Like many small businesses across the country, most partner-owners in medical or dental practices, are experiencing a significant drop in revenue as a result of the response to the corona virus health risk and social distancing orders causing business to temporarily close. This has created enormous challenge and stress in meeting payroll and other operating expenses.
The CARES Act was passed on Friday, March 27th by the federal government announcing a $2.2 trillion coronavirus relief package. To provide help to small business owners directly, the CARES Act contains several provisions, including the Paycheck Protection Program (PPP). This program authorizes up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis.
In general, forgivable loans come with terms you must meet to avoid having to pay back the money. Failure to meet the terms of a forgivable loan contract will mean a borrower having to repay what he borrowed, usually with interest.
For the recent Paycheck Protection Program forgivable loans, you will owe money if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utility costs over the 8 week period after the loan is made. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for nonpayroll costs. You will also owe money if you do not maintain your staff and payroll.
Unfortunately, the overwhelming need for this type of funding flooded the banks and credit unions across the country, leading advocates to urge Congress to quickly replenish the funding before another waitlist piles up.
If understanding the flurry of legislative action over the last few weeks has been overwhelming to you while trying to keep your business running, the limited amount of funding has probably added even more stress. We have received many questions from our clients about the Paycheck Protection Program, especially now that it seems like it may not be worthwhile for you to apply.
We put together four facts about the Paycheck Protection Program to answer common questions we have received and to help you through the process during this trying time. Note that, as of 4/16/2020, these facts are current, but as we have experienced thus far, can be subject to change rapidly.
As originally reported by the The Hill, the original $349 billion in relief earmarked for Payroll Protection Program (PPP) loans has likely been exhausted with the current applications in the system. As a result, timelines for applications should be immediately accelerated for any business who has liquidity needs during this crisis. While the original strategy oriented around timing the loan for forgiveness with payroll expenses upon return to business as usual, doctors in need of liquidity need to recalibrate to view the loan as a source of liquidity to avoid insolvency, rather than focusing on loan forgiveness.
Even though the original funding has likely been exhausted, Congress will likely vote on a bill to replenish the proceeds within the fund. This is important, since many businessowners who hear that the funds have been depleted won’t bother to apply, believing that doing so is a fruitless endeavor. However, the application queue will be funded on a first-come, first-serve basis, which means the proposed $200 million in additional relief will likely only be received by applicants who submitted prior to the replenishing of the funding.
Although the loan is a nice benefit for owners who are trying to support payroll during this difficult time, unemployment benefits are still incredibly robust for staff members, many of whom are making more money while furloughed than when they are working. Ultimately, to achieve forgiveness of the PPP loan, 75% of the loan had to be used for payroll expenses, which means the ultimate loss for a doctor who does not get funding is the 25% that could be used for rent, utilities, or interest, plus the payroll the doctor could have received for himself or herself.
However, this could be a silver lining gift – for doctors to receive forgiveness on the loan, all employees must be reinstated by June 30, 2020. Doctors who do not rely on the loan can incrementally reactivate staff members from unemployment without firm deadlines, and ease back into a full payroll expense. Since these funds for the loans will NOT be available to cover expenses beyond the first week or so of June (due to origination dates of the loans prior to the fund exhaustion), this flexibility could be a blessing for a lot of doctors who didn’t need the liquidity and postponed loan application to maximize the length of time the proceeds could be used.
While the loan must be used to fund payroll, there is limited guidance on what is required to fall into compliance for forgiveness. As a result, it is advisable to keep clinical staff members on furlough while clinical duties are still limited, unless they can be cross-trained to take on administrative or front-office duties in the practice. While these proceeds that would have been paid to clinical staff members for April payrolls will ultimately need to be used for payroll expenses, these proceeds could be used later to fund retention bonuses, advanced weeks of payroll, or prefund retirement plans. However, additional guidance needs to be provided before committing to a specific strategy, since it is subject to change rapidly with additional clarity from the SBA or Treasury.
As we saw in the first wave of paycheck protection funding, there is not an unlimited supply of money. If your business needs funding, act now!
We are closely monitoring developments with the CARES Act, including the impact to private practice owners, retirees, and student loan borrowers. There will be certainly be more confusion in the days ahead as we all work to make sense of the news and developments. Rest assured, our team is diligently working to interpret the information available to help you and your family navigate to the other side of this valley. Stay tuned for more updates, and please don’t hesitate to reach out with questions.
During good times and bad, we’re here to help you make smart decisions with your money. If you have immediate questions, please click here to get in touch with an SDT Advisor.
Andrew Tucker is a Financial Planner at Spaugh Dameron Tenny team. He treasures the opportunity to help medical and dental practice owners develop clarity and purpose in their businesses, so that they can focus on their profession.
For over 50 years, Spaugh Dameron Tenny has provided comprehensive financial planning for physicians and dentists in Charlotte, NC. In addition to providing personalized advice, we walk our clients through their options to help maximize finances and maintain financial security.
Securities, investment advisory and financial planning services offered through qualified Registered Representatives of MML Investors Services, LLC. Member SIPC. Supervisory office: 4350 Congress Street, Suite 300, Charlotte, NC 28209, (704) 557-9600. Spaugh Dameron Tenny is not a subsidiary or affiliate of MML Investors Services, LLC or its affiliated companies.→ Check the background of your financial professional on FINRA'S Broker check