Financial Planning for SMB's with Matt Dorsey
Updated: May 20
Season 1: Finances
Episode 2: Financial Planning for SMB's During COVID-19
Last Updated: May 20, 2020
Studio ATAO’s Community Skillshare is a virtual learning series that tackles specific, actionable and pertinent topics with subject matter experts. Each season (2-4 episodes) is centered on one main topic and is paired with a thorough resources document (such as this one) with additional information and relevant links. Community Skillshares take place on Studio ATAO’s IG Live on Wednesdays at 12pm PST, and we will announce upcoming episodes via our Instagram.
This particular resources document was compiled by Studio ATAO’s core team with leadership from our CFO & Beverage Director, Matt Dorsey. In his day job, Matt is the CFO of a real estate hospitality startup who has consulted & advised a variety of businesses across hospitality and tech. However, please note that Matt is not a licensed financial advisor, nor is the below meant to be specific business advice. Instead, we hope Matt’s skillshare session and this resource document can provide useful context and additional considerations for any financial decisions you are facing for your business so you can apply your own best judgment. Please feel free to share this resource widely with anyone who you think may need it.
This is a living, evolving document as things continue to change around COVID-19 and it is not exhaustive of all resources. If you have additional insights and suggestions on ways we can improve this document, we want to hear from you at firstname.lastname@example.org.
If you’re interested in joining in on the next Community Skillshare, please follow us on Instagram at @StudioATAO. If you’ve benefited from this free resource and want to help support our team so we can keep working on efforts like these, please consider sending us a one time donation or becoming a monthly patron. Any dollars of support is deeply appreciated.
Table of Contents
Video of Community Skillshare Season 1 Episode 2
Overview of the Stimulus Package
- Paid Sick Leave for Employees & Family
- Economic Injury & Disaster Loans
- Small Business Debt Relief Program
- SBA Express Loans
- Paycheck Protection Program
- Employee Retention Credit
- Deferral of Payroll Taxes
- Business Interruption Insurance
Cash Management Considerations During This Time
Overview of the Stimulus Package
As of April 1, the Federal government has passed two major pieces of legislation aimed at assisting individuals and small businesses in mitigating the impact of the COVID-19 pandemic:
The Families First Coronavirus Response Act was the government’s first major response to the crisis and included provisions that enhanced paid sick leave and paid family medical leave for individuals diagnosed with COVID-19 or caring for individuals with COVID-19, provided additional funding for government-assisted nutrition programs and boosted funding to governmental agencies.
The CARES Act - commonly being referred to as “the stimulus package” - was signed into law on Friday, March 27, 2020, and is the law through which the vast majority of programs and benefits have been created and, as such, is the main focus of the topics below.
Paid Sick Leave for Employees & Families
The Families First Coronavirus Response Act (FFCRA) was signed March 18, 2020, started April 1, 2020 and will go through December 31, 2020. This pertains to all businesses with under 500 employees. There are certain exceptions for businesses with less than 50 employees if you are able to prove that offering these paid leaves would risk them going out of business. They are also exempt from civil actions brought by employees for violating paid leave laws.
Businesses with less than 25 employees are also not required to reinstate employees after they return from paid leave if the employee’s position has been eliminated as a result of the economic impact of COVID-19.
The Emergency Paid Sick Leave Act stipulates that all employees are entitled to paid sick leave in addition to your existing sick leave policy if they meet any of the below 6 factors:
Subject to federal, state, or local quarantine or isolation related to COVID-19
Have been advised by their doctor to self-quarantine due to COVID-19
Experiencing symptoms of COVID-19 and seeking a medical diagnosis
Caring for a family member subject to a quarantine order or self-quarantine
Caring for children if schools are closed or their caregiver is unavailable because of the COVID-19 health emergency
Experiencing substantially similar conditions as specified by the Secretary of Health and Human Services
Full time employees can receive up to 80 hours of paid sick leave, part time employees receive the amount based on the average hours they work during a 2 week period. For employees that qualify based on factors 1-3 above, paid sick leave is capped at $511/day, $5,110 total. For those who qualify based on factors 4-6 above, the sick leave is ⅔ their regular rate and capped at $200/day and $2,000 total.
The Emergency Family and Medical Leave Expansion Act stipulates that for all employees that have been employed at least 30 days and cannot work remotely while caring for children whose schools or care facilities have been closed due to COVID-19 are entitled to up to 10 weeks of paid Family And Medical Leave Act (FMLA).
