Tim’s work at the Small Business Development Center (SBDC) is not unique to just Central Texas. Each county in the United States has a dedicated SBDC resource center. Interested business owners can complete a Client Assessment form on the McLennan SBDC website, www.mccsbdc.com, to be contacted by an advisor.
Paycheck Protection Program (PPP)
The most popular disaster loan is the Paycheck Protection Program (PPP). Local and national banks were flooded with applications with its initial launch. Tim reminded attendees that it is important for business owners to remember that many banks have already hit their lending capacity. Texas businesses alone completed nearly 400,000 loans totaling a staggering $40 billion. As of July 10, 2020, there are still $132 billion in funds remaining for businesses to apply for. While many banks have stopped accepting PPP applications, Tim had some recommendations if you are still wanting to send an application. To see if you’ll easily qualify for a PPP loan, you’ll need to do some quick math:
Net Income (based on your 2019 Schedule C)
Divide by 52 (weeks of the year)
Multiply by 4 (4 week period that PPP would cover)
Multiply by 2.5
If your result is $1,000 or less, Tim expressed that it may be very difficult to find a lender who will process your PPP application, but that he tries his best to place these businesses. For those interested in applying for the PPP, a very popular lender is Lendio.
The PPP was accessible to both for-profit and non-profit businesses. Of those who have already enrolled in the program, the top industries were Healthcare & Social Assistance, Scientific & Technical Services, and Construction & Manufacturing.
PPP Loan Forgiveness
A very common question that the SBDC receives is, “How will this loan be forgiven?”. Tim was hesitant to give a specific answer. He advised that borrowers should go directly to their lender for this information. Be wary of any other organization’s answers, as only your lender will be able to provide their interpretation of the SBA’s guidelines.
Some recent changes to the PPP requirements may make forgiveness easier to achieve. As of July 14, 2020, the following guideline changes have been made:
- Borrowers now have 24 months to spend the money on payroll, utility expenses, and rent.
- The payroll percentage requirement has fallen from 75% to 60% which is beneficial to businesses with smaller payrolls.
Tim clarified that forgiveness is the government’s ultimate goal and unless the requirements are disregarded, complete forgiveness is likely very achievable. Borrowers will be required to submit certain forms depending on the size of their company. If borrowers have trouble with getting their forms completed, Tim recommends asking their bank representative or lender for clarification.
The Economic Injury Disaster Loan (EIDL)
The second loan type is the Economic Injury Disaster Loan (EIDL). There are two parts to this loan– an advance and the loan itself. The opportunity to receive the advance has recently expired, but the EIDL loan is still available. Unlike the PPP loan, it is not forgivable but rather paid back over 30 years at 3.75% interest.
Here are some of the guidelines for EIDL loan usage (subject to change):
- CAN be used to make normal payments (utilities, vendor payments)
- CANNOT be used to pay out dividends or bonuses
- CANNOT be used for disbursements to owners unless it is for a typical salary
- CANNOT be used for repayment of stockholder or principal loans
- CANNOT be used for the expansion of facilities or acquisition of fixed assets
- CANNOT be used to repair or replace any physical damage to the property (use insurance for this)
- CANNOT be used to refinance long-term debt
- CAN be used to pay a vendor for a short-term loan or amount due
- CANNOT be used to pay off outstanding loans in full
- CANNOT be used to pay off an outstanding SBA loan
- CAN be used to pay a debt owed to the IRS
While there is a lot of grey area with the EIDL guidelines, Tim recommends that borrowers follow as closely as they can. He suggested that if you have a question on what is considered a permitted use of funds, always err on the side of caution and to reach out to a local SBDC advisor for guidance.
Many business owners are being turned down for the EIDL loan and major factors are poor credit and the accuracy of the provided information. According to Tim, those with unfavorable credit should not be discouraged. For some of his clients, Tim helped them build a report of alternative credit history with a letter of explanation for their unfavorable credit. Ask around to your vendors, utility companies, insurance agents, and others for letters that may build credibility for your business and increase your perceived trustworthiness to lenders. Tim and his clients have found some success by providing this information to supplement their credit reports.
Tim spoke on a key reminder for young businesses. Businesses that began operating after January 20, 2020 are not eligible for emergency relief loans. The purpose of this type of loan is to keep pre-existing businesses functioning through the pandemic and subsequent business interruptions.
Tim expects that a second round of EIDL funding may become available for borrowers after their initial six-month lending period, however, it may be more difficult to obtain. The first round of funding was very easily accessible, but Tim expects that if there is a second round it will be focused on hiring employees and applicants will be prioritized based on need.
Additional Funding Opportunities
Many cities and local chambers of commerce are offering grants to small businesses that are worth looking into. These are typically awarded to smaller businesses with very few employees and they may be a better alternative for those who do not qualify for the PPP or EIDL loan.
SBA 7(a) Loans are also a good option for business owners still needing funds. The SBA gave existing borrowers six months of payments and will be awarding the same benefit to any new borrowers whose loans are fully disbursed by the end of September 2020. Tim reminded attendees that the SBA is intended to act as a “lender of last resort” for businesses. It may be much easier to borrow through a local bank than it will be to be approved by the SBA.
How to Prepare for the Future
Owners should prepare now for the reality of a very different small business landscape. It is critical to assess how you operated your business before COVID-19 and how you’ll need to operate after. Evaluate what changes your business needs to make now to survive this crisis or any in the future.
- Increase your cash reserves. Now that you know what your business needs to survive, hold onto your cash in the event of an additional need.
- Prepare for changes in the workforce. Many workers were laid off and may not return to the same industry when they return to the workforce. Be prepared to find, train, and retain employees differently than you may have before.
- Make arrangements for supply chain shortfalls. Businesses are already feeling the effects of supply chain interruptions and increased demand. Now is a good time to increase your inventory to compensate for delayed or decreased supply. Seek out alternate sources for your supplies if possible. Tim expects this to be a problem for quite some time.
- Plan for increased cleaning and safety equipment expenses. Customers want to feel safe and it is in your best interest to invest in these supplies.
- Invest in Business Interruption Insurance. This safety net may be the difference between you and your competitors being able to survive the current business environment.
Contact Tim Holtkamp
We are so grateful for Tim sharing his expertise with us and small business owners all over Central Texas. If you have any questions for Tim, you can contact him at [email protected] or 254-299-8157.
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