to give up to get the capital you need to support your recovery business model. Additionally, private investors want a clear picture of how they get their capital back with a multiple of yield over a given period of time. You must have a viable exit strategy built into your financial model which tracks the valuation adjustment over time as your business recovers and grows. The realization event for the new valuation may be a merger, sale or IPO.
Private capital is available to rescue your company and support a relaunch but don't be taken advantage of by a lack of preparation.
Questions to Ask
- How long can I last with current cash on hand?
- How much capital do I need to restart my operation?
- What is my business worth?
- What is the exit plan?
Business Finance | 5 Min Read
SBA Extends PPP Loan Safe Harbor. Forgivable Money Still Available
Uncertainty Abounds
Over the past several weeks, the SBA's and Treasury's uneven administration and rules guidance of the PPP, created a large amount of uncertainty for many businesses who already applied for and obtained their loan proceeds. A series of rule changes, guidance and press releases by the SBA and Treasury have many businesses giving back their PPP Loan proceeds out of fear they no longer qualify and may be subject to criminal prosecution. Many other businesses are reluctant to even apply for PPP loans due to the perceived risks.
Borrowers Frustrated
Borrowers report requirements are challenging to either comply with or to meet in order to qualify for maximum loan forgiveness. Nearly half they say using the loan within the eight-week window is somewhat or very difficult, and the same percentage finds it very or somewhat difficult to get employee headcount back to pre-crisis levels. New guidance issued May 13, meant to relieve PPP loan recipients confusion and anxiety, is being met with broad relief from PPP participants and potential applicants who may be sitting on the fence, and is available from the SBA at PAYCHECK PROTECTION PROGRAM LOANS Frequently Asked Questions (FAQs) and from the US Treasury website at PAYCHECK PROTECTION PROGRAM LOANS.
Treasury/SBA Update
There are a 47 questions and answers providing updates and clarifications from the SBA. The top changes with the greatest potential impact are:
Owner Questions
Business owners have questions about how to spend the funds and what they can spend the loan on as many of the terms and conditions are broad and unclear when applied to specific business operations. "Nearly three-fourths of small business borrowers find the terms and conditions of the PPP loan difficult to understand with 22% finding them very difficult,” the SBA report said. While many PPP participants are relieved about the guidance, there is still significant apprehension that additional changes may occur resulting in unexpected non-compliance by businesses who are attempting to act in good faith. As a result, many advisors, including Critical Mission Consulting, Inc., a Denver business consulting firm, are counseling a conservative wait and see approach, when possible.
What To Do
Critical Mission Consulting, Inc. President, T.J. Agresti, sad about their business clients, "there is nothing that requires businesses to spend their PPP proceeds immediately. We are telling businesses, especially those planning to request loan forgiveness, to hold off on spending their loan proceeds and to wait as long as possible within the 8 week loan forgiveness period."
Main Street advocates are eager to see lawmakers move ahead with proposed changes when the House votes on the Paycheck Protection Flexibility Act, which makes tweaks to the PPP, including extending the covered-period window of eight weeks and the split on what the funds can be used on. The proposed changes have bipartisan support and could encourage more business owners to apply for aid. “No doubt, these key changes will make the program work more effectively for small businesses and their employees.
These changes also align with conditions on the ground,” said Karen Kerrigan, president and CEO of the Small Business & Entrepreneurship Council. “PPP needs to be structured more flexibly at this point given the very different stay-at-home and shutdown orders in the states, and the very different plans and phases for re-openings, which will drive demand,” she said. “A one-size-fits-all PPP program does not work — things have changed tremendously since the design of the program in early to mid-March.”
However, some business have no choice but to spend their PPP loan proceeds to keep their business afloat. "We are advising our clients to spend 75% on payroll qualifying expenses but if its between losing your business or having to repay the PPP loan, then do what needs to be done and save your business," said Mr. Agresti. These business have no choice but to ride out the uncertainty surrounding guidance of the PPP and hope they are compliant with the final rules.
