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When It Comes to PPP Loan Forgiveness, Track Every Penny Spent

The Puget Sound Business Journal talks with BPM’s Edward Webb and Jeffrey Mock about PPP loan best practices. 05.06.20

This article originally appeared May 6, 2020 in the Puget Sound Business Journal.

Your business has been able to secure federal aid under the Paycheck Protection Program (PPP). You’ve been able to keep employees on the payroll during the COVID-19 lockdown. Your business is still alive.

Now how do you avoid having to pay the money back?

Carefully document how the loan money spent in a way that you can clearly present the information to the bank that closed your PPP loan.

“What we’re saying to our clients is that transparency and documentation — being very diligent about everything you’re doing so you can tell your story to the banks — is going to be vital,” said Edward Webb, a partner in advisory services at BPM LLP, a California-based accounting and consulting firm with offices in Bellevue. “You cannot over-document. You cannot be too transparent.”

PPP loans are designed to keep the workers at small businesses on the payroll during the Covid-19 pandemic. The Small Business Administration, which administers the loans, says it will forgive PPP loans if all of a business’s workers stay employed for eight weeks and the money is used for rent, mortgage interest, utilities and payroll.

For many businesses that have gotten PPP loans, now comes the second step: Proving to the banks and SBA that the money was used to keep employees on the payroll for eight weeks, or other requirements were met, so the loans can be forgiven.

“That’s the critical point in time — when their eight weeks is over,” Webb said.

Jeffrey Mock, a partner in charge of the of BPM’s Bellevue office, said that, compared to obtaining the loans, “this phase is probably going to be the harder phase. The first phase was, ‘Send me the money.’ That went relatively smoothly. Reporting back is going to be a more complicated phase."

BPM is now working with clients to document their PPP spending and present that information to the banks. How that’s done, Mock said, “depends on the client and how sophisticated they are.” Some clients, he said, have put their PPP dollars in an entirely separate bank account to more easily track spending.

Webb said the firm is helping clients develop reporting systems that can be used week after week.

“Our goal is to help them get a methodology that they can develop and replicate over time pretty easily,” he said.

The first round of PPP funding, nearly $350 billion, became available April 3 and was gone roughly two weeks later. Congress swiftly approved a second round of funding, this time $310 billion, which became available last week.

The program has been hailed as a success for channeling hundreds of billions of dollars in federal aid into the hands of struggling businesses in a gobsmacking short amount of time — mere weeks. But it’s also been criticized for an array of technology glitches, fast-changing federal rules that created headaches for banks and the fact that some loans went to large corporate interests that arguably didn’t need the money.

Moreover, many desperate business owners, some of whom applied for loans from multiple banks, were left empty handed as the first round of funding dried up.

The SBA said this week that $175.7 billion of the second funding round’s $310 billion has been loaned, leaving $174.3 billion up for grabs. Between the two rounds of funding, a total of $495.7 billion loaned so far.

As of last weekend, more than 2.2 million loans had been closed in the second round of funding alone.

In Washington state, 50,288 loans had been approved in the second round of funding for a total of just more than $5 billion.

Not only is it a challenge to adequately document how the loans are spent to meet the PPP program’s requirements, Webb said, businesses are also now having to prepare for the pandemic-induced economic lockdown to lift. Will those businesses be able to snap back into markets and begin making money again? Will they be able to keep their employees on the payroll?

“What does that look like for them?” Webb asked. “Do they need to look at their operations and make some decisions about ongoing business viability?”

Mock said he spoke with a client this week who is debating whether to bring back his entire staff for as long as the PPP money lasts only to have to lay them off again when the money runs out.

“Even if you did have to pay part of (your PPP loan) back, it would be kind of crazy to spend it all and then lay them off again,” Mock said. Loans that aren’t forgiven mature at an interest rate of 1%. Webb said for some businesses the PPP money will run out before Washington's stay-at-home order lift May 31.

“We have business people who are paying people in essence to stay home. That was the purpose,” he said. “Down the road, the business owners are going to face a further decision. What do they do? … How do they respond to the shelter-in-place until May 31?”

In addition, businesses will need to figure out how the aid impacts their taxes, Mock said. PPP loan money isn’t taxable, he said, “but then there’s the issue that you can’t deduct the expenses that were paid with the funds."

“How all of that’s going to sync up at the end of the year ... is going to be an interesting issue,” Mock said.

Businesses are also almost surely going to face different valuations as the economy recovers. That might impact a business’s ability to pursue other financing that can keep them alive as the pandemic’s economic fallout continues.

“If the business is worth less, it can reduce the amount of (non-government) loans that you’re able to get,” Webb said. “It can require collateral or different levels of security."

Businesses that don’t address the question of their valuation early will, simply put face “increased risk,” he said.

“We don’t know what’s going to be coming with the economy,” Webb said. “If you’re not able to tell your story at a time when you have increased urgency you’ll have fewer options.”