Michael Ly and Sabrina Parsons joined David and Blake to explain the Small Business Administration's Economic Injury Disaster Loan (EIDL) and Paycheck Protection Program (PPP). Michael Ly, is the founder of Reconciled, a remote bookkeeping firm that is currently advising and helping hundreds of small business clients navigate both EIDL and PPP loans. Sabrina Parsons, who is on the board of directors at an SBA lender, Oregon Pacific Bank, has been actively communicating with both the SBA, and the Small Business Development Center (SBDC) this week.
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- Michael Ly, Founder/CEO of Reconciled
- Sabrina Parsons, CEO of Palo Alto Software and Board Member of Oregon Pacific Bank
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Michael Ly: [00:00:03] One of the things I'm telling clients is this is not a growth loan; this is not a VC, or private equity fund investment; this is not angel funding. The intention of this loan- the intention of these loans is to keep people on payroll.
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Blake Oliver: [00:01:29] Welcome to The Cloud Accounting Podcast. I'm Blake Oliver.
David Leary: [00:01:32] And I'm David Leary.
Michael Ly: [00:01:34] And I'm Michael Ly.
Sabrina Parsons: [00:01:35] And I'm Sabrina Parsons.
David Leary: [00:01:37] Blake, I've got special guests for us tonight.
Blake Oliver: [00:01:40] I am so excited, David! Thank you so much for setting this up.
David Leary: [00:01:43] There's lots of questions on what the programs rolling out from the SBA are. Even me, as a small business owner, I don't know what the answers are. I'm trying to navigate them myself. So, I brought on an accountant/bookkeeper, Michael Ly, who is advising hundreds of his clients, probably, on how to navigate this process; and then Sabrina Parsons, who's been on the podcast before. She actually is on the board of directors at a bank, and Sabrina has inside tracks with the SBA, and the SBDC, so she can kind of give us, like what's happening behind the scenes during this process, as well. With that said, Michael, and Sabrina, if you guys wanted to jump in and maybe say hi?
Michael Ly: [00:02:19] Yes, hi. Thanks, David and Blake, for having us; for having me and for having both of us. David, yeah, your situation is very similar to many millions of other small business owners across the country.
Sabrina Parsons: [00:02:31] Yeah, thank you. I'm really happy to be back with you guys, Blake and David. The last time we were together, we were actually at a conference, which seems so far away and so foreign now, since we're not allowed to ever do that in person for I don't know how long. So, I'm glad to be talking to you guys in some way or another, and I'm really glad to be doing this content today because the number of small businesses in the United States, right now, that are struggling is staggering. But there are some programs that can help them, and these programs are very difficult to wade through and figure out what's good for what business. So, hopefully we can help people.
Blake Oliver: [00:03:11] Sabrina, what bank are you affiliated with?
Sabrina Parsons: [00:03:14] I'm on the board of Oregon Pacific Bank, which is a small community bank in Oregon.
Blake Oliver: [00:03:20] Gotcha. Michael, for the folks who may not know who you are, listening in, where are you located, and what's your firm look like?
Michael Ly: [00:03:30] I'm normally located in Burlington, Vermont, though I'm sheltering in place in Tempe, Arizona, right now. I am CEO and founder of Reconciled. We're an online bookkeeping and business advisory practice. I've got 27 employees working from nine states and serving about 150-plus clients across the country.
Blake Oliver: [00:03:49] So, you must be really busy right now with all of these SBA loan questions, applications, I imagine?
Michael Ly: [00:03:55] Oh, yes, yes. From sunup to sundown, that's all I'm doing right now.
Blake Oliver: [00:03:59] So, even though we can't see each other, and we can't get together, you, and David, and I are all in the same state because I'm in Phoenix, right now. I'm normally in L.A., but I am also sheltering in place in Phoenix.
Michael Ly: [00:04:09] Yeah, the one time the three of us are in the same state, we can't even see each other in person.