There is momentum to make the program more flexible and the addition of the safe harbor should cover the vast majority of borrowers. Businesses who accepted under $2 million covers over 98% of Phase One loans and over 99% of Phase Two loans according to the SBA. The risks associated with taking a PPP loan may now be acceptable for many more businesses who were in a holding pattern waiting to spend their loan proceeds or apply for a new loan.
Money Still Available
There is still an opportunity to apply for and receive forgivable loans from PPP. The program has $126.5 billion in funding left, according to the Small Business Administration. A careful review, with advisors, of the application requirements, and the rules on how to obtain forgiveness, if that is the goal, are a must. Forgiveness is available if you use 75% of the loan for payroll but even if you don't want forgiveness, the loan is still inexpensive capital with a 2 year term and an interest rate of 1%.
For more news and reporting on the coronavirus and how businesses can handle challenges related to the Paycheck Protection Program and the pandemic, visit T.J.'s blog page or go to the Critical Mission Consulting website Coronavirus resources page.
Over the past several weeks, the SBA's and Treasury's uneven administration and rules guidance of the PPP, created a large amount of uncertainty for many businesses who already applied for and obtained their loan proceeds. A series of rule changes, guidance and press releases by the SBA and Treasury have many businesses giving back their PPP Loan proceeds out of fear they no longer qualify and may be subject to criminal prosecution. Many other businesses are reluctant to even apply for PPP loans due to the perceived risks.
Borrowers Frustrated
Borrowers report requirements are challenging to either comply with or to meet in order to qualify for maximum loan forgiveness. Nearly half they say using the loan within the eight-week window is somewhat or very difficult, and the same percentage finds it very or somewhat difficult to get employee headcount back to pre-crisis levels. New guidance issued May 13, meant to relieve PPP loan recipients confusion and anxiety, is being met with broad relief from PPP participants and potential applicants who may be sitting on the fence, and is available from the SBA at PAYCHECK PROTECTION PROGRAM LOANS Frequently Asked Questions (FAQs) and from the US Treasury website at PAYCHECK PROTECTION PROGRAM LOANS.
Treasury/SBA Update
There are a 47 questions and answers providing updates and clarifications from the SBA. The top changes with the greatest potential impact are:
- the expansion of the program allowing lenders to increase PPP loans to partnerships to include appropriate amounts to cover partner compensation.
- the allowance for seasonal employers to calculate their maximum loan amount using the alternative criterion issued April 28.
- the extension of the safe harbor for returning PPP loans from May 14 to May 18 that gives an opportunity for borrowers that received PPP loans to return them if they are not able to make a good-faith certification of the necessity of their loan requests .
- the SBA issued guidance for businesses who, together with their affiliates, accepted PPP funds of less than $2 million, will be assumed to have performed the required certification concerning the necessity of their loan requests in good faith.
Owner Questions
Business owners have questions about how to spend the funds and what they can spend the loan on as many of the terms and conditions are broad and unclear when applied to specific business operations. "Nearly three-fourths of small business borrowers find the terms and conditions of the PPP loan difficult to understand with 22% finding them very difficult,” the SBA report said. While many PPP participants are relieved about the guidance, there is still significant apprehension that additional changes may occur resulting in unexpected non-compliance by businesses who are attempting to act in good faith. As a result, many advisors, including Critical Mission Consulting, Inc., a Denver business consulting firm, are counseling a conservative wait and see approach, when possible.
What To Do
Critical Mission Consulting, Inc. President, T.J. Agresti, sad about their business clients, "there is nothing that requires businesses to spend their PPP proceeds immediately. We are telling businesses, especially those planning to request loan forgiveness, to hold off on spending their loan proceeds and to wait as long as possible within the 8 week loan forgiveness period."
Main Street advocates are eager to see lawmakers move ahead with proposed changes when the House votes on the Paycheck Protection Flexibility Act, which makes tweaks to the PPP, including extending the covered-period window of eight weeks and the split on what the funds can be used on. The proposed changes have bipartisan support and could encourage more business owners to apply for aid. “No doubt, these key changes will make the program work more effectively for small businesses and their employees.
