Small businesses face quandary in choosing coronavirus relief programs

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Small businesses are dealing with frustrating delays and changing guidance in applying for and receiving help from the Small Business Administration in its new Paycheck Protection Program, while also trying to choose whether to go with that program or another one that’s offered with a tax credit for retaining employees during the novel coronavirus pandemic.

The Institute of Management Accountants released a paper this month discussing how small businesses can position themselves to recover from the COVID-19 pandemic.

“The primary purpose of the document is to help small businesses take an overview and assess the whole picture before they just jump right in,” said Heather Bain, owner of Bain CPA Business Strategies, LLC in Houston, who co-authored the paper. “A lot of small businesses and the owners and the managers tend to be very reactive when they are under pressure. We are asking them to step back and take a holistic approach so that when it comes to executing their plans, they've considered all the facets of their business, not just the regulations, or not just the human resources piece, so that they can deliver a plan that will actually improve the quality of their business, getting leaner and being more ethical with how they treat their employees and suppliers, communicating more effectively with their customers and suppliers and workers.”

Entrepreneurs and small businesses in general tend to be relatively nimble and resourceful, she noted. “They’re able to move quickly so they really just need to be able to pause for a moment first and look at their whole business and look at the whole environment,” said Bain. “That’s what we’re really trying to do is make them aware of some of the peripheral issues and increase their scope.”

The paper is built around a three-step assess-build-communicate (ABC) planning process. The framework includes:

1. Assess the current situation, preferably with a team of experts.
2. Build a plan by brainstorming with your team of experts (and a Plan B if you have the resources).
3. Communicate calmly, clearly and continuously.

Beyond the three-step process, the report includes a COVID-19 response checklist, which provides guidelines for finance professionals that are developing recovery plans. The checklist features the key actors on the planning team, the main points to consider when developing the plan and considerations related to revenue, inventory, operations and employees, among other important recovery plan factors. The IMA plans to release updates to the report as new information becomes available.

Many businesses are hoping to get money from the new Paycheck Protection Program in the CARES Act, where they can apply for forgivable loans from the Small Business Administration that depend on whether or not they retain their employees on payroll. But there have been widespread reports with the rollout of the program in recent weeks and conflicting guidance for banks.

“Definitely if a business needs the funding, they need to jump in and get started right away,” said Bain. “That’s one of the reasons why we wanted to issue the white paper is to urge them to act now, and not take a wait-and-see approach. Start negotiating with their landlords and their lenders and their customers and suppliers right away and find out what the issues are. Especially if they don't already have a strong relationship with a banker, this is definitely a time that they need to reach out and make that connection and redevelop that relationship with their banker. I noticed that some bankers for some of my small-business clients have had a pretty smooth transition and others have been at a stop and start where they’ve had to restart the application process a number of times because the application changed. A lot of the applications changed over the course of the weekend [the first weekend of the Paycheck Protection Program]. There was a preliminary application that was sent out. On Friday it changed, and on Saturday it changed, and then finally most of the people that I worked with said that this morning they had made all of the changes that they had planned on making.”

Businesses also face a choice between choosing the PPP or an employee retention tax credit, or other programs such as the SBA Economic Injury Disaster Loan that have had their own set of problems (see our story).

“That’s why they really do need to contact an expert that can guide them a little bit more into their specific business and determine their business needs,” said Bain. “It’s very hard to determine which one they need just from the outside. In fact, the Paycheck Protection Program can be problematic if a company is downsizing. If they look at their 12 months of payroll, they can borrow based on that. But if they’re downsizing in the future and won’t be able to spend very much on payroll, both of them [the Payroll Protection Program and the Employee Retention Credit] are dependent on keeping payroll constant or even increasing. One aspect is you have to borrow money, and the company will be paying it back based on what they don’t spend within eight weeks, whereas the retention credit is something that can just touch and go. They take the credit based on what they need, and they’re not on the hook for a large repayment.”

She recommends that small businesses work with their accountant to help them make the right choice. “They do need a CPA or a CMA, someone who can look at the business specifically, find out what the goals are for the company to make sure that the managers have looked at all the considerations,” said Bain. “The PPP plan will allow the company to spend 25 percent of the funds on things that are not payroll, whereas the retention credit doesn’t. They just need to look at the whole picture and see what the ratios are between payroll and overhead and things like that and see which one works out better for the client.”

There are various calculations and comparisons that need to be made to allow the small-business loan to be forgiven under the Paycheck Protection Program, including a comparison that applies to wage levels.

“It basically says no employee’s wage can be reduced by 25 percent or more, compared to the most recent full quarter of employment,” said Pete Isberg, head of government affairs at the payroll giant ADP, during a recent conference call with reporters. “That target doesn’t apply to any employee who makes over $100,000, so if they do earn more than $100,000 per year, their wages could be reduced without affecting the forgiveness provision. Also, there are restrictions in what you can do with those loans. Loan amounts may not be forgiven if they’re used to pay wages over $100,000 per employee on a prorated basis, or if they’re used to pay employees who live outside the U.S. They can be used to cover prior rent obligations, interest on mortgages, utilities and other expenses. But at least 75 percent must cover payroll. Of course, it’s still possible we’ll see further guidance in the coming weeks. What does it mean not to be forgiven? That sounds bad. Basically there will be an amount that will need to be repaid.”

Small businesses can also turn to their accountants to help them manage their cash flow.

“We all know cash is going to be an issue for businesses,” said Bain. “If they're going to slow pay, then they need to be upfront about it and not just leave their suppliers with uncertainty, and the same type of thing with their workers. They need to pay their workers for their work. And if they’re going to have layoffs or furlough employees, they need to help them with the transition, and be very communicative and document everything very well so that they cover their bases. It’s really important. They can contact their local workforce commission in the states where they have employees and do a mass claim on their behalf if they have a large number of employees that they will be either laying off or putting on a temporary furlough or something like that. They need to try to work with the people that are depending on them for cash and treat them in an ethical manner and then document what they have done. That will also help prevent some lawsuits and things like that down the road.”

The IMA white paper recommends businesses try to make sure they have enough cash flow for six months and look at whether they would be able to operate as a going concern over the next 12 months, but that’s going to be a stretch for most businesses to contemplate given the current crisis.

“A lot of the companies I’m talking to are saying that the situation is so fluid that they can’t really think that far in advance,” said Bain. “Some of them have never been able to project that far in advance. It’s important to keep some long-term goals in mind because being too shortsighted creates reactivity. In the white paper we’re definitely encouraging businesses to look for the opportunities because there are a lot of opportunities right now. It could be a merger or acquisition. It could be rolling out a new product or service. It could be changing your revenue stream, your product mix, that sort of thing, based on your new reality. I think restaurants have done more takeout than they have ever done before.”

Some companies are also changing their product lines to fill urgent needs like for medical equipment and personal protective equipment.

“A local business here in Houston is uniquely positioned to create a space mask type of product that they’re able to contact the local hospitals and tell them they meet that need,” said Bain. “They’ll have more business than they could have imagined in the next few months. That’s really a big increase for them. Then they become more relevant. They can even become the heroes in their community.”

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