Employers must offer the first 2 business weeks (10 days) of the regular 12-week FMLA as unpaid leave (or for employees to use accrued paid leave or paid vacation). After this, paid leave is offered ⅔ the rate of the employee’s regular pay (capped at $200/day and $10,000 across 10 weeks). Note: employees that are eligible for FMLA may obtain paid leave for the first 2 weeks via the Emergency Paid Sick Leave discussed above.
Under upcoming guidance from the IRS, eligible employers who pay qualifying sick or child care leave will be able to receive a tax credit for the qualified sick leave or family leave, including the payroll taxes associated with that leave. To receive this tax credit, businesses can withhold the amount of these tax credits that would otherwise have been paid to the federal government (including federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes). If you need this tax credit in order to pay for the qualifying sick leave, you can file a request for an accelerated payment from the IRS. Click here for a full Q&A on this with the IRS.
There is also a non-enforcement period where the Department of Labor will not be enforcing the above sick leave policies using legal action against the employer “so long as the employer has acted reasonably and in good faith to comply”. Link here to the announcement.
Economic Injury Disaster Loans (EIDL)
The Economic Injury Disaster Loan is a Small Business Association (SBA) governed loan that has always been available for businesses (including self-employed people and nonprofits) that suffer from a “declared disaster”, but the CARES Act has expanded the ways businesses can obtain this loan until December 31, 2020. It also waived the personal guarantee requirements for loans below $200,000, the requirement that businesses have been in business at least 1 year and that borrowers cannot acquire funds from other sources.
EIDL loans are up to $2 million with an interest rate of 3.75% (2.75% for nonprofits) and a maturity of up to 30 years. There is also an up to $10,000 emergency advance (Emergency Economic Injury Grant Program - $1,000 per employee) that can be paid as the application is still pending, should be paid within 3 days of it being received, does not need to be repaid and which applicants can receive even if they don’t receive additional loan funds. If you had already applied for an EIDL before this advance was announced, you will need to reapply and opt-in for the grant option.
Note: For the EIDL, the affiliation rules are currently not waived for companies operating under NAICS Sector 72 businesses (accommodations and food services), meaning businesses in that category may still be disqualified from this loan for not meeting the SBA size requirements as a result of affiliation. You can review the full SBA affiliation rules here.However, these affiliation rules are waived for Sector 72 businesses in the Paycheck Protection Program (see below).
Note: You can apply for both the EIDL and Paycheck Protection Program (PPP), concurrently; however, how you use the proceeds you receive from the EIDL will impact how it is treated in the PPP program. Using the proceeds from the EIDL for costs other than payroll expenses will not impact your eligibility. However, if a business uses the EIDL for payroll expenses, the amount used for that purpose must be refinanced into the PPP. Any emergency grants a business receives in connection with the EIDL will be subtracted from the amount of proceeds from a PPP loan that can be forgiven.
The SBA will be covering all loan payments for non-disaster SBA loans, including 7(a) loans (but not including the Paycheck Protection Program, see below), 504 and microloans for 6 months, including loans that begin within 6 months of the CARES Act being signed into law (March 27, 2020).
SBA Express Loan
The CARES Act also increased the maximum SBA Express Loan from $350,000 to $1 million, through December 31, 2020. These are loans processed in an accelerated time frame (36 hours) and administered through SBA-approved commercial lenders. Typically, this loan was geared towards businesses who were having difficulty securing traditional financing.
The SBA guarantees up to 50% of the loan, and the business and bank negotiate the terms independently (with certain terms like the interest rate and collateral requirements capped/set by the SBA). However, it generally requires borrowers to have high credit scores, still has personal collateral requirements above a certain loan amount and interest rates are typically 9 to 11%.
You can learn more about SBA Express Loans here and apply for one directly with your business bank.
Paycheck Protection Program (PPP)
The Paycheck Protection Program (PPP) under the CARES Act is specifically meant to help businesses cover employee salaries, paid sick/medical leave, lease payments/mortgage interest and utility costs. Businesses with under 500 employees, including 501(c) nonprofits, self-employed people and independent contractors are eligible to apply. The program runs through June 30, 2020.
The PPP loan is meant to be faster, as it does not go through the typical SBA process, but is directly administered through your business bank. (The CARES Act has expanded the number of commercial banks that can administer this loan.) The qualifications for this loan are based on your business records, not credit checks, removes borrower & lender fees and waives the personal & collateral guarantee requirements typical of other SBA loans.
The application period for PPP for small businesses was mandated to be April 3, 2020 and for independent contractors and self-employed people April 10, 2020. However, due to the quick turnaround, many banks do not have their systems ready for loan applicants and many also are not accepting any applications from businesses they do not already have a lending (not banking) relationship with. It is best to contact a bank you have an existing relationship with and ask for the status of their process. All businesses will be asked to self-certify they have been impacted by COVID-19.
