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What considerations should small-business owners make during this time?

The financial considerations of owning a business are complex on a good day. Throw in a global pandemic and relief provisions that change by the hour, and it’s no wonder owners are overwhelmed. Tom Bodin breaks it down.

Transcript

Tim Maurer:
Hello. Tim Maurer back with another episode of Ask Buckingham, a new video podcast designed to bring clarity in the midst of confusion by connecting your great personal finance questions with straightforward answers from industry thought leaders.

Tim Maurer:
Today’s question will be answered by Tom Bodin, Practice Integration Advisor and team leader at Buckingham who has dedicated the bulk of his career to helping small business owners. And incidentally, he also plays a mean baritone sax. Tom, you’ve spent a meaningful part of your career helping the niche of small business owners navigate the myriad of financial planning issues that are unique to them. As we’re seeing small business owners as some of the most negatively impacted by the COVID-19 crisis, but through the recently passed CARES Act, small business owners are now poised to get some much needed help. First, what is the impact you’ve seen on small business owners navigating the COVID-19 pandemic even before the CARES Act came out?

Tom Bodin:
Yeah. I mean, the immediate impact was obviously almost a complete and total halt in business. When you’ve got customers not being able to show up and employees, in some cases, scared to show up for work operating a small business, which generally is not going to have a lot of cash reserves, it’s not going to have an over abundance of financing opportunities, I mean it was pretty much a screeching halt for a good amount of the industries that we serve. The CARES Act provided some needed liquidity, but even before that, the phase two of the legislation, this has really been an ongoing the last week and a half. It’s been pretty phenomenal to see where liquidity might be coming from in the future for small business owners.

Tim Maurer:
So Tom, can you give us an idea of on average how many months of cash reserves would a typical small business owner tend to have? How long could they make it with business just completely shut down.

Tom Bodin:
So when we’re advising small business owners, we try to target about two months of ongoing full operational expenses being in an emergency practice or a small business account. When we see something like this, which we really haven’t seen anything quite to this scope before in terms of COVID-19 and affecting all of these small business centers at the same time, one of the first things that we’re going to do, we’ve got that cash on hand, but then we want to do all actions we can to shore up and decrease the cash obligations of the small business. So what otherwise would’ve been two months of operating expenses, hopefully can last considerably longer.

Tim Maurer:
Absolutely. And I think that two months of cash reserves is probably a good bit more from what I’ve seen in the media than most small business owners even had in the first place, so most small businesses may be in even more dire straits than those you’ve had the privilege of advising. Now, what can small business owners expect to get help from from the CARES Act?

Tom Bodin:
Sure. So there are a couple of different elements to it and I’ll first start with some of the cash flow planning pieces before we move into the grants and the loans.

Tom Bodin:
So from the cashflow planning piece, we’ve got a delay in employer payroll taxes. It is a delay they will be doing the future, but taking advantage of that in the near term and working with your payroll provider to ensure that those payroll taxes are not going out the door is going to be one of the measures we can take to maintain as much of that cash as possible.

Tim Maurer:
Okay.

Tom Bodin:
Also from a cashflow perspective, we’re encouraging our business owners to reach out to any lenders that they currently have and discuss with them different types of either loan forgiveness and delaying payments for a certain number of months or switching to interests only.

Tom Bodin:
And then the third piece that we’re asking our business owners to go and do is reach out to their bankers and really ensure that they’ve got a viable line of credit that they can call upon if need be. All these actions, ultimately, to try to protect that cash reserve that are small business owners hopefully have. Now, in the CARES Act, they introduced some loan provisions as well.

Tim Maurer:
So Tom, real quickly before we get to loan provisions, when you talk about small business owners reaching out to their lenders or perhaps their bankers in lines of credit, are you finding that people are getting the answers that they hope from folks that they may owe money? Are they getting some loan forgiveness? Are they getting a pause on those? Are they getting access to lines of credit or is that all shrinking up because everybody else is fearful at the same time?