Blake Oliver: [00:04:12] So, we're representing Phoenix, Tempe, and Tucson. Those are like the three cities in Arizona, right, David?
David Leary: [00:04:20] Yeah, there's still Flagstaff, and there's still a couple other, but yes [crosstalk]
Blake Oliver: [00:04:20] Okay.
Michael Ly: [00:04:20] They're the only three worth gonna, right?
Blake Oliver: [00:04:20] Right. What we're gonna talk about tonight is the two types of SBA loans available. I understand there are two, right now, and, of course, this could all change very quickly. We've got the Paycheck Protection Program, also known as the PPP, and the Economic Injury Disaster Loan Program, a.k.a. EIDL. By the end of this, we will all be really sick of acronyms. Am I right? Did I get that right, Michael?
Michael Ly: [00:04:54] Yeah, you got that right, and actually, those are the two we'll talk about, primarily, on the show, but there's actually plenty more that the SBA does, but those two specific ones have gotten the most press over the past several weeks.
Blake Oliver: [00:05:05] Yeah. So, where do we wanna start with all of this?
David Leary: [00:05:09] I think I've heard from a lot of accountants and bookkeepers, there's a little bit of a playbook here, right? Like, "Hey, you want to first get control of your expenses; go for any free money that you can go for; renegotiate interest rates in your loans and any terms you can with your vendors. Then, it's like, okay, now stimulus is out there ... You go to CNN, and you see there's gonna be, what is it, $350 billion dollars for small businesses. It goes live tonight at midnight, and it's just this grab. But then you step back, and the rules are just overwhelming. What's a small business owner ...? What should you do first? Do you do the emergency thing first? Do you do the Paycheck Protection Program first? It's kind of, in a way, Michael, I'm coming to you is a client, maybe, and I'm like, "What do I do? What's the first thing?"
Michael Ly: [00:05:53] That's a great question, David, and that's a question I've been asked hundreds of times throughout the past several weeks. So, first, the first advice is what you exactly did is you asked an advisor of yours. If I was advising you ... You came to me as an advisor, and you said, "Hey, here's the situation ..." So, I'm telling every client, "It's great that you came forward and that you're wanting to advise ... Hopefully, the advisor you're working with has actively come out to you and been proactive with you to help you through this worldwide pandemic situation; very unique situation." I recommend any of the listeners to go to their banker, to their attorney, to their accountant, CPA, business advisor and talk through this, and if they're working with an SBDC rep, or an SBA rep to work through this.
[00:06:34] The first thing you wanna assess is what is the state of your business and your cash flow? You wanna work with your accountant, or your internal accounting staff, to assess that situation and to really see if your business- how it can survive and if it will survive over the next 60 to 90 days and for the rest of the year, and what kind of impact this COVID-19/coronavirus pandemic will have on your business. I think that's the first thing you wanna know before you apply or go for any assistance. You just kind of want to know the state of your business.
[00:07:06] Secondly, every state, depending on where you are, and every industry is actually gonna have different types of grants and incentives that are available to you, so you're gonna want to research and reach out to both your state's economic, or development authority to see what grants might be possible in your area. There are both private and public grants, and assistance, and loans that are being made available that are on a state-by-state, and industry-by-industry basis. Just doing a quick Google search is gonna help you, and also reaching out to your industry's trade association, which can be very, very helpful. That's where I would begin your journey before you look at any of this.
David Leary: [00:07:47] Okay.
Blake Oliver: [00:07:47] So, then, let's say we do that, and we've determined that it ... We are gonna survive, or we have a path to survival, if we take advantage of some extra financing, or take on a loan, or something like that, because we don't want to do it if we're just gonna fold anyway, right?
Michael Ly: [00:08:01] Right, right.
Blake Oliver: [00:08:03] So, we decide, okay, we can get through this. We just need the financing. So, now, we're gonna go get one of these loans and maybe this is a good place for Sabrina to come in ... Well, let me ask this. There's so much, I can't even think. Why are the banks involved in this? How is this whole thing working? So, this is a federal program with the Small Business Administration, but the all the lending is going through the banks, not the SBA; the whole loan process is all happening through the banks.