Note: Many business owners are reporting their banks have stopped issuing PPP's, or are not accepting applications. We've also run into similar issues. So far, the only 3 banks we've found that are accepting open applications from new customers online are Kabbage, Cross River, Live Oak Bank, Funding Circle and Lendio. We have no relationship with these banks, and have not used their services before. However, since they are accepting applications we felt it pertinent to at least mention them. We still encourage you to discuss your PPP options with a bank you know first, as they may be re-opening their applications soon.
All banks will have a different application process, but it’s a good idea to have ready:
SBA Form 2483 Paycheck Protection Program Application Form
Payroll statements for the period between January 1, 2019 and December 31, 2019, including an itemized register of each category of covered payroll costs for each employee
Your lender will need to submit the SBA Form 2484 Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty.
Notes on Eligibility
SBA’s standard affiliation rules have waived for businesses under NAICS code 72 (accomodation and food service). This means businesses in this sector with investors that have holdings in other companies will not have the employees of these other companies count towards their own 500 employee limit.
For franchises (see SBA list here), the 500 employee rule is applied on a per physical location basis, instead of across the company.
The amount you’re able to borrow is up to 2.5x your monthly payroll costs, capped at $10 million total. “Payroll costs” include wages (including tips), paid leave, healthcare benefits, state and local payroll taxes, and more (full list here via U.S. Chamber of Commerce).
Despite some initial ambiguity around this, payroll costs do not include payments to 1099 independent contractors. There is also a $100,000 annualized salary cap per employee that is calculated within the payroll costs.
Note: payroll costs do not include compensation for:
Any employees who reside outside of the U.S;.
Paid sick leave or family leave already covered by the Families First Coronavirus Response Act (FFCRA); and
Specific Federal taxes (including Federal payroll taxes, railroad taxes, retirement benefits, income taxes).
Your monthly payroll costs are calculated as:
Average total monthly payroll costs incurred the last 12 months prior to the loan date (2019) OR
Average total monthly payroll costs incurred for January and February 2020 (if you are a business that was not in operation last year) OR
Average total monthly payments for payroll costs for the 12-week period beginning February 15, 2019 or March 1, 2019 (you can pick) and ending June 30, 2019 (if you are a seasonal employer)
For independent contractors and self-employed people applying for PPP, please refer to our Personal Finances Skillshare for a thorough rundown of the loan amounts & forgivable categories.
There is also a loan forgiveness component. After your loan is issued, you will have a “covered period” of 8 weeks to spend the loan amount on “forgivable” categories (see below). Up to 100% of the amount borrowed is forgivable (does not need to be repaid) if it is spent:
Within the 8-week covered period;
On the forgivable categories listed below; and
As long as 75% of the amount spent was specifically on payroll costs.
The amount forgiven from PPP will not be treated as taxable income. However, as of May 4, 2020 new guidance from the IRS says the expenses that make up the amount of the loan that is forgiven will NOT be eligible for deduction from your 2020 taxable income. In effect, your taxable income will increase by the amount of your loan that was forgiven.
Everything that is not forgivable will be turned into a loan with a 1% interest rate with a maturity of over 2 years and the first payment deferred for 6 months. (Note: interest still accrues over the 6 month period.)
Forgivable categories are:
Payments of interest on mortgage obligations incurred before February 15, 2020
Rent payments on leases dated before February 15, 2020
Utility payments under service agreements dated before February 15, 2020
However, the forgivable amount of your loan decreases if you reduce the number of employees via layoffs or terminations or reduce salaries for those employees by more than 25% (for employees making less than $100,000 annually) between February 15, 2020 and April 26, 2020. You have the option to rehire these and/or new employees and increase their salaries to match previous headcount/salaries by June 30, 2020 in order to maintain your loan forgiveness amount.
The most up-to-date loan forgiveness application released by the Treasury is available here.
Employee Retention Credit
Certain businesses are eligible for a tax credit of up to $5,000 per employee if they are able to prove COVID-19 has significantly impacted their business. To qualify for this Employee Retention Credit, you must fall into one of below two categories:
Your business is fully or partially suspended by government order due to COVID-19 during the calendar quarter. (For example: the government has mandated restaurants can only offer takeout.)
Your current gross revenue is below 50% of the same quarter in 2019. (Once your gross revenue rises above 80% of a comparable quarter in 2019, you are disqualified after the end of that quarter.)
