Start a paper trail and don't 'prop up' an unhealthy business—expert advice on how to use PPP loans

Temporary closed signage is seen at a store in Manhattan borough following the outbreak of coronavirus disease (COVID-19), in New York, March 15, 2020.
Jeenah Moon | Reuters

For weeks, millions of American small businesses have been preoccupied with the application process for loans through the U.S. government's small business relief program

Due to delays and limited funding, it's been a hectic and frustrating process for many small businesses desperate for an influx of cash as government-imposed coronavirus restrictions have forced countless U.S. businesses to close their doors or reduce their operations.

What's more, those businesses also need to have a solid plan for exactly how they'll spend that money once it hits their bank accounts.

Known as the Paycheck Protection Program (PPP), the financial aid package's initial funding of nearly $350 billion ran out a week ago, forcing federal lawmakers to scramble to free up another $310 billion in funds. President Donald Trump is set to sign the bill (which allocates $484 billion overall that, in addition to the PPP money, includes $60 billion for Small Business Administration disaster assistance loans and grants, $75 billion in grants to hospitals and $25 billion for coronavirus testing) on Friday.

For those small businesses who are lucky enough to have already received their loan money, for those who have been approved for loans and are awaiting their checks or for those who will eventually get some of the newly allocated money, many will need guidance on the best ways to put that money to use to ensure the long-term health of their businesses while also adhering to guidelines set by the federal government that will determine whether or not those loans will ultimately be forgiven.

One online resource is the Coronavirus Small Business Resource Hub on the website for SCORE, a network of volunteer business mentors that is sponsored by the SBA. SCORE CEO Bridget Weston tells CNBC Make It that the hub — which includes informational workshops and webinars, while also connecting businesses to mentors via phone, email and video chat to answer questions and offer advice for free — is meant to help small businesses get quick answers to relevant questions about the coronavirus shutdowns and the government loan program.

"During a crisis is not the time when you want to be sifting through a ton of content trying to figure out what's relevant and what's not," Weston says.

In addition to Weston, CNBC Make It talked to Jessica Mah, the founder and CEO of inDinero — a financial software company that handles the accounting and finance operations for over a thousand small businesses — to get their advice for how small businesses can best manage any money they receive from the government's coronavirus loan program.

Pay your employees, negotiate the rest

The key guideline of the PPP loan program requires that small businesses who make use of the program put 75% of the government-provided funds toward paying their employees in order for the loan to be forgiven. The other 25% can go toward other costs — such as rent, utilities or paying contractors. (Otherwise, the business will have to repay the loan, along with 1% interest, within two years.)

That guideline has cause some frustration among businesses that already laid off their employees. Many business owners are wary of using loan money to pay their employees to do nothing while remaining unsure of when they'll be allowed to restart operations, much less when business will return to normal levels.

Here are the guidelines for round two of PPP
Here are the guidelines for round two of PPP

However, as long as those guidelines are in place, business owners who take PPP money are still advised to follow the rules.

"Everyone's worried about how forgivable this is," inDinero's Mah says of the loan program. Her advice is to "follow the rules" and use 75% of the loan to pay your employees. "This is a get-out-of-jail-free card — if you just follow the directions."

"And if you're worried about all your other overhead that's not employees, negotiate it," Mah adds. That can include rent, with Mah noting that she knows many business owners who have negotiated successfully to not pay rent for several months. Some of her clients have even managed to get their landlords to agree to accept the delayed rent payments "on the back end," meaning that the businesses would pay the full amount at the end of their lease in order to give them time to save up that money and not face a massive rent bill as soon as their business reopens.

Mah also suggests negotiating with contractors to whom your business owes money that isn't available at the moment. Unfortunately, businesses can not include payments to contractors in their payroll costs, Mah notes.

You can also talk to your contractors about getting their own PPP loan money.

Jessica Mah, founder and CEO of inDinero.
Source: inDinero

"I'm telling everyone: 'Negotiate with all your contractors and tell them to get their own PPP … and then negotiate a better price with them,'" Mah says. 

(Of course, as small business owners saw when the initial round of PPP funding ran out last week, there is a finite amount of money available for small businesses and no one is guaranteed to receive a loan.)

SCORE's Weston agrees that business owners' best bet for covering non-payroll costs is likely to negotiate.

"We are recommending that small business owners reach out to either their landlords or other business vendors that they work with that have set costs and try to work out a plan and communicate to them what the small business owner is doing to get through these times," Weston tells CNBC Make It.