Tom Bodin:
We are seeing a lot of success in that. So many of our clients are seeing one to three months of payment delays or one to six months of going interest only. Keep in mind that it is in the bank’s best interest that these small businesses make it through this disruption and get back to repaying their debts.

Tim Maurer:
Okay, great. So now let’s talk some about the loans that are being made available to small business owners through the CARES Act.

Tom Bodin:
So there’s really two primary loans that we’re looking at for our small business owners. The first one comes through from the SBA itself, and that is what we refer to as the EIDL loan or the idol loan. That is the business disruption and disaster loan in the CARES Act. The business disruption and disaster on has always been out there for the SBA, but in the cares act, what they did was made a $10,000 grant that gets to the business owner upon applying for the loan itself. That grant is in place whether or not the business owner gets the ultimate EDIL loan or not. So we want to see our business owners take advantage of that grant. And what that $10,000 allows them to do is apply that towards payroll, apply that towards the mortgage, utilities, some of the ongoing operational expenses, but predominantly it is designed to apply to payroll.

Tim Maurer:
So in the case of a grant, Tom, we’re talking about free money here, right? This is money that doesn’t necessarily have to be paid back?

Tom Bodin:
It is not only money that doesn’t necessarily have to be paid back. It is designed to not have any ongoing payment at the time. It will get rolled into the paycheck protection program, the PPP loan, with the design of ultimately forgiving that as well.

Tim Maurer:
Wow. Excellent. All right, so what then other loans are possible that they might be able to take advantage of?

Tom Bodin:
Yeah, so that second big loan that came out in the CARES Act is the paycheck protection program. Ultimately, the paycheck protection program, it’s going to be most useful to a business as they are starting to ramp back up. The PPP is based off of your prior one year’s rolling average, monthly rolling average, of payroll costs and it’s a pretty liberal and inclusive definition of payroll costs. When that loan is granted, then for the eight weeks trailing, as long as you get that loan before June 30th, 2020, the eight weeks trailing that you spend those loan proceeds on for payroll, for the interest portion of a mortgage or for rent, for utilities and for the interest portion of any existing liability for the small business is designed to be forgiven.

Tim Maurer:
Wow. So, how quickly could small business owners expect to get this relief? It sounds pretty substantial, but how quickly is it going to get to them?

Tom Bodin:
That is a real time process. We’re encouraging our small business owners to be reaching out to their lenders, make sure that their lender is going to participate and that SBA 7(a) PPP loan program and open up the dialogue. This all passed this past Friday, so a lot of the bankers are learning how to take the applications currently and that’s where that EIDL loan, that EIDL loan, is ultimately the way we do it for our clients, it’s going to be a bridge loan to get them to the PPP loan.

Tim Maurer:
Excellent. So these measures are helping take care of the business itself, what about the business owner? Is there anything to help a business owner from a cashflow management perspective?

Tom Bodin:
Yeah, and similar to what we talked about right at the top of the conversation in terms of really tighten the belt, see where you can get loan forgiveness and make sure that we’re trying to decrease those ongoing monthly costs. Now, the shelter in place provisions that we have, I imagine the majority of our business owners’ personal entertainment expenses are going down significantly.

Tim Maurer:
Yeah, perhaps.

Tom Bodin:
So we do a lot of advisory with, as medical professionals and legal professionals, and in the CARES Act, there was a student loan payment suspension until September 30th. So if you’ve got a student loan that is backed by the federal government that now you’re in your career and you’re paying that off at the same time that you’re really trying to manage your personal finances as well, we got a really nice respite there, that loan still happens to be backed by the federal government.

Tom Bodin:
The other area that we saw was a mortgage forbearance. And this mortgage forbearance, again, if the loan, so if your mortgage is backed by the federal government, you’ve got the ability to go in and request 180-day forbearance on your mortgage payment. That can be two very major monthly expenses that we’re able to put on hold while we deal with this crisis.

Tim Maurer:
Yeah. So with that mortgage forbearance, what requirements do you have to meet in order to get access to that relief?

Tom Bodin:
Yeah. So the requirements around that is basically, the way it’s stated in the CARES Act, is that you had been negatively financially harmed by COVID-19. Now you need to talk to your lender, and that is probably going to be sorted out there at the bank level, but the definition is incredibly broad.

