When You Should (and Shouldn’t) Use Payroll Protection Loans

When You Should (and Shouldn’t) Use Payroll Protection Loans

With jobless claims hitting record highs, you might finally need to figure how to ask for help. A portion of the Coronavirus Aid, Relief, and

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With jobless claims hitting record highs, you might finally need to figure how to ask for help.

A portion of the Coronavirus Aid, Relief, and Economic Security (CARES) Act allocates $350 billion in government-backed loans for small businesses, under the Paycheck Protection plan. As a small business owner or sole proprietor, that means you can borrow money to help meet your payroll, pay your rent or mortgage, and cover your utilities.

The first eight weeks of the payroll loan can possibly be turned into a grant so that it can be free money for you. Even if not, the maximum interest rate is 1 percent, and can be deferred for six months to a year. You apply directly at authorized SBA lenders.

The question is, should you access this program? Here are a few scenarios when it does and doesn’t make sense to tap into the PPP.

When you should take the loan.

  • If you have work that employees can do remotely. You may not be able to sell today, but you can create, design, and code. Focus on jobs that your employees can do remotely. You don’t want to bring people into work unnecessarily!
  • If you suspect this will only be a blip and you want to be ready to come back online in a flash. No one knows exactly how this will end, but if you think it will be sooner rather than later, this is a great idea.
  • If hiring will be difficult. You can layoff people now and rehire when things open again, but will that be easy to do? Yes, some of your staff will love to come back, but if you handle the termination poorly, or weren’t a totally awesome employer to begin with, you may have difficulty recruiting. Remember, recruiting, onboarding, and training all cost money.

When you should not take the loan.

  • If however you think the crisis will be prolonged and you don’t think business will ever recover, it doesn’t make sense. You’ll just be adding to debt you’ll have to pay back, with no company to earn the money.
  • If you think taking on more debt will make your company insolvent–even in good times–this might not be ideal. It should be noted that while some aspects of the loans may be forgiven, that’s not guaranteed. Plus, while they come with a reduced 4 percent maximum interest rate, that’s still more debt. If you were just barely making it (or operating at deficit) before the shut downs, you may not survive the increased debt.

There are a few more things to remember when making your decision.

Unemployment hurts everyone

When you layoff an employee, they are eligible for unemployment payments (generally–each state has its own rules), but those payments can be tiny–as low as $235 per week for state benefits. The federal government is adding additional money, up to $600 per week for eligible people. That’s still below the average paycheck.

In other words, unemployed people can’t buy your products. You can’t sell your products, so you can’t afford to hire anyone, and the cycle gets worse. It’s essential to keep people working as much as possible.

Speak with your local experts

Published on: Apr 3, 2020

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.

This article is from Inc.com

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