For what it's worth, SCORE's coronavirus resource hub notes that many vendors and contractors should be open to negotiation — whether that means lower payments, or spreading payment over a longer period of time — simply because they won't want to lose a long-term source of income.

"They will want to keep your business in the long run, and may be flexible about deferring or accepting reduced payments," SCORE says on its website.

Call your accountant

Weston also advises business owners to consult an accountant to find out how their business losses can help with tax relief. The CARES Act that created the PPP loan program also changed tax laws to allow businesses' net operating losses going back to the 2018 tax year to be carried back up to five years and carried forward over the next two decades. Those changes can help "improve cash flow and liquidity" for small businesses, according to the U.S. Chamber of Commerce.

Weston says SCORE recommends that businesses reach out to their accountants or a CPA "to find out what they can put toward business losses and look at their taxes for next year." Businesses can also talk to their insurance company to find out if any of their business losses are covered under their insurance program, she adds.

Create a paper trail

When it comes to proving that your business is following the PPP's guidelines, inDinero says business owners should be "over-prepared" in order to account for how every dollar is spent.

"Once you receive [the loan money], work with your accountant to document and show your work," Mah tells CNBC Make It. "You're going to [need to] have everything buttoned up, all the I's dotted, your T's crossed, to show 'OK, this money that I received from PPP was then directly sent to this person.'"

Ideally, Mah suggests that business owners ask their banks to create a sub bank account — a separate account within an existing, larger bank account — that can be called, simply, "PPP bank account" and the loan money can be placed there for easier tracking of how it's disbursed. That will help you create "a paper trail," according to Mah.

"You can create a sub account with your bank so easily, and then have it proven that [75% of] the funds from that bank account were directly spent on payroll," Mah says.

Make decisions as if your PPP loan won't be forgiven, and think long-term

While the influx of cash from the government might provide a feeling of relief for struggling businesses, Mah is adamant that business owners should not allow that money to stop them from making tough business decisions. 

"The problem is that people are propping up unhealthy businesses here," Mah warns. "They're keeping around employees who they know they can't keep and afford even if there was no coronavirus. That's a huge mistake."

Mah suggests making decisions about your business's future as if your PPP loan will not be forgiven.

"Don't do anything irrational or stupid because of PPP," Mah says. "Assuming you get zero forgiveness on the loan, what would you do?"

Some business owners could have to trim their payroll to a point that they know will allow their business to survive in the long run, especially with uncertainty around how long coronavirus restrictions will remain in place and how the economy will look once they're lifted. That may mean asking for less PPP money, since 75% needs to be used for payroll.

"You're going to hold onto these employees you can't support just because you used PPP money to pay for them? That's not good," Mah tells CNBC Make It. "So it's just better to not keep them and you'll get less PPP money. But you know, at least you're making a better business decision."

Once your business gets the cash infusion, it's still important to keep expenses as low as possible.

"At this point, you're also fighting for your business's survival on a long-term basis," Mah says. 

Don't lose hope

"I really want all small businesses to remember how critical they are to this economy," SCORE's Weston says. "So we just don't want them to give up hope.

"It may be discouraging now, [but] we will help as many business owners as possible to get through this so they can keep their doors open and have a viable plan so that a year from now they are still running a productive and successful business."

No one really knows when coronavirus restrictions will be fully lifted and the U.S. economy will return to some sense of normalcy. That's part of what makes it extremely difficult for small business owners to formulate plans to keep their businesses afloat until they can eventually reopen their doors.

However, Weston still encourages small business owners to try and come up with some sort of plan for what their business will look like once the economy begins to open up again, whether that means fully restarting their businesses or gradually ramping back up to normal business hours and operations. 

Weston recommends "looking at cash-flow projections and, if restrictions are lifted, what would that mean for client or customer flow? And how might that ramp up look?" That might require talking to your accountant or some sort of consultant.

But most importantly, Weston notes, is that business owners come up with a plan so they can have "realistic expectations" for how to operate their business in a post-coronavirus world while also "keeping expenses in check so that you're not overspending" what little cash they might have on hand at the moment.

Check out: The best credit cards of 2020 could earn you over $1,000 in 5 years

Don't miss:

Here's how to avoid a common mistake small businesses make when applying for loans, according to an SBA official

As small business loan money runs out, many approved businesses still await checks or clarity on strict guidelines

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