When the Coronavirus Aid, Relief and Economic Security (CARES) Act was announced in March, small businesses like mine had to decide whether to apply for the Paycheck Protection Program (PPP) to keep our employees on the payroll. As the pandemic hit, I saw that our clients — who are attorneys, accountants and other small businesses — would suffer as their own clients decided to put projects on hold and delay new work. Although our work hadn’t yet declined substantially since others needed our help to set up remote working, I could easily foresee a substantial drop in our business. Then our clients quickly started putting major projects on hold, and prospective new clients immediately delayed making any decisions. A few clients suspended operations and cancelled services or suspended making payments to us.
So, I sat down and analyzed potential scenarios, estimating that declines of 10 to 30 percent are within the realm of possibility. At the 10 percent mark, we could survive with leadership taking a small hit to our paychecks. At 20 percent or higher, though, we’d need to let go of staff and apply cuts across the board. I faced a choice to either proactively implement pay cuts, furloughs and layoffs or keep everyone on the payroll and apply for a PPP loan. We decided to apply for funding. We received a loan, and I was confident then that we’d meet all of the requirements for forgiveness down the road. We did exactly what the government asked of us: “Don’t let people go. Keep them on the payroll for at least eight weeks and we’ll forgive the loan.” But now I’m not so sure about that forgiveness.
Two weeks ago, Republican Senator Ron Johnson of Wisconsin wrote an editorial for the Wall Street Journal calling for limits to the PPP loan forgiveness. He plans to introduce a bill to Congress that would retroactively require businesses to pay back the loan if their sales didn’t decline more than 40 percent due to the coronavirus. Now my team and I are considering what to do next. I am certainly hoping our business doesn’t decline by more than 40 percent! But if it declines only 20 percent or 30 percent, I’ve now incurred the extra payroll costs I could have saved through pay cuts or furloughs.
On a recent web meeting, I talked with IT service company peers across the nation to hear their thoughts. As we see it, there are three possible options to deal with the loan forgiveness uncertainty:
1. Give the money back and immediately make the cuts as needed.
Recent news stories have reported that several large companies have returned their disbursements, and a few were called out publicly. Will we see additional calls for businesses to return their funds if they can’t “prove” a certain threshold of lost revenue? Johnson’s editorial has already sparked this type of conversation, and there’s a sense that if companies could use other sources of capital, such as a line of credit, they should have done that instead. If you choose this option, you are essentially now “on your own” without government help.
2. Keep the money and take your chances by spending it now.
Some business owners are convinced that there will be no backtracking and that the loan forgiveness promise will be kept. On the loan application, businesses had to certify that the current economic uncertainty made it necessary for them to use the funds to support ongoing operations, and loan forgiveness would be given for payroll costs if all requirements were met. If a new threshold is introduced, however, this could negatively affect companies that don’t meet that retroactive specific percentage of business decline.
For IT service companies like mine, our type of work is deemed “essential” since we’re keeping the servers running and websites up while the country works from home. At the same time, IT professionals are often paid above average as compared to other industries, and keeping highly paid people on payroll who don’t have enough work to do is expensive. If projects are canceled, keeping them on payroll is a huge risk. If you choose this option, you are taking a chance that you will be forced to begin repaying the loan over 18 months starting in October. Making those big payments might force you to lay off people then!
3. Keep the money but don’t spend it and wait to see if requirements change.
Other business owners have told me that they plan to set the PPP money aside (draining other cash reserves and drawing on lines of credit). They plan to keep their payroll costs as they are now and hang on as best as they can for as long as they can. As they wait for clarity, they may spend half or more of the loan amount to keep people on payroll. This is the “wait and see” option, which is only available to those with resources enough to withstand 20 to 30 percent revenue drops in the hope that they can use PPP money to “catch up” later.
For many businesses, of course, waiting isn’t possible. They’ve already spent the loan to cover costs in April or May, or it already looks unavoidable as June approaches. Either way, if we don’t receive clarity by the end of May, we may have to make the hard choice to start spending now or start letting people go before we tap into the PPP money.
Ultimately, if we knew what might happen to our business revenue in the future, we could easily make an appropriate decision, even if there might be a percentage of decline threshold that must be met for loan forgiveness. At the moment, though, the best we can do is plan our future based on our business scenarios, roll the dice, and take a chance on what happens next.