These changes also align with conditions on the ground,” said Karen Kerrigan, president and CEO of the Small Business & Entrepreneurship Council. “PPP needs to be structured more flexibly at this point given the very different stay-at-home and shutdown orders in the states, and the very different plans and phases for re-openings, which will drive demand,” she said. “A one-size-fits-all PPP program does not work — things have changed tremendously since the design of the program in early to mid-March.”
However, some business have no choice but to spend their PPP loan proceeds to keep their business afloat. "We are advising our clients to spend 75% on payroll qualifying expenses but if its between losing your business or having to repay the PPP loan, then do what needs to be done and save your business," said Mr. Agresti. These business have no choice but to ride out the uncertainty surrounding guidance of the PPP and hope they are compliant with the final rules.
There is momentum to make the program more flexible and the addition of the safe harbor should cover the vast majority of borrowers. Businesses who accepted under $2 million covers over 98% of Phase One loans and over 99% of Phase Two loans according to the SBA. The risks associated with taking a PPP loan may now be acceptable for many more businesses who were in a holding pattern waiting to spend their loan proceeds or apply for a new loan.
Money Still Available
There is still an opportunity to apply for and receive forgivable loans from PPP. The program has $126.5 billion in funding left, according to the Small Business Administration. A careful review, with advisors, of the application requirements, and the rules on how to obtain forgiveness, if that is the goal, are a must. Forgiveness is available if you use 75% of the loan for payroll but even if you don't want forgiveness, the loan is still inexpensive capital with a 2 year term and an interest rate of 1%.
For more news and reporting on the coronavirus and how businesses can handle challenges related to the Paycheck Protection Program and the pandemic, visit T.J.'s blog page or go to the Critical Mission Consulting website Coronavirus resources page.
Business Finance | 9 MIN Read
You're leading in a crisis and need a loan for working capital. What can you do to improve your odds?
Loan Repayment Insurance Is The Secret
The ability of a business to borrow money will make the difference between surviving or failing during the current crisis and being ready to thrive when the economy recovers. Many business leaders are asking their advisors for guidance on how to improve their odds of successfully obtaining a loan. At the same time, lenders are looking at the economic landscape trying to navigate a level of unprecedented uncertainty which is creating barriers to lending. A new lending product has emerged to provide both lender and borrower assurance that a loan will be repaid during these uncertain times. It’s called Performance Guarantee Insurance.
Performance Guarantee Insurance is coverage that guarantees the borrower's repayment of a loan. It affords companies the best chance at getting the working capital needed to survive, move forward, and be prepared to grow again as the economy comes to life and recovers. Lenders see a highly rated insurance company standing behind the borrower as the deciding factor in approving the loan. These are tough times that require tough decisions by business leaders who are making every effort and taking every action necessary to insure the continuing viability of their businesses.
Performance Guarantee Insurance is coverage that guarantees the borrower's repayment of a loan. It affords companies the best chance at getting the working capital needed to survive, move forward, and be prepared to grow again as the economy comes to life and recovers. Lenders see a highly rated insurance company standing behind the borrower as the deciding factor in approving the loan. These are tough times that require tough decisions by business leaders who are making every effort and taking every action necessary to insure the continuing viability of their businesses.
Unprecedented Times
The economic damage is triggering comparisons to the Great Depression.
The economic activity of the U.S. continues to plummet during the corona virus pandemic. Unemployment is soaring because of stay at home orders, social distancing policies and disruptions in supply chains due to outbreaks at critical production facilities. As a result, the US economy has shed 33.5 million jobs through May 7. This is not a typical “black swan” event with the depth and speed of the economic decline exceeding that of the Great Depression.
To put the economic impact in perspective, at the beginning of March 2020, the unemployment rate was 4.4% - what many economists consider a natural rate of unemployment. Now, that "real" rate has blown up to 24.7% unemployment and we are facing the reality that unemployment could rise above the Great Depression high of 24.9% to 30%, according to reports from the Federal Reserve Bank of St. Louis, with a contraction of GDP exceeding 38%. This impact would be worse than the Great Depression since unemployment is a lagging indicator of economic activity. Employers resist hiring new employees until there is confidence the economy will rebound and stay strong. It’s clear businesses are looking at continued suffering. The need for additional working capital will continue to increase as the depth of the economic downturn deepens and the recovery is prolonged.
