Thinking Strategically About SBA Relief Loans

The only way to generalize how the Covid-19 pandemic is affecting small and mid-sized businesses is to say that we’re all affected. Most of the business owners we’ve spoken with have had their heads down trying to understand how to access relief loans and/or how to maximize their use once they have the money. Using the loan strategically, to optimize the number of funds that are forgiven, is critical. Here are some tips that will apply to many different types of organizations:

Understand what costs are eligible for forgiveness

As a business owner, you want to pay back as little money as possible on your relief loan. That means understanding what costs are eligible for forgiveness and which ones are not, so that you can spend strategically.

Eligible for relief

– GROSS wages to employees

– Payments to active general partners (within limits)

– Payments to self-employed business owner (within limits)

– Employer portion of group health benefits

– Employer portion of retirement benefits

– Employer portion of state unemployment

NOT eligible for relief

– Annualized wages over $100,000

– Payments to independent contractors (1099 costs)

– Benefits to self-employed business owner

– Employer federal payroll taxes (SS/Medicare/FUTA)

– Payroll service charges

– Qualified sick/family leave

– Wages if the employee’s principal residence is outside the U.S.

We have heard of self-employed business owners being particularly confused by the ins-and-outs of these loans. This is a great time to go over the details with your accountant to assess how you can pay yourself vs. what goes back into the business this year.

Understand how forgiveness works and plan for it now

Before you even start to estimate how much of your loan may be forgiven, it is important to pause and note that getting “forgiveness” is very likely going to be a little more labor-intensive than it was to get the loan in the first place. Lenders wanted to help as many businesses as possible and were in a position to approve loans relatively quickly. They will be very careful on the backend, requiring clear paper trails on how that money was spent before they calculate how much money they will forgive. Planning now and carefully tracking as you move forward is critical (if your accountant has not already brought this up, they will).

Sometimes it helps to think this through without numbers. Your lender approved this loan based on a set of information that you provided. When you go back to ask for forgiveness, they will calculate the eligible costs incurred/paid during the time period after the loan was disbursed. Then they’ll check to see if the information you originally provided is still accurate, or if things have changed, and factor that into their forgiveness calculation. For example, if you had to let an employee go and your headcount dropped, that will reduce your forgiveness amount. Or if you had to reduce wages a significant amount.

The actual calculation is “costs eligible for forgiveness – calculated reduction in forgiveness amount = loan forgiveness”. An understanding of how your forgiveness amount could be reduced should factor into your business decisions over the next quarter.

Every business is different

As we watch our businesses every day, we’re noticing that they fall into four categories:

– Playing defense – these are the organizations that are unable to operate normally, are actively losing money, and are just trying to keep their head above water

– Stabilizing the ship – while things are far from normal, other businesses have been able to lock down to prevent catastrophic loss and are sitting tight for the time being

Pressing reset – some businesses have been able stem some of their losses and are thinking hard about how to modify their business model to survive in a new and largely unknown environment

Playing offense – finally, there are a handful of industries that are essential or highly in demand right now. Even with money coming in, they are struggling to operate safely, plan for the future, and survive without knowing what’s coming next

We will write about each of these four categories more in coming weeks and the challenges and opportunities they face.

No matter where your business falls on this spectrum, we can help. Contact us for a confidential discussion of how to think about your specific situation.


Source: PPP Forgiveness Calculation. GMS Surgent Certified Public Accountants and Advisors. 24 April 2020. Webinar.

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