Where to start on this topic…
I am going to break this up into several topics because they all deserve their own space and are likely going to be long posts. In this article, I will talk through how we, as small business owners, became informed about PPP. This spans initial media reports, to talking with our accountants and bankers and ends with our decision on applying for the PPP program.
PPP, What is it?
The Payment Protection Plan (PPP) was announced in March and came to fruition in April, 2020. As you know by now through reading my other posts, we were cautiously optimistic that the government was going to do something that could help small businesses that were getting decimated by shutting the economy down for Covid.
If you think small business owners were selfish because we need the economy reopened as fast as possible, you may be unaware of how small businesses work. If my business stays closed, I have no income, however I still have bills (rent, utilities, insurance, etc.) that I am required to pay even when we are closed. Mind you, I still have bills at home as well. Mortgage, food, utilities, etc. – no exceptions from those either. I don’t work 80+ hours a week for less than minimum wage because its fun, I do it because I believe I can build something to pass on to my descendants. And if my business goes under, there are generational impacts to my family. I not only lose everything I have worked for for the last 30 years, I lose my good standing, I lose my house, I lose everything. There is no safety net. There is no second chance.
Out comes PPP, the media and the politicians can’t talk enough about how it is going to ‘SAVE SMALL BUSINESSES AND THEIR EMPLOYEES’. We were glad to hear that. Our first perusal of the terms were concerning, but we held out hope that we were missing something that was actually beneficial for us. We proactively reached out to our accountants and business mentors for their take on the program. They had the same concerns we did.
Here’s the basics of the program:
- You have to spend the money in a 75% / 25% split with 75% going to payroll expenses and the other 25% going to other expenses
- You have 8 weeks to spend the money
- If the Government (Small Business Administration) doesn’t like how you spent the money or you don’t spend it according to the split, you have to pay it back.
Here’s where if you haven’t run a small business, you might not know that there are a lot of small businesses that don’t have a business model with 75% of their expenses in payroll. I know everyone thinks we’re made of money, but as owners of a startup, we don’t even make minimum wage and if the company isn’t profitable, we don’t get paid at all. We do pay our employees 30-60% over minimum wage, but it still wouldn’t get us to the 75% required by PPP.
So, the governments plan to save small business is to give them an 8 week advance on their payroll (they qualify you based on 1 month payroll expense times 2) and then give us 8 weeks to spend all of the money or we have to pay back this grant as a low interest loan. Without getting into all of the specifics, our actual expenses beak out into the following formula:
23% Payroll
77% Other business expenses that are not cost of goods sold
First obvious question is: How can we take the PPP and spend it in a way that actually benefits our business? We are a retail furniture store. If customers aren’t coming into the store, we do not need staff. There is also not endless cleaning or reorganizing that needs to be done in our 10,000 square foot store.
More than once I heard foolhardy business owners bragging that they were paying their employees to stay home. Unfortunately, I am not in a position to take out a what amounts to a personal loan to pay for employees to stay home – that is just craziness. I sincerely believed that there will be another huge round of small business closures directly attributable to owners that did not understand the terms of the PPP, who did not qualify for the “free money” and are unable to repay the loans. We talked to so many business owners that had not reviewed the terms or talked with an accountant about the implications.
Second question: How can we spend the PPP so that we spend 75% on payroll? Ok, let’s dive into this with additional PPP rules and regulations that complicate this one. You are not allowed to give yourself a raise, or any of your employees a raise when allocating PPP funds.
So, for example, if I have 8 weeks to spend $40, 000 and I have to spend $30,000 on payroll at a minimum in order for the PPP to qualify for grant status and not be paid back. 2 months of rent is over $12,000 (we have super low rent for a retail space) and then we have an additional $8,000 in regular business expenses like utilities and insurance etc…
Now, keep in mind that we already let go all of our employees except 1 because sales dropped nearly 80% during the week of March 15th as states started to close and lockdown citizens. As responsible business owners, we acted swiftly and let people go since we had no idea how long this was going to last and we are not going to go bankrupt because of COVID-19.
So our break down is roughly:
23% – Payroll
77% – Other Expenses
As you can likely guess, we didn’t apply for the PPP because we can’t spend the money in the format that the government prescribed (in all of their infinite wisdom) and still make it a grant to benefit the business. So much for the PPP being good for small businesses…
Fast forward to May 4th and everything changes for those people who should not have taken PPP but did anyway. Read more here
Of the estimated 45 million applications for PPP the Small Business Administration received, only 4% were approved.
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