Sabrina Parsons: [00:08:33] Yes. So, that's just for the PPP. It's just for the Payroll Protection Program where it's going through the banks. The EIDL, that's a loan that's actually ... That loan structure has been around for a long time, and it's used in mostly natural disasters. So, think of Katrina, New Orleans- that comes raging through; what you saw in Houston. You have a huge national disaster ... Sandy. Small businesses get wiped out. They have to close.
[00:09:09] The SBA is able to offer these loans as soon as the state declares a state of emergency. When the governor of the state says state of emergency, oftentimes they'll do that, and they'll declare it in certain counties. Your county has to be declared. Now, given COVID-19, we're pretty much at a place where every single governor has declared every single county, so it's unprecedented. Almost everybody is eligible to try and apply. Now, not everyone is going to be able to get that loan, but that loan is not through banks. That one is directly- you apply directly to SBA.gov, and it goes through Treasury; that is not through the banks.
[00:09:58] That is a true loan. It is not gonna be forgiven, and there are qualifications. If you don't have a good personal credit score as a business owner, you're not gonna get that loan. 650 or below, and you're not gonna be eligible for that loan. If you're not willing to put personal guarantees on the line, you're not gonna get that loan either. To Blake, or David, I forget which one of you said, if your business is gonna fold, you certainly do not wanna get an EIDL loan because you will be personally responsible for paying back that loan. That one isn't through the banks.
[00:10:32] The PPP is through the banks because it's in the format of the SBA 7(a) loan, which are always done through SBA-approved lenders. Those are lenders that have gone through a process. They get approved by the SBA, and the SBA backs those loans. The SBA is gonna PPP loans at 100 percent, if they're used correctly. So, that's just to kind of position these two particular loans. The process is different. How you get them is different. Who qualifies is different. The EIDL will not have forgiveness, although it's a great interest rate over 30 years, 3.75; whereas the PPP, if you don't get forgiveness, it's 24 months at a very low interest rate, but it's only a 24-month loan.
David Leary: [00:11:22] For the emergency one, if I heard you correctly, I have to put up personal guarantees, regardless of my business formation. So, if I'm an S Corp, et cetera, I still have to have personal guarantees. Interesting.
Sabrina Parsons: [00:11:35] Yep, you have to have personal guarantees, so you have to think through that. One of the things that, from that bank perspective, because ... The reason that I know a lot about the loan process is because I'm on the board of Oregon Pacific Bank, but through Palo Alto Software, we work with a lot of small businesses, so that's where I'm in touch and working very closely with the SBA, and the SBDC. Through going through all of that, what we're realizing is people- number one, they don't understand the difference, and some businesses may need both.
[00:12:14] My advice to a business, very much along what Michael said, you've got to start with understanding what is this gonna do to your sales, your revenue, and are there any expenses that you can cut except personnel? Because you will not have the loan forgiven, if you're laying off people because the Payroll Protection Program is exactly for that. So, you have to go- you've got to do your numbers. You've got to figure out how is my revenue affected? Are there any expenses I can cut? I'm gonna model this out without losing and laying off any staff because if I do, I'm not forgiven.
[00:12:52] Once you do that and you understand how much cash you need to make it, say, the next six months - let's just think six months - then you have to go through the Payroll Protection Program and say, "Okay, I'm eligible for a certain amount that I can borrow," and that is different from the amount that is forgiven. So, you figure out what you can borrow, what is forgiven; and I'm suggesting that people borrow what is forgiven, but that number may not match what you need. You may need more, and you may need to use it for things that you can't be forgiven - inventory, other expenses that aren't payroll expenses.
Blake Oliver: [00:13:38] Michael, that's what you were talking about when you said run these numbers. It's not just will I survive as a business, it's also does it make sense for me to take this loan because I have to keep all of my staff or substantially all of them, right?
