Our CLA professionals share details and updates on the Alternative Lending and Main Street Lending Program.
- Jennifer Rohen, CLA Principal, WOTC Practice Leader
- Todd, Sprang, CLA Principal
- Craig Arends, Managing Principal of Industry
- Omar Nashashibi of The Franklin Partnership
- Leslie Boyd, CLA Principal, Manufacturing
In case you missed it:
Questions and Answers:
Does the full PPP loan need to be spent in the covered period to get 100% forgiveness?
Under the current law, yes - we have to spend in the eight week covered period. There could be some changes to the law which Omar will cover today.
We have a line of credit loan with another company (not a bank), can we use that interest?
This is unclear. Currently it says interest on qualified mortgages on real and personal property.
Do leased copiers (in effect before Feb. 15 count as a forgivable non-payroll expense in the application section "lease agreements for real or personal property"?
Copier lease payments are eligible non-payroll costs for forgiveness and is limited to eligible expenses during the covered period.
If our PPP is for $100,000 and I spend $100,000 in payroll during the eight weeks - it should be $100,000 forgivable correct? No reduction in FTE. Nobody paid over the $15,000+ limit.
That would be correct.
Can you elaborate on how to calculate the Q1 2020 average annual salary or hourly wage in step 1, b of the PPP Schedule A Worksheet? Is this based on payroll that was paid during this time or accrued?
Q1 average wages or hourly rate should be based on amounts paid and reported on 941
To meet the safe harbor requirement, could you hire employees by June 30 to meet the FTE and then let them go a couple months later?
The $15,000 limit of salary only applies to self-employed, is that correct? Or any employee's gross salary?
The $15,385 limit applies to all employees.
For safe harbor calculations, if an employee was fired by cause or left voluntarily between February 15-April 26, can this employee be excluded from the FTE in step 1 of the Safe Harbor calculation?
The termination for cause or left voluntarily provisions relate to employees that were on staff for part of the covered period.
What if you are able to spend the entire 100% on payroll if it goes to 24 weeks. Will all of it be forgiven then?
Yes, you can elect to keep your original eight week period.
Can you apply for forgiveness when your loan amount is used up, or do you have to wait for the 16 or 24 weeks to apply for forgiveness?
You can elect the eight week period in lieu of an extended period.
Will a new forgiveness application and supplemental schedules be updated after Senate approves bill?
Likely yes, as there are changes to the rules.
Is there a limit on hazard/bonus pay?
We still have to follow the $100K payroll limit per employee.
I've been told that the House bill also includes moving the Safe Harbor date out from 6/30 to 12/31/20. Is that correct?
Any updates to the EIDL program? We just received these funds last week – a grant several weeks ago and then approved for a loan of $150k.
No changes, just make sure you understand the term sheet, what the funds are able to be used for, and read the language around distributions
Is it true that 501(c)(6) organizations are included in the new house PPP bill?
Table A (page 9, table 1 “cash compensation”): What exactly does gross wages / cash compensation mean? Is this gross salary including health, state taxes and 401(k) benefits paid by employer but excluding federal taxes paid by employer?
Gross wages are just the amount paid to employee before considering EE tax withholding. If you pay $1,000 and then have reductions for EE costs of retirement, HC, taxes, etc. the $1,000 would be the gross wages.
Our PPP funds will run out at 11 weeks of payroll. Will I have to maintain my FTE through the full 24-week forgiveness period? Are more PPP funds going to be available so I can cover 24 weeks of payroll?
That is the concern with the longer 24-week period. It is unclear if you'll need to maintain for the entire period, but you may be better off with eight week period if funds are running low.
Are building maintenance expenses forgivable as non-payroll expenses in the PPP Loan?
Unfortunately, no. Currently non-payroll expenses include rent, utilities, and mortgages.
Are workers’ compensation insurance expenses a qualifying expense for forgiveness?
No, workers’ compensation is not includable.
Regarding EIDL, can we get update?
We are starting to see Emergency Grants and loans (of only $150k) being funded and find the process can take four to six weeks.
Is the per employee wages eligible for forgiveness capped at $15,385 for the 24-week period? Or $46k ($100k annualized over 24 weeks)?
We believe the eligible wages will increase to the $46k amount as the limitation is based on the length of the covered period.
Our PPP funds were deposited 4/16. Our physicians are paid monthly (4/30). Can their April salaries (under the $100k threshold) be used as forgiveness or must the amount be prorated from 4/16?
It is unclear on the wages incurred before the covered period or if you will need to prorate. Can be interpreted both ways on the front end. We are hoping for additional guidance from Treasury.
I applied for an EDIL Loan, and got $1K/EE, and just got approved. Do I need to complete the EDIL Loan?
You do not have to accept the EIDL loan.
Just to clarify, the cash compensation on the SBA form in table 1 on page 9 includes only gross salary, right? You do not include health insurance paid by employer and 401(k) benefits paid by employer?
Yes, the ER health insurance and 401(k) are included on Schedule A lines 6, 7, and 8.
Are nonprofit companies 501(c)(3) included in the Senate bill?
