PPP loans – When the Time Comes to Pay the Piper
During the dark days of Covid restrictions and the drop in small business revenues, the Federal Government, like the Calvary in old Western movies, rode to the rescue. At the prodding of Congress, the Small Business Administration eagerly offered cash to all businesses who needed it (and some who did not) through its Covid Economic Injury Disaster Loan (EIDL) program or the new Payment Protection Program (PPP). Under the three draw periods of the PPP loans, the government advanced almost $800 billion in 11.8 million loans.
The Small Business Owner’s Dilemma
With an interest rate of 1% and maturities of two or five years depending on a Payment Protection Program (PPP) loan’s issue date, struggling business owners rushed to apply. An added incentive was the promise of payment forgiveness if a minimum of 60% of the principal were (1) spent on payroll and (2) employment and compensation levels were maintained. While many small business borrowers managed to receive PPP loans forgiveness, thousands of borrowers did not qualify for the benefit or failed to submit proper applications on time. Consequently, many find themselves between the proverbial “rock and a hard place,” desperately trying to repay the government and keep their business open.
A Better Economy Ahead
As U.S. inflation slows in 2023, economists expect the Federal Reserve to reduce the frequency and amount of interest rate raises. During 2022, the Fed increased the Federal Funds rate seven times from 0.25% to over 4.50%. Growth in real GDP dropped from 5.67% in 2021 to 1.64% in 2022. Economists project the U.S. economy to slow in early 2023 before beginning a three-year rebound through 2026.
The Small Business Owner’s Dilemma
The years 2020-2022 were an emotional roller-coaster for small business owners. The Covid pandemic and related government restrictions shuttered many businesses in 2020. The subsequent passage of the PPP loans program with implied forgiveness of the program loans invigorated survivors daring to hope the worst was over. Many accepted PPP loans believing that forgiveness of the loans was sure and that the funds borrowed through the program would cover their losses until sanity returned to the market.
Unexpectedly, the ghost of 1980s runaway inflation reappeared, the Federal Reserve lifted interest rates to a 15-year high, and the Fed exaggerated its promise of “free” money. Consequently, lenders are pressuring many small business borrowers to repay delinquent PPP loans with the critical cash flow needed to operate in the future. The question for many is, “What do I do now?”
The Light at the End of the Tunnel
While some have concerns about the immediate condition of the economy, there are multiple signs that the worst is over, and a new economic boom is in the future:
- Inflation in the U.S. dropped almost 30% from June 2022 (9.1%) to January 2023 (6.4%). Economists project that the Fed’s raising interest rates will continue to reduce inflation in the months ahead.
- Supply lines disrupted by the pandemic are recovering to pre-Covid levels. In many cases, new technologies and processes have improved the movement of goods and supplies.
- Employment is at its highest rate in over 50 years, and robust job growth continues. Wages in January 2023 were 7.86% more than one year ago. Consumer spending is increasing as markets recover.
- Industry rivals are fewer and weaker. The trials of the past few years affected everyone to some degree. Many businesses closed their doors during that time or suffered debilitating blows to their finances, organization, and customer base. Survivors are likely to face diminished competition ahead.
Marathon runners note that the last two to three miles of a race are always the hardest. Race finishers, despite their fatigue, resist the temptation to stop, especially when the end is in sight.
Many small business owners are in a similar plight. They have endured falling sales, cost increases, broken supply lines, and depleted capital resources. The initial relief of government aid is long gone, replaced by worries about repayment with cash they do not have.
Strategic Steps to Survive and Thrive Now
The winners in the next decade will be those companies who persist, despite the temptation to quit. Some advisers recommend bankruptcy, personal and business when times are difficult. Before making that choice, business owners should recognize its short and long-term consequences.
Jean Chatzky, financial editor of the TODAY Show and a personal finance columnist, notes that the credit card companies report bankruptcy to credit bureaus, who then report it to potential lenders for the next seven to ten years: “That’s going to signal to future lenders that you left the last guy hanging. That’s why, as with bankruptcy, debt settlement is an extreme option you shouldn’t take lightly. It’s not just an easy, cheap way to eliminate debt.” There are no winners in bankruptcy court or even the assurance that debts will be erased. Consequently, bankruptcy is an action taken only as a last resort.
A better option for many is to recognize the situation and take action to minimize its impact and duration by the following steps:
- Communicate honestly with employees and suppliers. No one benefits from a closure.Ask for help and understanding during the difficult period, and you may be surprised by their reaction. They might also have suggestions that improve the situation.
- Treat the PPP repayment as a fixed cost to be paid under all conditions. Repayment does not mean ceasing to ask for forgiveness or forbearance. Government regulations frequently change, and the possibility of improving your position is always present ifyou remain in good standing with your lender.
- Review your costs to eliminate any unnecessary expenses. Can you do more with less? Every expense item needs review, the only critical functions being those that set the company apart from its competition. Consider options of lease renegotiations or relocation, reducing headcount, replacing physical travel with virtual meetings, and outsourcing non-critical functions to others. To survive, transition fixed costs to variable, even if the latter is slightly more expensive. Successful companies focus on cash flow, not maximum profits, during difficult times.
- Improve marketing efforts to generate more sales or higher prices.Remember that the competition has similar problems and is unlikely to react aggressively to moderate changes. Be aware of price changes, moving up when allowed by competitive moves or unavoidable costs in raw materials.
- Solicit alternative funding sources. Banks and traditional lenders generally raise loan and underwriting requirements during stressful periods, focusing on their largest, financially secure accounts. Alternative lenders by Liberty Capital are typically more innovative and less dependent on traditional funding types. For example, a factoring arrangement with accounts receivable or a merchant cash advance may be possible where conventional AR loans are unavailable. Leasing arrangements may be lower costs than purchasing.
The years 2020-2022 have been rough for all businesses. Difficult times may recur, but new opportunities and challenges always follow them. As you consider the next steps in your business journey, consider the words of John D. Rockefeller, the son of an itinerant salesman and philanderer who became the wealthiest person in America:
“I do not think that there is any other quality so essential to success of any kind as the quality of perseverance. It overcomes almost everything, even nature.”