To put the economic impact in perspective, at the beginning of March 2020, the unemployment rate was 4.4% - what many economists consider a natural rate of unemployment. Now, that "real" rate has blown up to 24.7% unemployment and we are facing the reality that unemployment could rise above the Great Depression high of 24.9% to 30%, according to reports from the Federal Reserve Bank of St. Louis, with a contraction of GDP exceeding 38%. This impact would be worse than the Great Depression since unemployment is a lagging indicator of economic activity. Employers resist hiring new employees until there is confidence the economy will rebound and stay strong. It’s clear businesses are looking at continued suffering. The need for additional working capital will continue to increase as the depth of the economic downturn deepens and the recovery is prolonged.
Long Recovery
Cash flow plans need to account for the uncertainty of how long a recovery might take
Businesses are suffering unprecedented declines in revenue while at the same time the risk to their operations’ long-term viability grows. The risks for the economic recovery are severe, with many economists indicating the recovery is likely to be a long and grueling process that could take three or more years with severe ups and downs along the way.
As businesses struggle to survive the current shock, they need immediate cash in the form of loans and refinanced debt. Of critical importance to both the borrowing company and the lender is the risk of repayment. Naturally, in this climate, the higher the probability of default on a loan may result in no loan at all. Even if loans are considered, they may come with terms too costly for the borrower.
The little-known secret of Performance Guarantee Insurance reduces the repayment risk for the borrower and the lender. As a result, the likelihood a loan will be approved is greatly increased. Of course, it remains a tough decision for a business to take on new debt or refinance its existing debt.
As businesses struggle to survive the current shock, they need immediate cash in the form of loans and refinanced debt. Of critical importance to both the borrowing company and the lender is the risk of repayment. Naturally, in this climate, the higher the probability of default on a loan may result in no loan at all. Even if loans are considered, they may come with terms too costly for the borrower.
The little-known secret of Performance Guarantee Insurance reduces the repayment risk for the borrower and the lender. As a result, the likelihood a loan will be approved is greatly increased. Of course, it remains a tough decision for a business to take on new debt or refinance its existing debt.
Tough Times Require Tough Choices
To lead in a crisis means making tough choices to assure the long-term viability of the company.
Businesses in every industry are making tough decisions warranted by a crisis of the magnitude that COVID-19 represents. It started with furloughs and pay cuts, but every aspect of operational costs is being analyzed for possible savings, all with a focus on understanding how much cash the business will need and for how long. This is only part of the equation. All businesses need to ensure their financing remains viable. The process requires scenario based planning and a critical self-assessment of a business’s ability to service the debt.
Debt refinancing is a critical step in the cash flow analysis process. It can strengthen net positive cash flow and slow the burn rate to buy critical time until a recovery begins. Refinancing is a simple concept to pay down remaining debt from a loan with proceeds of a new loan with better terms, including more money for working capital, longer repayment terms, lower rates, and less frequent payments.
However, the financial analysis of whether to refinance or not is more complex as the lower payments may come with a lot of potential negatives. Debt refinancing means paying interest on interest. Prepayment penalties may be triggered. Refinancing short-term debt with other short-term debt can get very expensive creating a cash flow cycle from which a company cannot successfully emerge.
The decision to take on additional debt may seem simple on its face, balanced against the need for working capital in the midst of a sudden downturn in revenues. Again, the simple is not so obvious when considering the ability to repay the new loan must consider various projected cash flow models from optimistic to worst case scenario.
All of these factors pit a borrower’s hunger for funds and repayment risk profile against the lender's risk tolerance appetite. What’s needed is a financial structure that transfers the repayment risk, improves the risk profile for the borrower and increases the risk appetite for the lender. Performance Guarantee Insurance satisfies the needs of both the borrower and lender with an insurance contract guarantee for the repayment of the loan. The use of insurance allows a contractual structure, backed by a highly rated insurance company, that is familiar to business operators and lenders.