Michael Ly: [00:13:51] Correct. Correct, exactly. One of the things I'm telling clients is don't view this as ... This is not a growth loan. This is not a VC or private equity fund investment. This is not angel funding. The intention of this loan- the intention of these loans is to keep people on payroll. It's to keep businesses afloat and keep people on payroll.
[00:14:12] I've had many clients who have shut their doors or temporarily shut their doors, and they're thinking, "Okay, well, I've laid off all my employees, or I furloughed all of them, or terminated all of them. I wanna get this loan and bring it back to work ..." The first question I ask is: "Des your business have any potential to bring in revenue at all for the next two to three months, or four months? Are there any customers that are gonna be purchasing from you? If you're a restaurant, or a retail store, do you have any reason that you think you're going to be an ongoing concern? Because if you don't, you'll be bringing people on thinking that you're gonna get forgiveness and then you're just gonna be laying them off again. It's a pointless process for you." That's really why you want to evaluate, and as Sabrina said, the point is you believe you continue to be an ongoing concern and that their goal is to keep people on payroll, to operate your business, and that you still have customers out there that are willing to buy your product or service.
Blake Oliver: [00:15:07] Sabrina, I think I heard you say that if I don't get the forgiveness, it's a 24-month loan? What is that interest rate then?
Sabrina Parsons: [00:15:16] The interest rate is very low. It's 0.5 percent, so it's almost nothing, but you have to pay it back in 24 months. So, again, exactly what Michael said, the point of this money is to keep people on staff and to pay your rent or mortgage interest; so, you can use it for that, as well. Right now, we're going through ... It's April 2. People have had to pay their personal rents, and personal mortgages, and there's all this forgiveness, and you can't get evicted. On the business side, all the commercial building owners also need to pay their things. So, they're trying to help you keep people on staff and pay your rent, basically. That's what they're trying to help you do. So, Michael's exactly right on. Your business may also be a going concern, but may not be able to support itself, if you have to keep everybody on.
[00:16:08] Now, another big question people have is, "I've already furloughed or laid people off. I can't do this?" You can, if you bring people back. So, you can bring people back, but again, it's got to make sense. You just have to do the numbers . You just have to figure out how much can I get, how much is forgiven, and what does that do to my current financial forecast? Once you figure that out, it makes a whole lot more sense, because I don't think that you want to get saddled with a loan that has to get repaid in 24 months. Now, if the loan is $6,000, maybe that's fine, but if you're trying to deal with 50, 60, 70 employees, those people's payrolls, you're talking half a million to $2 million. Nobody wants to be saddled with that, even at a low interest rate and have to pay it back in 24 months.
Michael Ly: [00:17:00] That's where accountants are so relevant, right now. If, at any time in history, accountants are relevant, it's now for small business owners because accountants are equipped to be able to help their clients figure out which route to go makes sense for their business.
Blake Oliver: [00:17:16] There may have been some breaking news just a few hours ago. I recall seeing something, somewhere on Twitter, about this interest rate changing from half a percent to one percent at a news briefing.
Sabrina Parsons: [00:17:28] It's changed a couple of times. It was actually up at four percent for 10 years, and that's what a lot of people thought for a while, and the banks, as well. Then, when all the paperwork to the banks came through, and it was actually half a percent for 24 months. So, if it's changed again, I haven't heard about it, but it's changed twice- I mean, it's already changed once. It was originally a 10-year loan at four percent, and that changed to be a half a percent for 24 months.
Michael Ly: [00:18:01] Yeah. Blake, I think you're referring to the SBA's administrator finally put out on the SBA website, between 4:00 and 5:00 p.m. Pacific Time. They put out the interim final rule that the administrator wrote up of how they would go about advising and providing guidance to the banks and community banks. That did say, in that final rule that's going to the Federal Register now, that the loan interest rate would be one percent for this loan.
