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Paycheck Protection Program Loan Application Failed?

Missed the boat on your PPP loan? Consider five tips.Who knows how many small businesses applied for but failed to get a PPP loan.

Certainly millions. Maybe tens of millions.

Which begs an obvious question: What does someone who needed a PPP loan do now?

I have a handful of ideas for folks in this boat.

Prepare for Second Wave PPP Loan Funding

You may get a second chance to take a bite at the apple if Congress provides another tranche of funding. Stay alert to that.

For example, make sure you’re in line for a PPP loan someplace likely to restart lending.

Take time now to assemble the optimal documentation. (Maybe you want to get your accountant’s help this time around.)

And an awkward issue? If your first attempt failed because you lacked payroll cost to plug into the formula? Like say you’re an S corporation with no employees who just does shareholder draws? Or that you run a business that treats employees as 1099 contractors? Or say you just haven’t gotten around yet to filing your 2019 taxes?

See if you can take care of this stuff. See if you can be ready next time. (You might want to check out our blog posts about how the PPP loan formula works and about how you do PPP loan accounting if you get funding.)

Upgrade to a Better Small Business Bank

Let’s admit that some (maybe all?) of the big banks bungled this program for their smallest customers. This program worked terribly.

I’m thinking here of the two banks I use and their emailed promises to supply PPP loans to their customers. Promises later broken… But only after customers couldn’t apply for a PPP loan someplace else.

But hand-wringing about shabby treatment gets you no money. Accordingly, this idea: Look at the option of moving from that big bank you use now to some smaller community bank.

I have no name for you. Only this suggestion based on what we heard from clients. Talk to your small business owner friends and see if any of them got their PPP loan.

Consider the Employee Retention Credit Alternative

The PPP loans supply a business with free money. Usually. And you can’t beat free money. Usually.

But the federal government included other really significant assistance in the CARES act, too.

One of example of this assistance? The employee retention credit. We’ve got a longer blog post here, 50% employee retention credit, but the short description: You can probably get the IRS to fund 50% of the first $10,000 you pay an employee.

Many small businesses after looking carefully at both the PPP loan option and the employee retention credit, in fact, choose the retention credit.

The retention credit can in many situations pack a bigger punch.

Note: The retention credit seems to optimize in situations where a small business employs a number of modest wage seasonal employees and won’t be able to ramp up their workforce immediately.

Release Employees Who Can Rely on Unemployment Insurance

This awkward thought. If you haven’t already been forced to lay off or furlough employees—maybe you delayed because you hoped to get a PPP loan—maybe you reduce your workforce now. And then you let state and federal unemployment benefits support employees while you put your firm into hibernation mode.

To learn more about what you can expert, check out your state’s online resources. (Google is your friend here.)

You can get information on the Emergency Paid Sick Leave Act and Emergency Family and Medical Leave Expansion Act here.

But do know this. Substantial support exists for your employees. Furloughing workers so they can receive unemployment benefits and so you can conserve the capital you’ll need to restart in a few weeks or months may be best for everyone.

Cobble Together Bits and Bobs

Some small businesses can possibly cobble together a decent sized pot of state and local aid.

More than a few cities offer help. The City of Seattle, for example, runs a small business stabilization fund that provides $10,000 grants or loans to some small businesses. (More information here: Seattle small business stabilization fund.)

You don’t want the pursuit of free money to become your job. The odds seem long. Seattle literally runs a lottery for its grants.

But at the same time, the rules changed with the COVID-19 pandemic. And lots of federal and state aid exists—even if it quickly gets exhausted.

Dial Down Shareholder-employee Compensation

A quick esoteric point for S corporations. Look at the amounts you’re paying shareholder-employees. You need to pay shareholder-employees something reasonable. But as you know, any money you take as a wage triggers both income taxes and payroll taxes.

If you can avoid one or both of these taxes, that helps.

By the way, the worst thing you can do if you’re an S corporation shareholder who didn’t get a PPP loan? Invest additional money into the S corporation which you then return to yourself as wages.

Tip: We’ve got a blog post about when it’s possibly okay to pay zero wages to an S corporation shareholder-employee. You might want to look at that.

Copycat Big Service Firm Tactics

One final idea to leave you with? You might want to copy what some of the large professional service firms do.

For example, consider the approach used by the large CPA firms. The firms too large to qualify for a PPP loan or an employee retention credit.

In many cases, they are reducing their headcounts (say by 10%?), reducing their higher-wage employees by some percentage (like 10%) and then reducing business owner compensation by a significant amount (like 25%).

A combination of those tweaks surely adds up to way more than a PPP loan does.

Often the CPA firms seem to be combining cuts in spending that equal about 15% of their anticipated revenues. That’s a lot for firms that count as “essential services.”

Two Closing Cautions

I want to close with a couple of comments. Cautions, really.

First comment: What the economy really needs you to do? I mean, long term? Restart your business when you can. Began to make stuff and provide services again. Rehire people. That’ll be how you really contribute to the good of the community. You will probably be well-rewarded financially, too, if you can do this.

Second comment: I think you avoid actions that permanently damage your personal finances if you can possibly avoid it. For example, I would not think you tap your retirement account to fund your business. Just my opinion? You want the worst-case scenario you face as a small business owner to be this: You unfortunately liquidate the business… and then once the pandemic passes, you figure out what the next chapter looks like.

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