Debt refinancing is a critical step in the cash flow analysis process. It can strengthen net positive cash flow and slow the burn rate to buy critical time until a recovery begins. Refinancing is a simple concept to pay down remaining debt from a loan with proceeds of a new loan with better terms, including more money for working capital, longer repayment terms, lower rates, and less frequent payments.
However, the financial analysis of whether to refinance or not is more complex as the lower payments may come with a lot of potential negatives. Debt refinancing means paying interest on interest. Prepayment penalties may be triggered. Refinancing short-term debt with other short-term debt can get very expensive creating a cash flow cycle from which a company cannot successfully emerge.
The decision to take on additional debt may seem simple on its face, balanced against the need for working capital in the midst of a sudden downturn in revenues. Again, the simple is not so obvious when considering the ability to repay the new loan must consider various projected cash flow models from optimistic to worst case scenario.
All of these factors pit a borrower’s hunger for funds and repayment risk profile against the lender's risk tolerance appetite. What’s needed is a financial structure that transfers the repayment risk, improves the risk profile for the borrower and increases the risk appetite for the lender. Performance Guarantee Insurance satisfies the needs of both the borrower and lender with an insurance contract guarantee for the repayment of the loan. The use of insurance allows a contractual structure, backed by a highly rated insurance company, that is familiar to business operators and lenders.
Insurance Transfers Risk
Risk management often includes insurance to transfer the risk to an insurance company.
Risk transfer using insurance is an integral component to an effective risk management plan. Insurance, at its core, is about transferring a defined risk of loss from one party to another in exchange for a premium. The premium represents the cost to cover the risk associated with a contractual obligation to pay a benefit in the event the defined risk occurs. In the case of life insurance, the premium an individual pays covers the costs of the insurance company having to pay a benefit in the event of death.
The costs of coverage for any risk require people called actuaries, who work for insurance companies to determine the risks associated with a policy. They look at how likely an event like death, disaster or an accident is, and the likelihood of a claim being filed, as well as how much the company will be on the hook for paying out if a claim is filed. They put this information into a chart called an actuary table and give this to a person called an underwriter. Now, the underwriter uses this data along with information provided by the person or company asking for insurance when they issue a policy to determine what the exact premium will be for coverage they want.
The costs of coverage for any risk require people called actuaries, who work for insurance companies to determine the risks associated with a policy. They look at how likely an event like death, disaster or an accident is, and the likelihood of a claim being filed, as well as how much the company will be on the hook for paying out if a claim is filed. They put this information into a chart called an actuary table and give this to a person called an underwriter. Now, the underwriter uses this data along with information provided by the person or company asking for insurance when they issue a policy to determine what the exact premium will be for coverage they want.
Insuring The Loan Repayment
An insurance policy can guarantee repayment of a loan to the lender in the event of borrower's default.
Almost any risk can be quantified by insurance actuaries, including the risk that a borrower will default on a loan over a given time period due to a lack of revenue. Numerous factors are considered when actuaries quantify the risk of a borrower defaulting on a loan. Some of these are the macroeconomic conditions, specific borrower strengths, weaknesses, opportunities, and threats, current industry conditions, operational risks, revenue risks, current asset valuation and supply chain risks. Today, the duration of the pandemic with possible ebbs and flows over time are a new factor.
The actuaries consider all these factors to create an actuary table indicating how likely it is that a borrower will default on a loan and how much the insurance company will have to pay if a claim is filed. The underwriters use the actuary table along with additional information on the company and/or the individual owners of the company to determine what the exact one-time premium will be to insure the repayment of the loan i nth event the borrower defaults. The total loss guarantee on the loan is straightforward to measure based on the loan principal, interest, and penalties in the event of a default at a given time in the life of the loan.
Naturally, the insurance is only as good as the strength of the company standing behind the promise to repay the loan, as indicated by their credit rating.
