New SBA Relief Funds Available for 2021

New SBA Relief Funds Available for 2021Many who were holding SBA loans in 2020 saw their interest and principal payments automatically made for six months due to provisions made in the CARES Act.  Some new funding has been released for a second version of this program in 2021.  But changes have been made by the SBA in February, so we wanted to ensure our readers got the most current and accurate information.

The 2020 Program

The original program was backed by $17B in funds.  The new program included guidance on the loan payments made by the SBA in 2020, and the news is good.  Not only were those payments made on your behalf not taxable, but the interest and fees paid by the SBA are now deductible!

The SBA programs that were eligible included:

  • 7(a) loans (general small business loans up to $5M, and the loan type that is the majority held by the SBA)
  • 504 loans (major fixed assets/real estate loans up to $5.5M
  • Microloans ($500-$50,000 small business loans)

The 2021 Program

The new funding is derived from a bill that passed in the final days of 2020 and had promised the same six months of payments by the SBA for all new loans all the way until the end of September 2021.  Ostensibly this would be one more incentive for people considering buying a business to make a decision: the government was offering free money to make that leap.

If the loan was fully disbursed on or before September 27, 2020, it was eligible for the original six months under the CARES Act and the previous program.  Any loans that were fully disbursed after September 27 would come under the 2021 program.

The 2021 program also noted that those in particular sectors could be eligible for up to an additional five more months of payments, namely:

  • Food service
  • Accommodations
  • Arts and Entertainment
  • Recreation
  • Education
  • Laundry
  • Health Care

However, it seems that over the holidays somebody in the SBA was actually running some numbers and realized that the paltry $3.5M allocated for this second round could not possibly deliver on the promises.  So, in mid-February the SBA sent out a procedural notice.  As government documents go, it’s surprisingly readable and thankfully short.  But in fairly straightforward language we read:

SBA has determined that the $3.5 billion that was appropriated to carry out Section 325 of the Economic Aid Act is insufficient to make the payments for the periods authorized by Section 1112(c)(1) of the CARES Act, as amended by Section 325 of the Economic Aid Act.

In other words: we’d like to give you more money, but we know we won’t be able to.  The document goes on to shorten the promised six months of payments to three months for any new loans, and a possible three additional months (instead of the five previously discussed) for those impacted sectors.  

The document also lists all the NAICS codes that are eligible for this program.  In case you didn’t know, a NAICS code is used by the government for statistical purposes and puts industries into neatly organized codes.  812111 is the code for a barber shop, for example (also one of the codes eligible for the program).

Who’s Eligible?

If you get a new SBA loan in one of the categories listed above between February 1 and September 30, 2021, the SBA will make your payments subject to funds.  That means you could get a loan by July or August, well before the deadline, and still miss out because the SBA has no more money for this program (unless more funds are allocated for this program before then).  So, that means if you’re interested in this “free government money,” you’ll need to move quickly.

To get an SBA loan you don’t have to prove the decline in revenue necessary to qualify for the second round of PPP funding, but you do have to show you have been unable to get credit elsewhere.  Ironically, those who weren’t previously eligible for SBA funds may now be eligible because the financing options they once had have disappeared.

Need some bankers who are familiar with the SBA to help you navigate this?  We know some great ones.  Give us a call and we’ll connect you.

PPP: 2021 Edition

PPP: 2021 EditionOne of the final acts of the outgoing administration in Washington was the signing of a bill that had $284B allocated for a second round of the Paycheck Protection Program (PPP).  The program is set to last until March 31, 2021 or when all the allocated funds have been assigned, whichever comes first.  The pool of those eligible for this round is significantly larger than last time, and in even better news for some, those who already received a first PPP loan and had it forgiven are eligible to receive a second one.  

Eligibility

First-time borrowers must have a business of under 500 employees, and that business must have been operating since February 15th, 2020 (and must still be operating).  Gross receipts in the first three quarters of 2020 must have been reduced by at least 25% from the corresponding quarters in 2019.  The loan amounts are capped at $10M.

