PPP Won’t Work for my Small Business

Apr 8, 2020 | Finance

Content Contributed by Scott Emley from High 5

Last night, the US Treasury sent out the “preliminary” (likely final) restrictions and definitions regarding the Payroll Protection Program (PPP) for small businesses like mine.

Please keep in mind that everything I say/write … that I am appreciative that our Government is moving quickly with little and changing data, and by no means am I smacking a gift horse in the mouth. However, after careful and repeated analysis using what I presume is current data, I am having a hard time seeing how the PPP benefits small businesses like High 5. I also want to preface this by honoring our Lake Travis and Austin communities, leaders, fellow businesses, guests and employees – who have been incredibly loyal and amazing despite the challenges. Throughout the process, we have experienced love like never before – which is truly humbling in such a strange environment (and for a business that is currently closed).

On March 16, through no fault of our own, High 5 was forced to close due to mandatory restrictions imposed by state and local government, and as a result, immediately furloughed 80% of our staff. Over the previous 5 months, High 5 enjoyed its best string of 5-months on record, capitalized with a huge party to commemorate the fact that (we learned and validated) our High 5 location on Anderson Lane was the ACTUAL LOCATION where in 1976 Jimmy Buffett tasted his first Margarita and inspired him to write Margaritaville! (yes, true! and can’t wait to continue celebrating the spot with Parrotheads from all over!)

As news of a possible pandemic began to break overseas, we pivoted to tighter safety and over-emphasizing visible cleanliness. We had amped up everything possible to remain safe and open for our community and staff, from implementing an Active Prevention Policy in February to installing bidirectional counters to ensure we had a limited number of guests in our facilities, to selling “every other lane” for space, and finally, even installing an outdoor deep-clean hand-washing sink at our entrance. But, on the afternoon of March 15, we determined that it was likely “socially irresponsible” to remain open and promote close contact in the wake of the growing pandemic, and closed the doors of all High 5 facilities in Texas. By March 16, the cities of Austin and Lakeway, TX followed with closures of non-essential businesses and restricting to groups of 10 or less. My commitment to each employee from the moment of closure, furloughed or not, was to fight for what is in our mutual best interest of High 5 and High 5 employees – and to commit to a High 5 Grand Reopening when allowed and reasonable from the stigma of COVID-19 and closures around the nation/world.

We instructed every furloughed employee how to claim unemployment ASAP. Within 48-hours of closure, we had contacted all of our landlords, lending institutions, and suppliers to indicate the predicament, and all but two so far are/were willing to share in the pain so that we could emerge together when allowed to reopen safely. We submitted a claim against our insurance business interruption, despite the unilateral email from our broker to all customers that COVID-19 was not covered. We want to be first in line when the government changes insurers’ minds – just like being evacuated from an imminent hurricane, business interruption should apply for businesses whether they are physically affected by the peril or not – in both cases, they are experiencing business interruption, and COVID is no different! Time will tell! When Texas became eligible for the SBA’s disaster loan (EIDL), High 5 was quick to apply – then reapply when the system changed to provide $10,000 ASAP, and possibly more with 30-year terms and a low 3.75%.

So, up until this morning, I had (like many others in my industry) viewed the PPP of the Care Act as a welcome help from the government – that I could use to pay landlords, utilities, and payroll. Initially, the PPP was presented as a program that would flow funds to us, as a 0.5% loan payable over 10 years, and if used to pay rent, payroll, utilities, and interest, would be forgiven. However, last night, the terms changed drastically. Only payroll would be 100% forgiven, and only payroll “spent” within 8 weeks after the loan was funded. Rent, utilities and interest would be forgiven at 25%, and any amount unforgiven would be due over the next 24 months at now anywhere from 1 to 4%.

Meanwhile, how are our furloughed employees doing, you ask? Until July 31, 2020, furloughed employees are able to make $600 above their unemployment income, thus anyone making less than arguably $50,000 could potentially make more income on Unemployment Income than I could compensate as a standard employee. Yes, it is a challenge for an employee to file and claim, but for those that are successful, the checks are flowing – and they are generally happy right now. (Check Box: furloughing was the right call apparently!)

So back to the PPP – the government’s goal is for me to bring all my employees back ASAP – so they can make their pay previous to furlough (less money) and to still not work because (recall) we are closed. This seems silly, as there is no incentive for me to do that for High 5 nor for the furloughed employee unless they make more than $50,000 annually.

So what if I take the PPP loan now, but don’t bring back my furloughed employees until 4 weeks from now (because there is no incentive for High 5 or the employee to bring them back while closed), presumably around the time we reopen? Or maybe even better, I take a risk and wait until 4 weeks from now to take the PPP loan, assuming that the PPP has not dried up yet and attempting to time the PPP benefit to the moment I can rehire and get employees back to work? In either case and in the meantime, the landlord still needs to be paid! As such, the forgivable amount (blending payroll and rent) ranges from 50-80% of the total by waiting to bring staff back, even if I try to time it. If we are eligible for (example) $500,000 of PPP loan, this means that anywhere from $100,000 to $250,000 is on my balance sheet and due in 24 months with interest! Monthly Mega-OUCH!

Enter the Employee Retention Credit, or ERC. If you take the PPP, you are ineligible for the ERC, so listen carefully and in light of the PPP challenges above. The ERC allows High 5 to take a $5,000 refundable credit against the first $10,000 an individual employee makes from “now” until December 31, 2020. Do the math – take your payroll over the course of last year and calculate (linearly, even though it will not be if you have cycles like us) what 7 months of payroll would be for each employee. For anyone making $10,000 or more, count $5,000 per head. Anyone making less than $10,000 during that timeframe, multiply their pay by 50% (i.e. will be anywhere from $1 to $4,999 for each head).

Sum it all up, and that is the refund benefit you could receive over the next 3 quarters. No debt, no worry about hiring back too soon, no time-bomb, and you are in control of your own destiny. Granted, rent is still due, but recall there is still that EIDL loan! If I borrow (say) $200,000 to pay rent, over 30 years at 3.75%, that’s under $1,000 a month. Granted that is an amount financed for 30 years, but less painful pill to swallow over the next 24 months than repaying a PPP… plus, we made back the amount in ERC along the way…

So, hence my conclusion: PPP is a time bomb for small businesses. Change my mind! The waters are challenging to navigate for all of us, but to ensure long-term success, at least for High 5, we should focus on as little debt as possible … and if we need to take it on, extend the terms for as long as possible so it does not hurt so bad over the next 24 months.

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