The actuaries consider all these factors to create an actuary table indicating how likely it is that a borrower will default on a loan and how much the insurance company will have to pay if a claim is filed. The underwriters use the actuary table along with additional information on the company and/or the individual owners of the company to determine what the exact one-time premium will be to insure the repayment of the loan i nth event the borrower defaults. The total loss guarantee on the loan is straightforward to measure based on the loan principal, interest, and penalties in the event of a default at a given time in the life of the loan.
Naturally, the insurance is only as good as the strength of the company standing behind the promise to repay the loan, as indicated by their credit rating.
The Promise Behind Insurance
 | An insurance company credit rating is the opinion of an independent agency regarding the insurance company's solvency, financial strength, and ability to pay policyholder claims. There are four major insurance company rating agencies: Moody’s, A.M. Best, Fitch, and Standard & Poor’s (the last two companies also provide corporate credit ratings for investors). Each agency has its own rating scale that doesn’t necessarily equate to another company’s rating scale, even when the ratings appear similar. |
Borrowers and lenders relying on the promise of an insurance company to pay off a loan in the event of a default will prefer, or even demand, an insurance company with an investment grade rating to issue the Performance Guarantee Insurance. An investment grade rating provides the assurance that the insurance company will be able to meet its obligation to pay the benefit in the event the borrower defaults on the loan. As an example, an insurance company with an S&P Global rating of 'AAA' has the highest rating assigned by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is extremely strong. An insurance company rated 'AA' differs from the highest-rated AAA only to a small degree. The obligor's capacity to meet its financial commitments on the obligation is very strong.
In the case of Performance Guarantee Insurance, the issuing insurance company has a 'AA' S & P Global Ratings which indicates the insurance company's solvency, financial strength, and ability to pay policyholder claims is very strong. The borrowers and lenders can be confident the loan will be repaid because of the capacity and willingness of the insurance company to meet its financial commitments on the Performance Guarantee Insurance in accordance with the terms of the insurance contract in the event of a default.
In the case of Performance Guarantee Insurance, the issuing insurance company has a 'AA' S & P Global Ratings which indicates the insurance company's solvency, financial strength, and ability to pay policyholder claims is very strong. The borrowers and lenders can be confident the loan will be repaid because of the capacity and willingness of the insurance company to meet its financial commitments on the Performance Guarantee Insurance in accordance with the terms of the insurance contract in the event of a default.
Best Odds For A Loan Approval
Performance Guarantee Insurance can make the difference in getting a loan approved.
Shifting the risk that cash flow will not be sufficient to repay a loan from the borrower to an AA rated insurance company is a powerful tool to improving the odds of a loan getting approved. The risk profile of the borrower is drastically improved based on the investment grade guarantee behind the borrower’s performance. The back stop of the insurance creates the financial strength of a stabilized projected revenue stream and a balance sheet protection. The final result is improved credit worthiness and an attractive loan for the lender. In fact, the financial impact of Performance Guarantee Insurance may allow a company to obtain their own investment grade rating of BBB or better. An investment grade rating is especially important for companies seeking to offer their own debt for sale in the form of bonds.
Lenders, as the beneficiaries to the coverage, mitigate their downside risks associated with potential poor financial performance for their existing and future loan portfolios. A lower risk profile often results in better loan terms that are more cash flow efficient for the borrower further strengthening the outlook on the borrower’s performance long term.
Lenders, as the beneficiaries to the coverage, mitigate their downside risks associated with potential poor financial performance for their existing and future loan portfolios. A lower risk profile often results in better loan terms that are more cash flow efficient for the borrower further strengthening the outlook on the borrower’s performance long term.
Bottom Line
There’s great uncertainty about jobs and the economy, about the federal SBA and PPP loans, and about reopening businesses and the potential for closing them again later in the year. Performance Guarantee Insurance enables both small and large businesses to engage lenders and acquire much needed cash. The insurance increases the likelihood of borrowing success by improving the creditworthiness of the borrower thereby reducing the risk for lenders. This is a great message to send to internal and external stakeholders, as well as lenders who want to help businesses survive these unprecedented times.