Blake Oliver: [00:18:30] Okay, so that just happened because I'm reading here, on a CNBC story that is dated April 2 at 7:09 p.m. Eastern, and we're recording at 8:00 p.m. Pacific, that Mnuchin announced in a press conference this afternoon, or in the evening, Eastern Time, that interest rates were raised to one percent, after hearing concerns from banks. So, I guess-
David Leary: [00:18:57] I'll check his Twitter [crosstalk]
Blake Oliver: [00:18:57] Yeah, because that's where official policy is made these days. So, apparently, there was a resistance from the small banks. Sabrina, maybe you have some insight on this. Resistance from the small banks because they're getting a cut of all of these loans that are being originated, and it wasn't gonna be that much money. Like, for a $100,000 loan, it would be $5,000. Now, they're raising this percentage, so the banks are gonna get more for these smaller loans, or something like that?
Sabrina Parsons: [00:19:30] Yes, exactly. I do know that the banks were concerned. Now, ours is a small community bank, and our perspective had been, you know what, we need to help small businesses. We need to help our community. There is a small fee that the bank gets for getting the loan through; and given that interest rates are basically at zero - 24 months and 0.5 - our community bank's perspective was it's fine. It'll be worth our while, and our community desperately needs it. But there was definitely some kind of pushback from some small community banks that said, "We don't get anything."
[00:20:11] Now, the biggest thing there to really consider is it's all the very small businesses that they're most concerned about; that they have this volume of thousands and thousands of businesses that need Payroll Protection Program loans that are gonna be less than $100,000; because the loans above half a million- and I forget, there's ... I think it's half a million, but loans about that amount, they get three percent for, but if you're getting $1 million, the bank's getting $30,000, and that's not bad. It's not the business model the bank has, but you're making something from it, and it's worth the time; versus, for $100,000, you're making $5,000.
[00:20:56] So, there was definitely concern, not just from the banks, but I think from the general community, that if you didn't make a teeny bit more incentive for the banks, you don't want people playing with things and not serving all the businesses. You don't want cherry picking. The SBA will the auditing banks, so they do want preference for underserved entrepreneurs - entrepreneurs of color, women, and rural entrepreneurs need to get preference. Banks are gonna have to prove that they're doing that. This was kind of a concession to sort of make sure that we can serve as many small businesses as possible.
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David Leary: [00:22:40] All right, I got all my ducks in order. I know I'm not gonna have to lay off people. I'm ready to apply for these loans. I've started to see things about fees. Can the bank charge me a fee, like an origination fee? If Michael's helping me prepare my paperwork, is he allowed to charge me in the process of trying to apply for this loan? What's okay and not okay out there?
Sabrina Parsons: [00:23:01] A bank can't charge you. That's absolutely not allowed. The bank cannot charge you for the PPP, and the SBA is not gonna charge you for the EIDL at all. Now, in terms of will Michael? I expect he will, and he should, if he's doing work for you. The work has to be done. In our company - we're a small business; we're under 100 employees; we've been affected by this, and we've been looking at it - we do have a CFO. So, he's taking his time, and his effort, and he's looking at all of this and seeing what makes sense for us. I would expect that if Michael's gonna do this, he should be charging you, and you should pay him because you should want him to do really good work.
Michael Ly: [00:23:43] Yeah, no, definitely Sabrina. Like any accounting firms, we're prioritizing on focusing on our own customers first because those customers have agreements with us. They're paying us advisory fees, and monthly servicing fees, right now. In the same vein, the banks- many banks have communicated that they're gonna first prioritize and focus on their current customers that they have relationships with and that they may also already have SBA-backed loans with. They're gonna be focusing on those customers, putting them in line - that would make sense - before new customers get in line with them.
[00:24:17] Like I tell my customers, you do want to reach out to your current banker, or your current bank. If you don't have a relationship with them already besides just a deposit relationship, you want to find out who the bank lender is at your bank and have a- communicate with them, form that relationship, and begin to let them know what assistance you'll need, and what option you want to go with, and get the help of your accountant, or your attorney, or your advisor to walk you through this, as you apply for these loans.
