As many companies apply for and receive assistance from the Payroll Protection Program or other government loans, many companies and founders have expressed concern over how forgivable these loans really are and how to properly use the money they receive.
Since the start of this crisis, I've been working with business owners, giving advice for both how to apply for and then use those loans in the best way to benefit their company in the long run.
The following are tips I give to my clients to help them use the money they receive to prop up their business in an uncertain time, without hurting their company in the long run and ensuring the loan is forgivable.
1. Follow the rules; negotiate with everyone else
One of the most important things I can advise is to know the rules of the loan you receive and follow them to ensure, to the extent you can, that it is forgivable. It's not entirely clear how much of a PPP loan will ultimately be guaranteed to be forgivable. To be safe, you should follow the guidelines set in place.
One of these guidelines requires that companies use 75 percent of the loan to pay employees, which can be frustrating if you have already laid off workers or are concerned about paying employees to do nothing. Still, the PPP is designed to help companies meet employee payroll, and that's what you need to use the funds for if you want to make the case for forgiveness later.
Where you do have room to negotiate is with your landlords or contractors. Several of my clients have successfully negotiated to get their landlords to agree to accept 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. Contractors are not included in the 75 percent payroll expenses, so I would advise you to advise your contractors to apply for their own PPP loan -- and therefore get a better price from them.
2. Cross your t's and dot your i's
When it comes time to prove your business followed the guidelines of the loan, you want to be prepared and account for every dollar you spent. Once you receive your loan, work with your accountant to document and show your work -- creating a paper trail to show where the money went and to whom.
To do this, I advise my clients to create 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 and can be easily tracked and documented. This is a simple way to show that 75 percent of the loan went to payroll, proving you followed the guidelines and ensuring a forgivable loan.
3. Treat this like an unforgivable loan
The PPP program is meant to provide relief to small businesses, but don't let that money stop you from making tough and smart business decisions. Ask yourself, what would you do if there were zero forgiveness on this loan? Do that.