This tax credit is calculated as 50% of the amount of qualified wages you would have paid to an employee over the qualified period. The qualified period is the period of time between March 12, 2020 and January 1, 2021 where your business falls into one of the above categories. Qualified wages include both cash payments and employer provided healthcare costs. The maximum credit available is $5,000 per employee as the cap for qualified wages per employee is at $10,000 over the entire qualified period.
For businesses with 100 or less employees, qualified wages are for all employees; for those with more than 100 employees, the qualified wages are only for the employees that did not work (i.e. furloughed employees) during the qualified period. -IRS
A business is able to obtain these tax credits by reducing the amount of federal employment taxes due to the IRS and keeping them for business use (see Notice 2020-22). If you need advance payment of your anticipated tax credits in order to pay wages, you can request that with this form 7200.
However, you cannot use the Employee Retention Credit if you receive a loan under the Paycheck Protection Program (see above). It is one or the other. You also are not allowed to receive tax credits for the same wages as qualified in the Employee Retention Credit and the FFCRA.
Deferral of Payroll Taxes
Businesses (including self-employed individuals) are allowed to delay the payment of their social security and RRA taxes due between March 27, 2020 and December 31, 2020. 50% of these taxes will be due December 31, 2021 and the last 50% due December 31, 2022.
Note that this deferral does not apply to the business’s Medicare taxes, or the employee’s social security or Medicare taxes.
This deferral also does not apply to businesses who receive any loan forgiveness under the Paycheck Protection Program. You are able to defer taxes or receive loan forgiveness, but not both.
Business Interruption Insurance Coverage
Currently, business interruption insurance does not cover any losses due to COVID-19. However, multiple states have proposed legislation to require insurance companies to retroactively cover businesses affected by COVID-19. These states include Massachusetts, New Jersey, New York and Ohio.
Cash Management Considerations During This Time
In times of incredible uncertainty, your main concern as a business owner may need to shift from accounting profitability to day-to-day cash management. It’s more important than ever to be aware of how much, to whom and when cash exits your business. It may be a good idea to funnel all outgoing money (cash and credit card) through one or a handful of people, so you are acutely aware of how money is being spent in your business. While it’s often necessary to continue paying for some goods and services, halting automatic subscriptions and carefully matching your credit spend to your cash balance is critical to keeping on top of your expenses.
A thorough review of the major categories of your expense base is always a good starting point to cash management. The overall question should be: based on what I have now, how long can I continue to operate my business? (Alternatively: when is my zero cash date?)
Generally speaking, expenses fall into these major categories:
This is an important time to understand what aspects of your workforce are essential to your business as well as which teams are revenue-generating (e.g. sales), and which are cost centers (non-revenue generating). How much operating budget does each of these teams receive, and how does that need to be adjusted going forward? If you have contractors and/or consultants working for your business, you can apply the same mindset towards their work to assess if they should be kept on-board during this time.
You may be facing a decision of laying off or furloughing workers to lower costs during this time. Please make sure you understand the future cash implications of this against stimulus options like the Paycheck Protection Program and Employee Retention Program (see above).
Ultimately, it is a business-by-business decision if you can afford to retain employees during this time; if you are debating what avenue to go down regarding laying off or furloughing employees -- ultimately, it comes down to how long you expect your labor capacity requirements to be at a lower amount than pre-COVID. If you don’t think you’ll need a large segment of your workforce for a long time, it may make sense to lay off employees; if you believe things will be back to normal (or close to it) within a foreseeable timeframe, it may be better to furlough your staff. (Note that in some cases of furlough, you may need to continue paying for healthcare.)
If you will be conducting a large layoff, please review the WARN Act (Worker Adjustment and Retraining Notification Act) on both a federal and state level before you do so. The federal WARN Act requires covered employers (those with 100 or more full-time employees or 100 workers that contribute 4,000 hours a week) to give a 60-day advance notice to all employees in anticipation of closing a facility or operating unit of a business. During this time, employees must still be paid and given job placement assistance. The Federal WARN Act does not apply to any temporary layoffs under 6 months, but does kick in if that layoff is later extended (i.e. you ask your furloughed employee to stay on furlough 9 months instead of 5.) While there are exceptions to the WARN Act for “unforeseeable business circumstances”, of which COVID-19 likely falls, no specific federal exception has been made as of now and states have different additional requirements to the federal WARN Act.
You also need to ensure any layoffs or terminations do not result in Disparate or Adverse Impact. According to the Society for Human Resource Management, or SHRM:
“Adverse impact refers to employment practices that appear neutral but have a discriminatory effect on a protected group. For example, testing all applicants and using results from that test that will unintentionally eliminate certain minority applicants disproportionately is disparate impact.”
