The COVID-19 pandemic has had a devastating effect on the U.S. economy, causing businesses to close their doors and unemployment rates to soar. To help ease the burden on struggling Americans, the government passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, which includes relief geared specifically toward small businesses: the Paycheck Protection Program (PPP). Through two rounds of funding, the government offered $659 billion in loans.
Getting your hands on the funding proved to be tricky, but small businesses that were able to do so can stretch this lifeline to the max with a little careful planning.
5 ways to optimize your PPP funding
Working with an accountant to make an individual plan for your PPP funds is ideal, as the best use of funds varies from industry to industry, and even state to state. But if you’ve secured funding and are working on your own, these five ideas can help you get the most out of the program.
Know the forgiveness rules
One of the standout features of the PPP loan is the opportunity to qualify for loan forgiveness. In order for 100% of the loan to be forgiven, you’ll need to meet certain criteria, including:
- Using the funds for payroll costs, mortgage interest payments, rent payments and utilities
- Allocating at least 60% of the loan proceeds to payroll costs
- Spending the funds within the covered period, which is a maximum time period of 24 weeks
Forgiveness can be complicated, and there are a number of rules that you’ll want to familiarize yourself with, including staffing requirements. Review the SBA interim final rule for the full forgiveness requirements.
Create a detailed audit trail
If you’re hoping to qualify for loan forgiveness, it’s important to keep accurate records of your expenditures. When you spend money that helps you qualify for loan forgiveness, keep all receipts and records. If you use a bookkeeping system, make a note in the system.
The loan forgiveness application instructions include a detailed list of the documents you’ll need to keep and submit with your application. These include:
- Bank statements, tax documents or other documents showing payroll costs
- Account statements or canceled checks as evidence of mortgage interest payments
- Account statements or canceled checks as evidence of lease payments
- Invoices and receipts for utility payments made
Because 60% of your loan proceeds need to be used on payroll in order to qualify for forgiveness, focusing on a plan to pay your employees is likely going to be your top priority. If all of your employees are still working for you, this may be as simple as continuing to make payroll. If you laid off or furloughed staff before receiving PPP funds, you’ll want to make a plan for hiring back employees so you can begin making payroll payments.
Focus on your cash flow
During tough times, cash flow is important. While your PPP funds can help cover payroll, mortgage interest, rent and utilities, they likely won’t cover all of your business needs. You’ll still need to focus on stretching the cash you do have on hand for as long as possible. And most small businesses don’t have a big reserve to draw from — according to a JPMorgan Chase report, 25% of small businesses have fewer than 13 days of a cash buffer in reserve.
To focus on your cash flow:
- Trim expenses: Review your current monthly expenses with a critical eye. For each expense, ask yourself whether it’s truly necessary or if there is a less expensive alternative. Cut the expenses you don’t need, and try to negotiate new terms with vendors you still need to work with. They may be willing to offer a discount or a less expensive alternative in order to keep you as a customer.
- Collect your receivables: When times are good, it’s easy to let receivables collection slip a little. If your receivables are being paid late, it’s time to create a process to ensure you’re getting paid as quickly as possible and following up on outstanding payments. Look into options that make it easier to be paid, like an online invoicing system that allows for immediate payment via bank account or credit card.
- Confirm outstanding payables: Before paying bills that are currently outstanding, take some extra time to confirm that everything is accurate. Mistakes happen, and when business is busy, you may not have had the time to double-check all payments.
Communicate with your customers
Your customers may be eager to support your business but unsure of how to. Keep your customers up to date with regular communication. If you have an email list, consider sending out emails to let them know the status of your business and give them updates as to what they can expect when your business is fully operational again. Keep your website updated with opening days and hours. And be sure to post updates on your social media channels, as well.
Getting approved for PPP funds may be a welcome lifeline for a struggling small business. But it’s just as important to take the time to know how to best use the funds available to you.