Must-know tips for small businesses and nonprofits considering stimulus loans.

Can you tell me about Concerned Capital and a few trends from your conversations with business owners right now?

Concerned Capital helps businesses access capital to grow, transition, and navigate change. We work with businesses of all sizes, many in the manufacturing industry, to help them transfer ownership to long-term employees and leverage other financial tools (such as working capital loans and hiring tax credits) to grow. What we’ve seen business and non-profit leaders who are experts in their fields are getting stuck when it comes to understanding and accessing emergency funding programs created to provide immediate support for their operations.

Many executives and owners I’ve spoken with are anxious about taking on debt. Everything that’s come out in the economic relief package is a loan, and people are anxious to take them during a time of uncertainty. People need to take a look at what they’re doing now and think about how that work can be sustained—especially when we don’t know where things are heading. Just because you’re eligible to borrow 2.5x your average monthly payroll costs with the Paycheck Protection Program (PPP), doesn’t necessarily mean that you should.

People need to take a look at what they’re doing now and think about how that work can be sustained — especially when we don’t know where things are heading.

Can you say more about this? What should people be thinking about before applying for or taking these loans?

Employers need to go through the critical exercise of understanding how much they need, what it will be used for, and how much they can realistically pay back. There are important considerations that factor into the “debt forgiveness” built into the PPP. This program is set up to take a snapshot of your employee headcount or full-time equivalent (FTE) jobs on February 15th and then compare it to the FTEs on June 30th. The amount of loan forgiveness is based on the employer keeping or rehiring employees to maintain salary levels. If an employer reduces the number of FTEs or if wages decreased by June 30th 2020, then the amount forgiven will be reduced accordingly. So, if you have 10 people on staff in February 2020, the payroll amount and number of employees is your benchmark. To find the amount you are eligible to borrow, you take the monthly average of your payroll from January-June in 2019 and multiply that amount by 2.5.

Let say on June 30th you only have 6 people on staff. Maybe your resources were depleted and the money you borrowed runs out before then. Now you’ve let people go and your organization is responsible for a loan where a portion will need to be paid back (remember, you must maintain your pre-crisis level of full-time equivalent employees or else there is a reduction in the debt forgiveness). The good news is that the loan may not have to be paid back for two years, the interest rate is low, and the payments may be deferred. The bad news is now when you apply for additional grants or funding down the line, you have that debt hanging over your organization. While the forgivable feature is nice, I encourage employers to think hard about what happens if you don’t meet the requirements and how your organization would pay back the part of the loan that remains after June 30.

We should mention that the PPP and other programs are accessible not only to small businesses but to nonprofits as well. What other programs under the recovery package should these organizations be looking at?

In addition to the PPP, businesses and nonprofits should definitely look into the Economic Injury Disaster Loan program (EIDL). This isn’t a new program, just one that’s been drastically expanded for businesses and nonprofits with less than 500 employees. The maximum loan amount you can take is $2 million under this program, but you can also get a cash advance of up to $10,000. The advance amount is calculated to be $1,000/employee and it does not have to be repaid (a business with 5 employees can get $5,000). This program was created to inject cash quickly into the economy, so even if you are denied an EIDL loan, you can still get this advance. The application is simple and you can apply directly on the SBA website. Remember that you can apply for both the PPP and EIDL if you are eligible (there are some considerations if you take both). Things are changing rapidly, but as of today (April 9), this article provides a good summary of the EIDL details.

We’ve heard that small businesses and nonprofits — particularly those in communities of color — have had trouble applying and accessing funds through the PPP. Can you explain this?

You have to apply for the PPP through your local SBA-approved lender. The federal government has provided little guidance (as of this writing) on the specifics to lenders and applicants. Congress made it a priority that the process would be simple, so they waived requirements for applicants like collateral or detailed financial records. What does this mean? Banks are now being asked to bear the risk and lend their own capital, so to reduce risk, they’ll lend to the people they have existing relationships with. Yes, the loan is 100% guaranteed by the SBA and much of the loan could be forgiven, so in theory, there is a reduced risk of defaults. But in reality, banks are conservative by nature. They don’t yet know how this will work and have shown to be very cautious about implanting the program.

The lenders we have spoken with are concerned because they do have time to conduct their normal due diligence. They are being expected to turn things around fast, which is why they are helping businesses they have already underwritten for a loan in the past, and why they are not prioritizing new borrowers for this program. If you don’t have that track record with them — often the case with small businesses and nonprofits — there’s a good chance you’ll struggle to access funds under the PPP. Unfortunately, most Community Development Financial Institutions (CDFI) have been left out of this program (except for a few large ones) which focused on national and community banks. CDFIs are the lenders of choice for small businesses, so not including them marginalizes the businesses they maintain existing relationships with. Big banks cannot be the exclusive partners for recovery.

That being said, our team has been approached by several community banks looking to grow using the PPP. If the bank where you have your deposits is not helping you access PPP, perhaps there is a local community bank that would work with you. Just keep in mind that they may require that you bank with them.

CDFIs are the lenders of choice for small businesses, so not including them marginalizes the businesses they maintain existing relationships with. Big banks cannot be the exclusive partners for recovery.

Things are changing every day — from the state of the crisis to the new programs designed to mitigate it. Anything else that you’re excited about right now?

At Concerned Capital, we work with businesses in transition. We’re seeing many older business owners ready to retire, which opens an enormous opportunity for employees to buy the businesses where they work. The debt markets are frozen so it’s very hard to get a loan right now if the SBA isn’t backing it.

This is the time for employees to talk to their employers about their long-term plans. It’s the time for employers to train workers in anticipation that they might one-day operate the businesses themselves. The alternative is that private equity groups are ramping up acquisitions because they know people are desperate — we call that vulture capital, not venture capital. We know this can be a sensitive conversation and encourage employees to connect with their state employee ownership/co-op development programs or follow us on Twitter as we often share resources. Our work is to help bring capital to the table and work with employees (who don’t usually have the capital on hand) and company owners to structure ownership transition deals that meet everyone’s needs (like supporting the owner’s retirement goals).

Last, I am excited about the California Small Business Loan Guarantee program, which I hope will be a model for other states. It is targeting the most vulnerable businesses (those without a track record, run by non-citizens, and others) that do not qualify for relief under the federal aid package. If your state doesn’t have this, I encourage you to reach out to your representatives. Programs like this will help us ensure that everyone is included in the recovery.