501(c)(3) are already part of the PPP. The Senate is just considering the house bill.
What you missed:
Rohen: Hello CLA family, friends, colleagues, and community partners. Welcome back to our livestream. Today, our country is amid another crisis. As we all are aware, last week we observed the reprehensible death of George Floyd. This event has initiated a wide variety of responses across our country and within our communities. Our hearts at CLA go to each of you as you lead, manage, and resource teams that are filled with sadness, fear, anger, frustration, and uncertainty. We also share our combined and individual commitment to continue the journey at CLA for equity, fairness, and inclusiveness.
We want to take a moment of silence before we start to acknowledge everyone impacted at this time.
We struggled about whether to even have the livestream today, but we ultimately decided that we wanted to bring the education related to lending to you. We hope you are staying safe and healthy. Today we are focusing on alternative lending programs, the Main Street Lending Program (MSLP) and some updates from Washington, D.C., on what’s happening related to the legislation that recently passed through the House and is now on the floor of the Senate. Our guests today are Craig Arends, Todd Sprang, and Omar Nashishibi with the Franklin Partnership Group. Welcome back, guys.
Omar, I’d like to start with you and what is happening in D.C. related to some current legislation. Last week, a bill passed through the House with 417 votes in favor and only one opposed. It contains changes to the relief period as well as to the percentages of payroll and other expenses for PPP loan forgiveness. Omar, can you please hit the highlights of that bill?
Nashishibi: Here are some of the key points of the bill:
- The eight-week forgiveness period is extended to 24 weeks.
- The ratio percentages of 75/25 for payroll costs have been lowered to 60/40.
- Additional safe harbor provisions related to the ability to re-hire and as it relates to Full-time equivalent headcount.
- In the original CARES Act the terms were for 10 years, this legislation takes it back to five years and gives businesses more flexibility for re-payment.
- The payroll deferral provision will be removed.
- The Truth Act failed to receive the two thirds vote required.
Rohen: Thanks, Omar – I think that’s very helpful to understand their outline. Where do things stand now with the Senate, and what are some of the key differences?
Nashishibi: Some of the key differences with the Senate:
- The Senate bill was only going to extend the eight-week forgiveness up to 16 weeks, rather than the 24 weeks in the House bill.
- We also saw it allowed the additional eligible expenses to include some PPP equipment.
- It was silent on the 75/25.
- They got a lot of pushback in the Senate – they need to get something done now. The restaurant industry wanted the forgiveness period extended from eight weeks to 24 weeks.
Rohen: What timelines are you hearing related to votes, action, and other things?
Nashishibi: House is gone until June 30. Senate will be in a “take it or leave” situation. Not seeing a lot of differences.
- If there are no objections, they will try to move forward with unanimous consent, which requires that no senator raise an objection to the bill’
- If there is an objection, then we shift back into normal legislative process – which typically can take 72 hours for the bill to move, but we are hopeful something will get sent to the president by the end of the week.
Rohen: If a person files an application for forgiveness and the rules change, is there any legislative commentary about next steps or actions?
Nashishibi: There is specific language in the House bill which states that any loans that originated under the CARES Act provision for the PPP forgiveness will be counted as if it was always included with the new provisions. All the new terms will apply under the new 60/40.
Rohen: Another question coming in from the chat — what did you hear about a new forgiveness application and supplemental schedules that could be updated after the Senate approves the bill?
Nashishibi: We think the application will be, but there will be some tweaks. The question is how quickly those will come out. If we get an indication that the Senate is going to move forward with unanimous consent, then we could get process moving. Rohen: We have one more question, — do you have any updates on future COVID-19 legislation?
Nashishibi: We are now shifting to CARES Act II or Phase four legislation, which we’re hoping for in July. There most likely will be one more final, recovery type bill.
Rohen: Thanks, Omar! I think with all the PPP conversation, we need to include some alternative lending options to the PPP, and to that end, we’ve brought back Todd and Craig. Todd, let’s start with you. Do you have any perspectives on the information that Omar provided?
Sprang: We will need to be patient and wait for new forms and documentation. My overall comment is positive. The extension of the covered period, combined with the longer amortization period for the loan is advantageous for both. I would expect increased forgiveness percentages on the original balances for the borrowers.
Rohen: Can you also provide an update of what’s been happening with the Main Street Lending Program and what we need to know now?
Sprang: I’ll provide an overview of where the program stands and why it’s been slow. This has to do with the structure of the program vs. PPP so I’ll cover this in broad terms.
Difference between PPP and Main Street Lending Program:
- PPP — the lenders make the loans and they stay on their balance sheet, the SBA guarantees, and the short-term duration of the forgiveness component erases it from PPP.
- Main Street Lending — the loans have a longer deferral period and terms; those loans move off the balance sheet to the federal government.
Rohen: I know that an updated FAQ was released on May 27. Can you update us on that FAQ and what it contained?
Sprang: I will summarize some of the changes.
- Section A was updated to:
- Provide linkage to the CARES Act.
- Alert borrowers and lenders to conflict of interest provisions.
