In March of this year, President Trump signed into law the Coronavirus Aid, Relief, and Economic Securities (CARES) Act, a $2.3 trillion relief package designed to help with economic damage caused by the COVID-19 pandemic. Part of the Act was the creation of the Paycheck Protection Program (PPP), a loan package designed to put $350 billion into the hands of small businesses for use in paying employee wages and other critical expenses.
Since then, thousands of small businesses including staffing firms signed up for the loan, which functions as a grant as long as you use the funds a certain way – namely, for payroll, mortgage interest, rent and utilities during your covered period. If your expenses do not qualify, you have five years* to pay back the money at 1% interest.
Now that you have your PPP Loan, as a staffing owner you might have some questions about how you can use the loan and be eligible for forgiveness. Based on conversations with our clients, here are 5 things every staffing owner should know about your PPP Loan.
1. How you can use the money now
The PPP is not just a low interest loan – it is meant specifically for payroll and other critical business expenses. You are able to spend the PPP on four main categories: payroll, utilities, rent, and mortgage interest. If you use the money outside those strict guidelines, you could be subject to scrutiny.
Eligible expenses include:
- Payroll costs including any compensation (salary, wages, tips, commission, paid leave, bonuses, hazard pay, etc) incurred during the covered period. It also includes employer paid benefits as well as employer assessed state and local taxes;
- Business mortgage interest payments;
- Business rent or lease payments;
- Business utility payments including electricity, gas, water, transportation, telephone, or internet access.
In contrast, expenses that are not eligible include: compensation of an individual employee in excess of $100,000 per year annualized; taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code during the covered period; any compensation of an employee whose principal place of residence is outside of the United States; and qualified sick and family leave wages already covered under the Families First Coronavirus Response Act.
2. How you can get your loan forgiven
The overarching idea of the PPP loan is that they are a loan in name only – once you have the money, the amount spent over your covered period on payroll, mortgage interest, rent and utilities may be eligible to be completely forgiven. Additionally, the forgiveness is tax free unlike other cancelled debt.
To maximize forgiveness, the Paycheck Protection Program Flexibility Act requires that 60% of the loan proceeds must be used for payroll costs and payroll-related expenses. 40% may be spent on the certain non-payroll expenses outlined above.
Any portion of a PPP loan that isn’t forgiven must be repaid at an interest rate of 1%. It will be deferred until the date that SBA remits the forgiveness amount to the lender.
3. Factors that affect your loan forgiveness amount
There are certain factors you should be aware of that may lead to a reduction in your forgiveness amount.
- Your loan forgiveness amount may be reduced if you reduced full time equivalency or wages (exceeding 25%) during your covered period and do not qualify for a safe harbor.
- It may be further reduced if you do not use 60% of your loan amount on payroll costs.
- If you received an EIDL Advance, the SBA will reduce your loan forgiveness by the amount of the advance.
For more information, visit our PPP Loan Forgiveness Estimator.
4. What to know about audits
Any business that receives a PPP loan may be audited. There are three areas the SBA may focus on when it comes to audits:
- Borrower eligibility: was the borrower actually eligible for the PPP loan based on the rules and guidance available at the time of application?
- Loan amount and loan use: did the borrower receive the correct amount they were eligible for, and did the borrower use the loan funds for allowed expenses?
- Loan forgiveness: is the borrower eligible for forgiveness on the claimed amount?
If you use PPP funds for unauthorized purposes, the SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you may be subject to additional liability such as charges for fraud. The last thing you want to deal with on top of just trying to remain in business while keeping your workers safe is potential claims against you.
So, the lesson here be careful to stay compliant and don’t treat the PPP as “free money”! Work with your trusted legal and financial advisors when necessary.
5. What to do when you’re out of money
As federal stimulus packages including the PPP begin to run out, many staffing companies will be left trying to find new working capital solutions. While the PPP was helpful, in many cases only postponed the financial pain of lost revenue due to the effects of COVID.
It’s important to consider cash flow and liquidity options for the future, especially in light of the financial uncertainty of this current moment. You won’t always be able to count on government stimulus packages, so you want to know your options – the most popular in this industry being bank financing and accounts receivable financing. You can find more information about the options by downloading the Essential Guide to Financing Your Staffing Firm.
We hope this information was helpful to you as you navigate the current economic climate. If you want to discuss options for financing when PPP money runs out, contact us anytime with questions.
*Loans granted after June 5, 2020 are now subject to a minimum maturity of 5 years. Borrowers that received their loan before then may work with their lender to extend maturity date.
About the Author
Jeremy Bilsky is the Senior Director and General Manager at Advance Partners. Jeremy has direct leadership responsibility for the Advance Partners business unit, leading the senior management team and all related functional areas. Jeremy has been with Advance Partners for over 15 years in many capacities, including General Counsel, Director of Portfolio Management, and serving on the executive team managing and overseeing Advance Partner's internal risk functions. Read full bio
DISCLAIMER: This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney in your state. The information in this article may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct or up-to-date.