Disclaimer: Critical Mission Consulting, LLC is providing Performance Guarantee Insurance to its customers.
Going back to work is something we can all celebrate!
The economy is starting to open and business leaders need to plan their rehire policies. I crafted a rehire policy that addresses many of the issues that must be addressed when bringing back a terminated or furloughed employee. I am also making a recall letter template available which outlines the formal communication advising an employee that they are being invited to return to work.
Treasury Secretary Steve Mnuchin seeks more funding for PPP
The Federal Reserve’s new Main Street Lending Program is another chance to secure much needed cash now.
The $349 billion Paycheck Protection Program, or PPP, ran out of money 14 days after businesses across the country submitted the first applications. The SBA shut down its application process and ceased enrolling new lenders into the program.
Many businesses were left in shock not knowing what to do when the PPP ran out of money. Some businesses are still applying and even getting recommendations from their banks to continue with the process. Some completed their applications before the money ran out and were waiting for their approval. It appears that political survival and the necessity to further prop up the economy forced Congress to approve additional PPP funding.
Treasury Secretary Steven Mnuchin told CNN on Sunday 4/19/2020 that he's hopeful that a deal could be reached as early as Sunday to replenish a tapped-out small-business loan program and that the deal would include additional funding for hospitals and testing. "I think we're making a lot of progress," Mnuchin said on Sunday, noting that he has had multiple conversations with Senate and House leadership in recent days. He later added, "I'm hopeful we could get a deal done today. "The Senate could approve the measure as early as Monday and the House on Tuesday. Mnuchin said the agreement so far would include $300 billion for the Paycheck Protection Program, which funds small-business loans during the crisis.
On March 21, 2020, the Washington Post is reporting that Senate Minority Leader Charles E. Schumer said Tuesday that lawmakers and the White House have reached a nearly $500 billion deal to replenish a small business lending program slammed by the coronavirus and boost spending on hospitals and testing. “We have a deal and I believe we’ll pass it today,” Schumer (D-N.Y.) said on CNN. Read more at the Washington Post The new package includes $310 billion for the PPP, with $250 billion refilling the program and $60 billion set aside specifically for smaller institutions like credit unions and community banks. That latter $60 billion is key in getting funds to smaller banks and lenders (according to the bill, $30 billion to institutions with between $10 billion and $50 billion in assets, and the other $30 billion to institutions with less than $10 billion in assets).
Business who missed out on the first round of thee PPP loan program should not hesitate to submit an application. The fund will be exhausted rapidly based on Lenders are warning their customers they might not be able to secure loans even if Congress provides an additional $300 billion as soon as this week. Banking industry representatives say the program has a burn rate of $50 billion per day and needs closer to $1 trillion to meet demand, with hundreds of thousands of applications pending.
"This is going to go within, at most, 72 hours," said Consumer Bankers Association President Richard Hunt, who represents large banks. "But the odds are more like 48 hours."
Unfortunately, many small businesses will not obtain a PPP Loan and will not survive. For some companies who need $1 million or more, one possibility is the Federal Reserve’s new Main Street Lending Program. The Main Street Lending Program functions more like a traditional SBA loan program. There is no forgiveness of loan option like the PPP (tied to utilizing the funds for payroll).
The program opened to companies with up to 10,000 employees and is run directly by lenders. It will provide support for up to $600 million of loans.
The key Main Street Lending terms terms are:
The $349 billion Paycheck Protection Program, or PPP, ran out of money 14 days after businesses across the country submitted the first applications. The SBA shut down its application process and ceased enrolling new lenders into the program.
Many businesses were left in shock not knowing what to do when the PPP ran out of money. Some businesses are still applying and even getting recommendations from their banks to continue with the process. Some completed their applications before the money ran out and were waiting for their approval. It appears that political survival and the necessity to further prop up the economy forced Congress to approve additional PPP funding.