Blake Oliver: [00:24:45] The banks are gonna get one percent because the SBA is going to pay the interest to the bank on the small business's behalf if they comply with the program and use the PPP money to maintain payroll.
Sabrina Parsons: [00:24:59] They're not actually ... If you get full forgiveness because they're ... You have six months' reprieve, basically, to pay back the loan. If you get full forgiveness, the bank is only getting that percentage, either five, or three percent, depending on the amount. The bank is not getting paid the one-percent interest. It's beyond that, and anybody who keeps the loan and doesn't get full forgiveness. So, that's my understanding that the bank isn't necessarily gonna make any money, per se, from the loan, those eight weeks. The little bit of money to be made is from that three or five percent that they're gonna get, depending on the loan amount. Then, if people borrow more than is forgiven, or they don't spend it in the right way, then the bank can make that one percent, and it's the actual- it's the borrower that will pay it.
Blake Oliver: [00:25:54] Okay, so the one percent applies only if the loan is not forgiven.
Sabrina Parsons: [00:25:58] Exactly.
Michael Ly: [00:25:58] Correct.
Blake Oliver: [00:25:59] The portion that is not forgiven. What is this three to five percent, again?
Sabrina Parsons: [00:26:02] So, it depends on how much you're getting. It's a sliding scale. If you're eligible for ... I think it's- and I'm trying to find the exact information here ... If you are eligible, up to $500,000, the bank gets five percent of that. Beyond that, the bank gets three percent.
Blake Oliver: [00:26:20] So, that comes out of the amount that I would get is like [crosstalk]
Sabrina Parsons: [00:26:25] Nope. That's getting paid by the SBA.
Blake Oliver: [00:26:27] Oh, okay.
Michael Ly: [00:26:27] It's basically a lender fee. It's basically a lender fee, yeah.
Sabrina Parsons: [00:26:30] Yep.
Blake Oliver: [00:26:30] So, the banks are gonna make a lot of money from this.
Sabrina Parsons: [00:26:34] Well, it depends, right? If your average loan is $50,000, and you get your five percent, $2,500 for the amount of scrambling, and work, and dealing, that's not ... The banks aren't making a ton of money. I mean, if you're looking at it from I'm gonna be a ... This is gonna be a huge moneymaker; maybe in bigger communities, where businesses are bigger, if your average loan size gets up above $500,000, it's an opportunity for banks to make money.
Blake Oliver: [00:27:08] Because they're making five percent on those bigger ones?
Sabrina Parsons: [00:27:11] Three percent [crosstalk] It's five percent on the lower amount; three percent on the bigger one; but it's just more money, right?
Blake Oliver: [00:27:16] Right.
Sabrina Parsons: [00:27:16] From the community bank perspective, as a board member, the opportunity I see is it's an opportunity to actually serve your customers, serve them well; help them so that they don't go out of business. I don't want them to go out of business because then I don't have a customer. So, I am incentivized to help them stay in business, and it's an opportunity to actually serve people who may become customers. Anybody who's banking with a community credit union, they don't do SBA loans. They're not SBA-preferred lenders.
Blake Oliver: [00:27:53] Oh, interesting.
Sabrina Parsons: [00:27:53] Different banks are ... Yeah, community banks can't. Credit unions can't be SBA lenders, the way the credit union makeup is. There are gonna be people out there who have banks that are not SBA-approved lenders, and they're gonna have to go to other banks. So, it is an opportunity, if done correctly, to grow your customer base. I think that's the bigger opportunity. It's, number one, you don't want your customers to go out of business because that's not good for you, and, number two, if you're able to figure out a way to streamline this and help a lot of customers, you could be in a really good position, once we get out of this crisis [crosstalk]
Blake Oliver: [00:28:35] The reason I brought this up - I'm sorry, Michael. I'll come back to you - is that I did- in my head, I did the math. I said, okay, $350 billion; five percent of that is $17.5 billion dollars. That's a lot of money that the banks are gonna get.
