Armanino Blog

You’ve Received Your PPP Loan Funds – Now What?

by John Schweisberger
April 21, 2020

If you are among the millions of small businesses that applied for a Paycheck Protection Program loan, and better yet, you have actually signed the loan documents and received the funds — congratulations!

Time to breathe a bit easier, right? The eight-week reprieve is in hand, and now you can rest secure in the knowledge that your business will make it through the second quarter…

Well, not so fast – this is most definitely NOT the time to rest. To the contrary, this is the time to develop your plan for what to do with the loan money, and more importantly, what to do after the loan money runs out eight weeks from now.

Everyone knows that the PPP funding needs to be used primarily to pay your employees. In fact, 75% of the proceeds are required to be spent on payroll costs in order to qualify for forgiveness. (If you use the loan for expenses outside the 75/25 ratio, the amount that is not forgiven will be rolled into an SBA 2-year loan at 1%.) This raises several tricky questions:

  • What will business conditions look like in eight weeks? Will your business still be impacted or shuttered?
  • Should you re-hire all, some or none of the employees you laid off?
  • Should you bring furloughed staff back on active payroll?
  • Should you reinstate salaries that you reduced? And do you need to bring them back up to 100% or can you raise them incrementally?
  • If you decide to only activate some of the furloughed or laid off employees, which ones do you bring back and how do you do that while staying compliant with the many labor laws?
  • After the eight weeks, will you have to turn right around and lay off/furlough the same people you just brought back on board?
  • Is 100% forgiveness of the loan the right goal?
  • What happens if you don’t hit the 75% payroll costs threshold?
  • If you carry some of the PPP loan proceeds over into a 2-year note at 1%, how much should you try to carry over and what do you use it for? Furthermore, what’s your ability to repay that money?

The answers to these questions are not always obvious. Every situation is unique and has its own set of complicating facts, but one aspect is common to all: every borrower needs a carefully thought-out plan. At no time in the history of the American economy has the need for strong financial planning been more important to more businesses.

The 13-Week Cash Runway and Waterfall

There is more to your business than the four categories of spending covered by the PPP loan. And, you have many more stakeholders than just the SBA. A good financial plan for these troubled times begins with a thorough assessment of all your sources and uses of cash to determine your cash runway. We have a useful primer on this entitled “Just Live: Cash ‘Triage’ for Small to Mid-Sized Companies.

The triage exercise in that article highlights challenges and raises potential actions to the surface. Again, there are many variables to consider when building a financial forecasting model that will help you select the best options available and enable you to track the implementation. The strong model presents you with both long- and short-term options and associated impacts with best and worst cases, and allows various levels of stress testing.

Your team should look not only at the next eight weeks, but also the five weeks beyond, the next quarter, and even the year beyond that, if appropriate. You should also incorporate all aspects of cash flow relief, such as the payroll tax deferral option and the employee retention tax credit outlined in the Coronavirus Aid, Relief, and Economic Security (CARES) Act or the tax credits associated with leaves of absence provided by the Families First Coronavirus Response Act (FFCRA).

Once your model maps out where cash is coming from and going to, it’s time to take a look at the most often overlooked part of liquidity management: the waterfall. As its name suggests, the waterfall analysis describes the various claims that stakeholders have on your cash, in the order of priority as the cash flows out your doors. The analysis must take into account not just the actual dollars involved, but also the collateral that may be pledged, the risks associated with each level and the downstream ramifications.

The PPP loan introduces a new funding device to your business, one that may or may not play well with other funding agreements you have in place. It is important to understand whether the PPP funds create other unintended consequences with these other sources.

The Survival Plan

With the triage complete, the runway surveyed and the stakeholders considered, and armed with the insight you need to consider your options, now it’s time to actually build your plan. It should prioritize the immediate, near-term and longer-term actions you should take to best assure the survival of your business, along with a Plan B and Plan C in case certain variables turn against you. Most importantly, your plan must include metrics — especially forward-looking ones — that will enable you (and other interested parties, like your banker) to track performance and give everyone visibility into the operations of your business.

Any survival plan will involve many hard decisions. Be prepared to make them, as distasteful as they may seem. Negotiations with lenders, vendors and investors may be necessary; remember, they too want your business to survive, even though they have their own needs to meet. You may have to hold back on restoring all your staff, or worse, let additional people go.

Every decision at this point needs to be taken with an eye towards survival. Nobody — not your investors, bankers, the government, your employees, customers or suppliers, and especially you — wins if your business fails.

Our experienced teams have guided hundreds of companies through downturns. We can help you with everything from business strategy to HR to providing experts to augment your internal staff. Reach out to learn more. And for the latest resources on keeping your business running during disruption, visit our COVID-19 Resource Center.

April 21, 2020

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