Treasury Secretary Steven Mnuchin told CNN on Sunday 4/19/2020 that he's hopeful that a deal could be reached as early as Sunday to replenish a tapped-out small-business loan program and that the deal would include additional funding for hospitals and testing. "I think we're making a lot of progress," Mnuchin said on Sunday, noting that he has had multiple conversations with Senate and House leadership in recent days. He later added, "I'm hopeful we could get a deal done today. "The Senate could approve the measure as early as Monday and the House on Tuesday. Mnuchin said the agreement so far would include $300 billion for the Paycheck Protection Program, which funds small-business loans during the crisis.
On March 21, 2020, the Washington Post is reporting that Senate Minority Leader Charles E. Schumer said Tuesday that lawmakers and the White House have reached a nearly $500 billion deal to replenish a small business lending program slammed by the coronavirus and boost spending on hospitals and testing. “We have a deal and I believe we’ll pass it today,” Schumer (D-N.Y.) said on CNN. Read more at the Washington Post The new package includes $310 billion for the PPP, with $250 billion refilling the program and $60 billion set aside specifically for smaller institutions like credit unions and community banks. That latter $60 billion is key in getting funds to smaller banks and lenders (according to the bill, $30 billion to institutions with between $10 billion and $50 billion in assets, and the other $30 billion to institutions with less than $10 billion in assets).
Business who missed out on the first round of thee PPP loan program should not hesitate to submit an application. The fund will be exhausted rapidly based on Lenders are warning their customers they might not be able to secure loans even if Congress provides an additional $300 billion as soon as this week. Banking industry representatives say the program has a burn rate of $50 billion per day and needs closer to $1 trillion to meet demand, with hundreds of thousands of applications pending.
"This is going to go within, at most, 72 hours," said Consumer Bankers Association President Richard Hunt, who represents large banks. "But the odds are more like 48 hours."
Unfortunately, many small businesses will not obtain a PPP Loan and will not survive. For some companies who need $1 million or more, one possibility is the Federal Reserve’s new Main Street Lending Program. The Main Street Lending Program functions more like a traditional SBA loan program. There is no forgiveness of loan option like the PPP (tied to utilizing the funds for payroll).
The program opened to companies with up to 10,000 employees and is run directly by lenders. It will provide support for up to $600 million of loans.
The key Main Street Lending terms terms are:
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For businesses that meet the requirements of the Main Street Lending Program, it is an alternative worth taking a look at with interest rates that may never be this favorable again. Time is of the essence for for the rest of the small businesses that make up 45.% of the U.S. economy. Get your PPP Loan applications in today!
New Wholesale Model Could Shake Up Airline Distribution Thanks to American Airlines Test With Sabre
4/19/2020
 New Wholesale Model Could Shake Up Airline Distribution Thanks to American Airlines Test With Sabre |
Under the wholesale model, the airline, not the global distribution system, pays the travel agency an incentive. The travel agency pays the global distribution system a fee for each booking made via the reservation system, which the tech companies run.
The wholesale model can save airlines money.
Read the full article at https://finance.yahoo.com/news/wholesale-model-could-shake-airline-153026033.html
The wholesale model can save airlines money.
Read the full article at https://finance.yahoo.com/news/wholesale-model-could-shake-airline-153026033.html
 | Employers are considering many alternatives to address the significant economic hardships caused by the COVID-19 pandemic. One such alternative is putting one or more groups of employees on furlough—a low paid or unpaid leave of absence. However, now more than ever, employers must carefully address health plan coverage during a furlough. |
 | Buy-sell agreements are critical when dealing with a closely held business and yet often ignored or given short shrift by business owners. Life insurance is an effective tool that business owners can use to implement the provisions of a buy-sell agreement by providing liquidity at the death of an owner to both his or her business and family. Having a properly drafted buy-sell agreement is key in avoiding conflict and memorializing how life insurance proceeds are to be used at the death of a business owner. The creation of a separate entity to hold life insurance is increasingly being used by practitioners in buy-sell agreement planning to avoid tax traps and other pitfalls. |
TJ Agresti, JD, LLM, CAM
Founder and President
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