If you are one of the many being forced to consider the gut-wrenching possibility that, despite receiving Payment Protection Program (PPP) and/or Economic Injury Disaster Loan (EIDL) funds, you may have to shut down your restaurant, you many be wondering what happens next. Will I still owe the government for what I spent?
The PPP offers a feature that will allow 100% forgiveness. The passage of the Paycheck Protection Program Flexibility Act made it even easier to receive forgiveness, allowing businesses to spread the use of the funds over a 24-week period vs. the initial 8 weeks, and realigning the percentage required to be spent on payroll from 75% to 60%.
With the extended time and lower percentages, forgiveness seems simple. However, there are other factors that can influence forgiveness. One is a reduction in forgiveness if the business has reduced the weekly number of full-time equivalent (FTEE) employees. Another reduction will occur if salaries and wages have been cut by more than 25% for any employee who fell below the $100,000 annualized mark for the used payroll period.
One interesting wrinkle is the lookback date – the selected period used for the determination of the loan in which the SBA compares the salaries and full-time employee equivalents – has been moved from June 30 to December 31, 2020. The amount of forgiveness is reduced by a percentage depending on the reductions in either or both categories during this time period. There are exceptions – if an employee is made an offer to return to their position and they refuse in writing, this will not be counted against the business. The pushed back date means that forgiveness will take a while.
Another interesting scenario is if the business took an Economic Injury Disaster Loan (EIDL) advance as well as a PPP. In the CARES Act, the advance will be deducted from the amount of the forgiveness of the PPP, since you can only be forgiven up to 100% of the loan amount. The EIDL advance can be repaid or become part of the PPP and convert to a 5-year loan at 1%.
What if the business took the PPP funds, is unable to meet the forgiveness requirements and shutters? What then? The lending institution that initiated the PPP loan will process a claim with the SBA for an honor of the guarantee.
In the case of the PPP, there were no collateral or personal guarantee requirements. This means a default would automatically trigger the SBA guarantee of 100% of the loan. The bank could not legally seize business or personal assets and liquidate for repayment. However, the business now is in default to the federal government, which could seize federally held funds, such as the company’s tax refunds, until the note is satisfied. Also, the company would be reported to credit scoring companies, such as Dunn & Bradstreet, making it difficult to borrow money again.
The EIDL is completely different. This loan was made directly between the business and the Small Business Administration. The EIDL advance did not require repayment, even if the EIDL loan was ultimately not received (only if a PPP loan was also made to the business).
The EIDL is a loan at 3.75% for up to 30 years. There are no collateral requirements for EIDL loans of less than $25,000 and no personal guarantees for loans less than $200,000. So if you received an EIDL loan of less than $25,000, the same is true as the PPP – you just now owe the government.
However, loans more than $25,000 and less than $200,000 required a “blanket lien” on all business assets. This means the Small Business Administrator or a legal agent for them will sell the assets of the business to cover the loan debt and any fees that occur in the process of collection. Once the loan is more than $200,000, then the personal guarantee of the owner of the company comes into play, exposing them to negative reporting on their credit reporting and possible seizure of their personal assets.
A grey lining (we can’t call it a silver lining) is that a business can seek bankruptcy protection to avoid a default. The SBA’s primary goal is to assist small businesses in growing the economy, so they are more likely to work with the business to reach an amicable settlement.
There are factors to consider, including any loan that goes into default or into bankruptcy will be closely examined. All numbers used to determine the loan amounts will be scrutinized. This could cause a lender to lose the guarantee or a loan not to be discharged in a bankruptcy.
Another factor to consider is the PPP guidance does allow the U.S. government to pursue criminal charges against the related borrower if it finds the proceeds have been used for fraudulent purposes, say purchasing a Rolls Royce, a Rolex, a beach home etc.
It is always a difficult decision to close a business, and even more so when there are employees involved and the good name of the business. There are currently discussions to forgive all PPP loans under $150,000 without going through the task of applying to the bank, then the bank applying to the SBA, and the lookback for the full-time equivalents and salary reductions before issuing the forgiveness. There is also the proposal of a second wave of PPP loans to those businesses that have exhausted funds from the initial rounds.
This could be a lifeline for those who have yet to reopen but have spent the allocated funds and now have no money. The hospitality and food service industry is a vital part of the economy and must be provided a way to survive and flourish. Hopefully the federal government will find another way to do so moving forward. ν
Daniel McCoy has been a business consultant with the UGA-Small Business Development Center (SBDC) at Kennesaw State University since 2017. In his role with the SBDC, he has been a key player in more than 45 new businesses going from idea to sales, including restaurants, franchises and food trucks, and has assisted in more than $10 million in capital infusion. He has more than 20 years experience in the banking industry and 14 in the retail world, and is a Certified Professional for the Society for Human Resource Management (SHRM). For more on how the UGA Small Business Development Center can help your concept, go to georgiasbdc.org.
This article first appeared in Restaurant Informer‘s October 2020 issue. To read the full issue, visit the magazine issues page. Do you work in the Georgia’s restaurant trade? Sign up to receive a free subscription to Restaurant Informer and the monthly Enews.