Tim Maurer:
Yeah, and intentionally so.
Tom Bodin:
Yeah.

Tim Maurer:
All right, so we’re taking care of the business, we’re taking care of the business owner, what about additional help for employees of small businesses?

Tom Bodin:
That’s been a real hard thing for a lot of our clients to move forward with. So in the CARES Act, the federal government has come back and really done two very important things. One, they have eliminated the first week of delaying unemployment. So when you go through after April 1st and applied for unemployment, if you qualify, then you’re going to be receiving that unemployment check pretty much immediately. So it helps with cashflow continuity that they moved away from that one week holding period. The second item is, in the CARES Act, the federal government has provided an additional $600 per week on top of what the individual state would have been providing on unemployment.

Tom Bodin:
Now, unemployment is administered on a state by state basis, so that state specific number really is state specific, and a lot of our employees are going to go through the process of experiencing what that looks like in a very different way, depending on what state they’re in. But the CARES Act was designed to provide up to 100% of their salary continuing to be paid. If a business needs to furlough employees, needs to close for a temporary period of time, or even has a reduced workforce. So if you’ve got employees that normally would have been working 30 hours a week, but now we’ve only got about five to 10 hours, still encourage them to sign up for that on employment and make sure you articulate to your employees that this is not that traditional approach of unemployment where you don’t have a job, you’re looking for a job, you can’t find a job. The federal government decided to utilize the unemployment infrastructure as the most efficient way to get these dollars to your staff and to your employees. So while it might feel negative, I encourage business owners to talk to their staff that we’re really leveraging the tools of federal government wanted us to do, not that you’re technically unemployed or fired. You might be furloughed or you might have lower hours.

Tom Bodin:
Also important to know, they opened up unemployment to self-employed individuals. So you as a business owner, if you are a sole prop or if you are an S Corp, I would encourage you to also file if you are saying your business either shuttered for a time period or if you are experiencing a significant decrease in your revenue and profitability.

Tim Maurer:
Tom, I really appreciate the kind of broad overview of the measures in place to help small business owners as a company, as business owners themselves and as employees. What are you saying to small business owners as the first couple application steps that they should be taking if they’re trying to figure out what they should do next right now?

Tom Bodin:
The way that the SBA, EIDL loan, the EIDL loan is set up, that’s a direct application to the SBA. That one’s not going to be administered by your banker. But as I mentioned earlier, we do want to see that incorporated in the PPP loan.

Tom Bodin:
So step one, get online file for the EIDL SBA loan. They’ve got a very streamlined process now. It will not take a significant period of time. The second is look and think about what you need to do with your staff. If you need to furlough them, if you need to reduce their hours, come up with a plan to help them file for unemployment. Make sure you’re articulating to them that it is, this is a temporary furlough or this is a temporary reduction in hours. And then reach out to your banker, one, for if there’s anything outstanding that we might be able to move to interest only or move off in payment, but also see if they are going to be that SBA 7(a) lender for the PPP loan because you want to make them aware of your application for the EIDL loan as quickly as possible and goal is going to be to have that rolled over into the PPP loan. Get the dialogue started with your banker as soon as possible. Make sure you’re getting it in front of the communication plan to your staff as well.

Tim Maurer
Tom, extremely helpful. I will say I’m not surprised that the first thing small business owners need to do is accustomize themselves to a few more acronyms, but I guess we should have expected that. I appreciate your help very, very much and thank you for tuning into this episode of Ask Buckingham. If you have a question that you’d like to see us address, you can do so by navigating to the website, askbuckingham.com, or by emailing your question to question@askbuckingham.com, or just click in the upper corner of your screen, it’ll take you directly to the website. Remember that there are no dumb questions, but unfortunately there are plenty of poor answers out there. Our hope is that by giving you straight answers to your questions it will bring a sense of calm and allow you to apply what you’ve learned in pursuit of good decision making. So please follow us, and by all means, Ask Buckingham.

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