Second-time borrowers must have a business under 300 employees, and must have used or allocated all of the funding they received under the first round of PPP.  Their loan amounts are capped at $2M.

How to Calculate

There are two ways to calculate your loan amount.  You can take either:

  • Average monthly payroll in 2019 or
  • Average monthly payroll in the year prior to the start of the loan

That number is then multiplied by 2.5 for most businesses, or 3.5 for hospitality businesses.  It’s just one of many boxes on a standard government form.

What Expenses are Eligible?

In round 1, the eligible expenses were narrowly defined: rent, mortgage interest, payroll, and utilities.  This round took account of several other costs:

  1. Property Damage.  If your business was the recipient of vandalism, looting, etc. that was not covered by insurance or other compensation, repairs are covered.
  2. Operations Expenditures.  If your business had to get new digital infrastructure to enable remote working, for example, such as software or cloud services, those costs are covered.
  3. Supplier costs.  If you had payments to suppliers whose products/services were essential to you at the time of payment (or are now), those payments are covered.
  4. Worker protection.  If you have had to make changes to your work environment, such as construction of barriers, expansion of the premises for social distancing needs, installation of filtration or ventilation systems, or ongoing costs like masks or gel, those costs are also covered.

Tax Implications

The forgiveness guidance given for the first round of loans is the same in this round, but with more explicit financial and tax guidance.  Points worth noting include:

  • The loans have a five year maturity, and are pegged to a 1% non adjustable, not compounding interest rate
  • No prepayment penalties may be levied by lenders
  • The covered period (the period in which the loan must be used in order to be considered forgivable) can be between 8-24 weeks, and can be chosen by the borrower

The SBA has a tool to help you find a lender in your area (as well as a PDF defending themselves from accusations of abuse from the first round of PPP).  There are even some nonbank lenders getting in on this, including Square (known for its point-of-sale and credit card processing business) and Fintech player Kabbage.

Clarification was also given that PPP forgiven funds would not be taxed as income, and any normally-deductible expenses paid for by PPP funds would remain deductible.

Should You Take the Money?

At the risk of sounding like an accountant, “it depends.”  If you really need the money and are eligible, there’s already precedent in place for loan forgiveness so there’s virtually none of the uncertainty that existed last year when the first round of PPP came out.  

If you are considering selling your business, talk it over with a business broker (we know a few) as to whether this is something that should be done before putting your business on the market.  

However, if you don’t really need the money, then you probably shouldn’t take it.  There’s not an unlimited pool of funds, and there are businesses out there that could really use those funds to not just “get by,” but simply survive.  If we are going to make it through these months and years together, we are going to have to (continue to) think of others even as we make highly personal business decisions.

One of the new skill sets we picked up in 2020 was learning the sorts of questions banks contemplating a buy/sell business transaction are asking when Covid-19 and PPP are in the mix.  To learn more, feel free to give us a call.

PPP Forgiveness: An Update

United States CurrencyA lot has happened since we first wrote about the Paycheck Protection Program (PPP) earlier this year. Some of those loans have actually started to be forgiven, and we wanted to make sure our Apex clients and readers have the most up to date information.

Timeline

Unbelievably, $134 billion of congressionally approved funds went unspent when the program stopped taking applications in early August. It was around the same time that the government began accepting applications for loan forgiveness and in late October we began to see the first positive decisions.

The deferment on loan payments was ten months after the last day of your “covered period.” The covered period is usually defined as the period between the disbursement of the loan and the subsequent 24 weeks. If you want to avoid making any loan payments whatsoever, you need to put the application in during this deferment period.

Your application will go to the lender who originated your loan. They have 60 days to review it and then it is forwarded on to the SBA, who has 90 days. But given the timelines we’ve already seen above, those are worst-case scenarios. Some lenders, like JPMorgan Chase, which has the most PPP loans by dollar amount, have been sending emails to customers inviting them to apply for forgiveness based on when they received their loan.

How to Apply

The latest (and simplest) form is the 3508S, aimed at loans of $50,000 and less. Nearly 3.6 million of the over 5 million PPP loans were for amounts of $50,000 and less, and accounted for about $60 billion in loans.