If you are considering a layoff at your company, it’s best to work with your HR leaders to determine if this may apply to you. You can find more details and resources on how to approach this process from SHRM here.
The good news is that employees laid off, furloughed, or have had their hours reduced (e.g. went from full-time to part-time) by COVID-19 are all eligible for unemployment benefits, so please make sure to offer your employees ample resources on how to apply for unemployment in your state.
Rent, Utilities, Debt & Other Fixed Costs
Many states and/or local jurisdictions have put in place stays or moratoriums on evictions for non-payment for tenants (both residential and commercial, in some cases) that have been impacted by COVID-19. While this does not relieve you of the obligation to pay rent once the moratorium ends, if needed you can at least delay your rent payment to help keep cash in the business for the allowed time frame. If you are planning to do this, make sure to contact your landlord to explain how you have been impacted by COVID-19, send them a copy of the relevant moratorium and work together on a repayment schedule with as little interest, fees, or legal proceedings as possible. Open channels of communication are always best to help make these difficult interactions as professional and positive as possible.
Note: some of you may be looking at the “force majeure” clause of your lease as a potential way out. Unfortunately, in almost all cases this only applies to physical damage to property in which you can no longer use said property for business, of which COVID-19 does not fall under.
Various utilities providers such as Pacific Electric & Gas and Consolidated Edison have suspended both residential & business shutoffs for non-payment and waived late fees for businesses that have been impacted by COVID-19. While you still owe the amount spent on gas or electricity, if you may benefit from a delay in payment make sure to contact your provider as soon as possible to ask for possible payment deferrals. Often these utilities are linked to your bank account, so you may also need to turn off the automatic debit on your account once you reach an agreement with your provider.
If you have any outstanding debt, contact your loan provider and ask for payment deferrals. If you have an SBA loan, check to see if it is qualified for automatic loan forbearance under the Small Business Debt Relief Program under the CARES Act. This program covers payments on non-disaster SBA loans, including 7(a) loans (except Paycheck Protection Program), 504 and microloans for 6 months, including loans that begin within 6 months of March 27, 2020.
Now is also a very good time to renegotiate any contracts you have with essential, existing service providers and double-check with all of them about offering temporary suspensions of fees. If there are any providers that you can halt or remove for right now, do so. Categories of these types of providers include:
Physical service providers (e.g. cleaning services)
Internet and phone services
Credit card companies and banks
Healthcare benefit providers
Payment processors and terminals
Enterprise software providers (e.g. CRM, task management)
The federal deadline for filing your business income taxes has been extended to July 15, 2020. You can confirm via this document any changes to your state deadline.
Non-income business taxes, primarily at the state and local level (colloquially known as SALT, state and local taxes) have not been extended, but you can and should call your local jurisdiction’s taxing authority and ask for a payment extension.
The few main buckets of business taxes for hospitality businesses are:
Sales & use tax
Transient occupancy tax
Ad valorem (taxes on depreciable assets, e.g. real estate or cars)
After reviewing your expenses and reducing what you possibly can, it is also worth reviewing your cash in, specifically how you may be able to pivot your business model temporarily to offset declines in revenues. For example, most restaurants are doing this by offering takeout and/or delivery when they previously may not have; retail shops are bolstering their e-commerce presence; classes are going virtual.
When considering a new revenue strategy, it is important to understand your prospective Cash Conversion Cycle (CCC) -- that is, how long it takes for you to convert cash into saleable inventory, make the sale and receive funds. First determine what the typical CCC for your business is, and compare that to your considered pivot; if it is longer, make sure to review the cash you have available to ensure you are able to sustain your costs during this longer cycle. The goal is to generate enough revenues to keep your business afloat during COVID-19, and you do not want to accidentally deplete your cash in pursuit of a new avenue and be forced to close.
You may also be considering selling giftcards or a similar “redeem in the future” type product for your business. This is a great idea for collecting cash now for future expenses. However, make sure you understand the escheatment laws (laws governing unclaimed property) for the state in which your company is domiciled. Escheatment rules govern how and when any accounts of value (including giftcards) are considered “abandoned” or unlikely to be redeemed, reported to the state and the funds of said account remitted to the government. You can review escheatment laws by state here.
Donate & Support
If you’ve enjoyed this Skillshare episode and want to want to help our team at Studio ATAO, you can become a monthly patron of ours at Patreon or send us a one-time donation via GiveLively. We thank you for your support!