Top Tips on Applying for a CARES Act Loan

Herring explains details of Paycheck Protection Program loans

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The Coronavirus Aid, Relief, and Economic Security (CARES) Act is a $2.2 trillion stimulus and benefits package passed by Congress to assist small businesses facing uncertain times due to the COVID-19 pandemic.

Greg Herring, founder and CEO of The Herring Group, a consultant company, addressed the role of the CARES Act for small business owners, specifically landscapers, during a recent webinar hosted by the Aspire Software Company.

His primary focus was to provide an overview on the Paycheck Protection Program, a federal relief program established by Congress and implemented by the U.S. Treasury Department and the Small Business Administration (SBA) with rules, requirements, protocols, and processes that all participating banks must follow.

He also reviewed a couple of other components of the bill.

“There are some other elements of that act that are relevant, but I can hit them just at a very high level because they're fairly simple,” Herring said.

First, for any small business owner that has an existing Small Business Administration loan, the SBA is going to pay principal and interest payments for six months.

Herring said the second provision small business owners need to be aware of is the ability to tap into up to $100,000 in their retirement plans to use and could repay over three years with no penalty or income tax. Failure to repay leads to no penalty but the ordinary income tax will be applied to the amount withdrawn from the retirement plan. That provision remains viable through Dec. 31.

Paycheck Protection Program

Through the CARES Act, small business owners can apply for an SBA long for 10.8 weeks of payroll. The significance of the loan is that based on a certain calculation, the loan can be forgiven.

“Essentially, you're having an eight-week time after you receive the funds to track your expenditures incurred and paid,” Herring said, noting that would include payroll, rent, utilities and interest.

“You're going to get a loan for 10.8 weeks of payroll. and then you're going to be able to use that loan for to fund eight weeks of payroll, and then just doing the math that leaves about 2.8 weeks of payroll left for rent, utilities and interest,” he said.

If payroll was flat, looking back at the base period, which is used to calculate the loan amount and looking at the eight week period, then you're going to get most of that loan forgiven, assuming that you have at least 2.8 weeks of payroll.

“Certainly, the goal is 100% forgiveness, but even 50% forgiveness is a fabulous deal right now,” Herring said.

In order to get 100 percent forgiveness, you need to have:

  • No reduction in full-time equivalent employees.
  • No reduction or less than a 25% reduction in individual salaries and wage rates.

“This is computed at the individual level so if I work for you and I was paid, $100,000, and now you're paying me $70,000 then I'm going to have more than a 25% reduction,” Herring said.  “You don't want to reduce my wages.” Herring said he had a client that had done some wage reductions and was encouraged to restore them prior to getting the loan.

  • Payroll cost increases + rent + utilities + interest > 2.8 weeks of payroll costs

“Simply put, if your payroll costs go up and those numbers are greater than 2.8 weeks of payroll and you're going to be 100% forgiven,” he said.

To further clarify, Herring noted that the rent, utilities and interest debt must be in place prior to Feb. 15. Also, he said normally when debt is forgiven its taxable, however, in this case it will not be.

Rule #1

“If you only remember one thing, remember this one.: You may only use the loan proceeds to fund payroll costs, health care benefits, rent, interest and utilities,” he said.

If a business owner takes out a $1 million loan, the funds must be used on those items. “If that means you can't use it all in eight weeks., you have to use it after the eight weeks but on only on these items,” Herring said.

He stressed that for those planning to buy equipment or vehicles for cash, it needs to be very clear that the loan proceeds were not utilize for those purchases. “That's the way that you can really get messed up and have the government accuse you of fraud,” Herring added.

Rule #2

According to the CARES Act, it may be possible to delay, when the eight-week period starts by waiting to sign the loan documents.

“If your payroll was running behind last year, and let's say you're in Michigan and you're shut down but you think you're going to resume, you would want to have a discussion with your banker as to whether you can hold on to that paperwork and sign it when your payroll is going to be closer to what it was during that base period calculation that you used to apply for the loan,” Herring said.

Generally, he said it is important for contractors to be talking with their bankers and not miss out on the loan opportunity.

“Better to get the loan and have less optimal forgiveness than not to get the loan,” he said. “I think if you're all the way through that process, and it's just a matter of signing the paperwork there may be the opportunity to delay it.”

Quick and Dirty Calculation

To provide example, Herring suggested a business that in 2019 had 100 full-time equivalent employees with a payroll of $400,000 per month.

That same owner gets a loan for $1 million, so that’s $400,000 times two and half. For the example, he said the employer drops the number of full-time employees to 80, (a 20 percent reduction) reducing the payroll to $320,000 per month and $100,000 per month in rent, utilities and interest.

Based on that scenario, gross forgiveness is approximately $775,000. However, Herring explained that because the number of FTEs went down from the base period to the current period, the forgiveness gets cut by 20 percent to $620,000.

“This is where some planning could facilitate you receiving more forgiveness,” Herring said.

If there is no other recourse but to lay people off, he said to participate in the PPP program, it needs to be done by April 26 and they need to be rehired by June 30.

“You won't necessarily have a cut in those FTEs, and you might not have that additional penalty so to speak for against your forgiveness,” Herring said.

A full version of Herring’s PowerPoint presentation that goes into greater detail on the loan process is available.

For additional information on the CARES Act, The Herring Group has an entire page of resources available related to COVID-19 issues.