Form 3508S focuses more on certification than on calculation. The calculation usually revolves around your payroll. To qualify for forgiveness, at least 60% of the loan must have been spent on payroll. The remainder could have been used for other eligible costs like mortgage interest, rent, and utilities. But rather than get the paperwork necessary to back up those other eligible costs, take a look first to see if you hit the amount just on payroll alone: many do. Furthermore, the earlier murmurs about forgiveness being somewhat mitigated because of employees that were let go or pay cuts in general seems to be resolved in the 3508S, which penalizes you for neither.

If your loan amount was more than $50,000, you may need to use the 3508 or the 3508EZ. The EZ form has generally been aimed at those who are self-employed with no employees or who maintained salaries and head count at certain levels. But check with your banker and accountant to be sure.

Talk to Your Bank and Be Proactive

What we’ve learned this year is that those who have kept an open line of communication with their banker and those who have acted with speed have had good things happen when it comes to government aid. This isn’t a situation any of us would have wished for, but we’ve seen that some of the deals we have in process are being held up precisely because of questions about the forgiveness of loans that are on the balance sheet. If this is something that is holding up a sale in process, this is just the thing to break that logjam, and for those who have been holding off on listing a business because of uncertainty regarding PPP, no need to wait any longer. You can list your business while pursuing PPP forgiveness. While we often like to say that we’ve “seen it all” we can also say that we’ve been unafraid of doing deals during this time period, despite never having lived and worked through a worldwide pandemic, as have many of our buyers and sellers.

If you’ve got questions about PPP and a business transaction, give us a call!

Covid Questions from Banks, Part I

Covid Questions from Banks, Part IWe are still watching deals happen during this unique year in our history. What we’ve begun to notice more and more is that banks are asking more questions. With an overall feeling of caution in the air, an industry already known for its caution in “normal” times has become even more cautious.

We wanted to share some of the questions banks are asking our clients as they pursue traditional financing.

Strategic Questions

How has the business been affected by Covid-19?
This doesn’t just concern finances, but the status of your lease, the state of your employees, and the general state of your industry (this includes general forecasting on the future). There will be more specific questions to follow, but this is an “executive summary” answer.

Did the business shut down? If so, for how long, and why?
Obviously, a bank will be happy to see a simple “No” here, but well-answered “Yes” and “Why” responses are also helpful.

Did the seller pivot and does the buyer have to change anything about the operations or model in the near future?
This is the asterisk that banks are going to put on your older financials. They want to know what things look like now that you’ve made adjustments (if you did) and what the buyer will have to do (if anything) in the months ahead.

Are there growth opportunities because of the crisis?
While there is much doom and gloom in some parts of the market, those in transportation and manufacturing have had banner years. Some pivots have also yielded great results for businesses.

PPP/EIDL Questions

Did the business receive a PPP loan or an EIDL loan?
This is fairly obvious and part of the financial snapshot of the company anyway.

Does the business expect the PPP loan to be forgiven?
Well, this is slightly more complicated as it’s not entirely in the hands of the seller. We’ve
written about this already, but we expect more clarity in the months ahead to assist sellers in answering this question.

Will the PPP loan be paid off by the seller prior to the sale of the company?
This hasn’t been a deal breaker, but if it’s a yes, it has seemed to have provided some comfort to the banks. Understandably, if a seller is hoping for loan forgiveness, they might choose to wait rather than pay off a loan that would have been forgiven, especially if it’s a large amount.

Supply Chain Questions

Has your production or supply chain been disrupted? Please explain in the context of pre-Covid vs. post-Covid.
One unexpected side effect of the sudden demand for Plexiglas is that it’s doubled and tripled in price. Businesses that you wouldn’t immediately think had anything to do with that material on a day-to-day basis are seeing the price of it go through the roof. There can be delays measured in weeks to obtain Plexiglas at the new price.

How does this affect margins?
In the Plexiglas example above, obviously without a severe (and understandable) change in price to the customer, margins are going to get chewed up. This will need to be explained across every product/service in your business.