- Briefly address workouts and restructurings when dealing with this structure vs a traditional loan.
- Section B was updated to specifically address the ability of a lender to make a MSLP loan to a new customer.
- Section C restated previously disclosed information about the limited ability to refinance existing loans with MSLP proceeds.
- Section C6 – Rather lengthy and provides more details about priority and security. This detail may address some detailed questions borrowers and lenders have about subordination.
- Section D provides details of Main Street Lending Program funds.
- Section E borrower eligibility issues:
- Provides more details on what it means to have significant operations in the U.S. and issues such as foreign ownership and multiple loans within an affiliated group.
- It also addresses why a private equity fund is ineligible but a portfolio company of private equity may be eligible after applying the affiliate test – which applies to private equity owned businesses in the same manner as any other business subject to outside ownership or control.
- Section F – application process was pretty skinny and unchanged.
- Section G provides guidance to lenders on adjusted EBITDA calculations. Not too useful to borrowers as it still depends on the lender you go to.
- Sections H - L are applicable to lenders and detail the operations of the facilities that are applicable to them.
- Appendices are useful reference tools:
- Appendix A looks very similar to the CLA summary published by Craig and I on May 11, but does provide a bit more detail.
- Appendix B outlines required covenants
- Appendix C details the financial information each borrower must provide to their lender
- Two pages of information required annually for all borrowers
- Two and a half pages of information required quarterly and vary by which facility they utilized (MSELF, MSNLF, MSPLF)
Rohen: Thanks, Todd. I think that really helps us understand where things are with the Main Street Lending Program. I know that there are some other programs also available, and we haven’t scratched the surface of those, so we have Craig Arends, who leads our Private Equity group, back to walk us through those. Craig, can you give us an outline of what the needs are right now and what’s happening?
Arends: I think what we have been seeing and talking about has been around cash needs as the economy opens up. For many organizations it will be time to figure out how to survive a dramatic shift in sales volume; staffing needs; slow paying customers; and stretched vendors, all while keeping the banker informed and seeking alternative cash or capital sources.
Rohen: So, what are those alternative capital opportunities?
Arends: Alternative capital opportunities are:
- Banking lending options — asset-based lending
- Private capital sources, including private equity
- Short term bridge loans or loans to cover purchase orders and slow paying accounts receivable
- Debt with warrants attached
- Mezzanine debt
- Preferred stock
- Minority interest with selling equity
- Sale of business
Rohen: Can you explain more about when organizations should consider alternative capital solutions?
Arends: Organizations need to understand the need for cash. They can use a tool such as CLA Intuition 2.0 to determine if it is a short-term cash need or a long-term cash need. Then they should follow the “golden rule of financing” – match short term cash needs with short term capital or cash sources.
- For example, if you need capital for a building, long-term change in business model, etc. look for longer term capital or cash. This could look like equity investments, mezzanine, preferred stock, etc. These have longer maturities. If your need is short term liquidity you could be looking for purchase order financing, AR factoring, asset-based lending. Also, don’t forget about looking at tax planning and grants. There are a lot of grants that could apply and help you for your cash needs.
Rohen: Craig, some of these options can have high interest rates or are very expensive cash options. Wy should organizations consider them?
Arends: Jen, great question. They can seem very expensive and they are expensive, generally the capital or cash providers would say they are returns needed for the risk they are taking. To be clear PPP and even the Main Street Lending Program are short-term, lower cost options, but are not for all organizations given the eligibility and restrictions. So, organizations need to understand what their cash needs are for and match it to the best option available at the lowest cost available.
Rohen: How do we help clients understand this at CLA?
- We put together the kind of budgeting and cash flow modeling needed to create a working plan.
- We take the time to coach and guide business owners about budgeting and cash flow modeling, to ensure they truly understand the process.
- With modeling in place, we are able to discuss changing circumstances with clients and their bankers.
- We can help put information memorandum together, so they can seek other private capital.
Rohen: We are going to take a couple questions from the chat — is there a list of which banks will be participating in the MSLP?
Sprang: There is no such list. I expect the larger banks to participate, I don’t expect some of the smaller banks. Start with the bank where you have an existing relationship. Rohen: Another question from the chat — can we make multiple pre-payments without penalty to MSLP? Sprang: Yes, you can make prepayments without penalty.
Rohen: Omar, I wanted to go back to you and discuss timing of the June versus December deadline, could you speak to that?
Nashashibi: The question relates to the House bill and what happened to the June 30 deadline and the timeline of restoring FTE and payroll until June 30. The House bill does extend it to December 31.
Rohen: Unfortunately, that’s all we have time for today. Thank you to our guests today, to you for your questions, and to our moderators in the chat for all the support, great information, and answers.
We’d like to remind you to continue to visit our COVID-19 Landing page at CLAconnect.com for more information on PPP forgiveness as well as other hot topics. You should also take a minute to subscribe to our emails so that we can continue to share up-to-date information with you about our forgiveness tool, including a demo of the tool itself, and how we can continue to support you during this time. Thanks for watching, and be well.