Projections

The big question: What are your detailed projections for the next 2-3 years?
We’re seeing banks ask for forensic level detail here as we’ve never seen before: they want month by month breakdowns. We know that these are educated guesses at best, but this is what we’re seeing creep into diligence at this moment.

We don’t want to overwhelm you with all of the questions, so we’ll save more for a future article on this subject. In the meantime, if you don’t want to deal with the bank on your own, give us a call. We’re happy to help!

Understand the Benefits of a Quality Banking Relationship

Whether you’re building your business to sell one day or thinking about buying a business for the first time, you need to make sure you have a quality banking relationship established. 

Some people think of a bank as simply someplace they keep their money or where they go when they need something. In reality, banks offer much more. Unfortunately too many people often fail to take advantage of those benefits because they haven’t established a quality banking relationship. 

The Benefits of a Quality Banking Relationship

Apex Business Advisors BankingA Shared Goal

Contrary to popular belief, bankers are actually interested in your financial success. The better you do, the better they do. They want you to succeed and will do what they can to help you.

That might be sending you referrals or connecting you with strategic partners. It might be simply giving you helpful advice on a business decision.

Knowing Your Numbers

Apart from seeing basic financial statements like a P&L and Balance Sheet, bankers are used to seeing  sophisticated financial documents and using them to make strategic adjustments for profitability.

Beyond simply examining the present, they can help you forecast the future. Remember, this is something they do every day across all types of businesses. When was the last time you sat down with your banker to discuss your financial statements?

Insider Access

If you have a good relationship with your bank, and there are new products or services the bank will be offering, you might be the first to know. Keep in mind that your banker is going to be your advocate if and when you need something important. The most important measure they keep in mind in their business is trust… and that takes time to build.

Customer Service

Do you want some odd charge adjusted? Want better rates on a line of credit or on your savings account? Want a higher credit line?  All are possibilities when you have an active and regular banking relationship. Why? Because you’re more than just an account number and a balance.  

You’ll also feel more comfortable asking for help when you have an open communication line instead of just calling out of the blue or only when there’s “trouble.”

Where to start?

Start by scheduling a meeting with your banker and look to make it something regular. Ask what you can do to help them and have a list of things you need help with  They may not be able to help you with every single issue, but they may know someone who can.

If you don’t have a bank or banker you feel you can build a relationship with, give us a call. We can give you a few trusted ones we work with and you can pick one that makes the most sense for you and your business.

Choosing a Lender

SBA logoThe majority of acquisitions require some level of bank debt to facilitate the transaction and to greatly enhance returns for the buyer. In most cases, buyers want to use as much bank money as possible and utilize their own personal funds for working capital and for family needs.

Banks will generally require about a 20% down payment to consider lending on a transaction, and most banks will use the SBA guarantee program to cover the intangibles such as Goodwill. Without the SBA guarantee, banks would only be loaning on a percentage of hard assets, i.e., machinery, trucks, equipment, and real property.

Since the vast majority of businesses sell for much more than just the value of hard assets, a buyer will need to seek an SBA lender experienced in acquisition lending. There are many SBA lenders, but few who are proficient at financing business purchases.

We have witnessed buyers wasting lots of time (weeks and months) in an effort to meet with 5 or 6 banks.  Often, this results in endless promises and confusion, only to leave the buyer disappointed in the end. Loan Officers want deals, but they have to get them approved internally and most times the loan committees are more conservative and cautious than the loan officer. Apex has experience dealing with the various local and regional bankers and knowing what they are looking for in a deal. We are here to help.

To be very clear:  We do not work for the banks or get paid by the banks. Our relationship with banks involves knowing who is doing deals and assisting buyers and sellers with getting financing for a transaction. We try to find the path of least resistance because we know that time can kill deals.

Talk to your Apex Business Advisor to answer any of your questions regarding buying or selling a business.

Other Apex News:
Please join me in congratulating Apex’s Valerie Vaughn for obtaining her Certified Business Intermediary (CBI) designation!

Doug Hubler
President