Michael Ly: [00:28:52] Yeah, well, the majority of these loans, again, are gonna be smaller than $350,000, and the final rule said for loans not more than $350,000, they would receive that five percent; but then it does step down to three, between $350,000 and $2 million; and then it drops down to one percent, if it's a loan above $2 million. So, between [crosstalk] $2 million and $10 million max that you're allowed on the PPP, the banks only gonna get one percent of that loan.
Blake Oliver: [00:29:17] And it's limited to ... Is it two-and-a-half times your average monthly payroll?
Michael Ly: [00:29:24] Yeah, two-and-a-half times the average monthly payroll cost, and there is a definition to that monthly payroll cost that's provided by the SBA on what they're defining as monthly payroll costs.
Blake Oliver: [00:29:36] And I should say, is it the monthly payroll costs? So, I take a month of my payroll costs and multiply it by 2.5, with all those provisions, or is it a larger period of time? I was confused on that.
Michael Ly: [00:29:47] Yeah, according-
Sabrina Parsons: [00:29:48] You have to take- Oh, sorry.
Michael Ly: [00:29:50] I was gonna say, according to the final rule, it's the previous 12 months of payroll costs and the average of that [crosstalk] So, it's the total. Yeah, over 12 months [crosstalk]
David Leary: [00:30:00] So, when I go to the bank, I have to have some report that shows my payroll for the last 12 months and then the current quarter, by month.
Sabrina Parsons: [00:30:07] Yeah, well, they'll actually ask you on the application. So, the SBA has an SBA application. Some banks are rolling that into their applications, but the SBA already released it. It's out there, and you can get it - their actual application. On their application, what they want to see is that actual calculation of ... You have to do everything. You go, you do your rolling 12 months; you get your payroll, you divide it by 12, you multiply it by 2.5, and now you've got what you're eligible for. So, that'll be a line. Then, the next line will be basically you have to figure out what is actually eight weeks, because that's not two-and-a-half months, and it's eight weeks of now, and what are all the approved expenses? So, that's a different number. When you go to them, you do have to have some records.
[00:31:02] Basically, if you've been using accounting software, and you have your payroll in it, you'll have some records. If you have been paying payroll tax, you'll have all of that. That's really what they want. They just want to be able to see that. One of the things that a lot of people are recommending is that when you get your PPP money, that you actually open an account, you put it all in that account, and you pay only approved expenses because it's a very clear, easy, trackable way to be able to show and make sure you're gonna get your forgiveness; rather than co-mingling, and then you have to be very careful with recordkeeping. You still have to be careful, but if you're getting a chunk, and you're gonna pay eight weeks of payroll, and rent, and utilities, which are approved, put it in a separate account, and pay it all from that account, and only pay those things, and it'll make your recordkeeping easier.
David Leary: [00:31:58] I do the calculation based on my payroll, and that's how they figure out how much the amount for the loan is, but I can use it, and spend it on my rent, and other items.
Michael Ly: [00:32:09] Yeah, there's a list of forgivable expenses that are covered in the covered period. It includes payroll, rents, utilities, and other items that's been listed out by the SBA.
David Leary: [00:32:19] Is my rent and all that included in the original calculation?
Sabrina Parsons: [00:32:22] No, and that's why the original calculation is two-and-a-half months, I guess. You get to calculate two-and-a-half months, and you only get forgiven for eight weeks. That allows you potentially to have some extra, to pay for rent and other things.
Blake Oliver: [00:32:41] I was wondering if the wo-and-a-half months was just how long they hope this is gonna last, at the longest. That it's like, "Let's really hope that it's done by April, May, mid-June ..." because if not- that brings me to my next question, which is the amount is $350 billion. How quickly is this gonna go, Michael, or Sabrina?
Sabrina Parsons: [00:33:03] Every small business in America applies for it, and everybody just gets $12,000.
Blake Oliver: [00:33:11] Great [crosstalk] Wow, I hadn't thought about that.
Sabrina Parsons: [00:33:15] So, there you go. But not everybody's gonna apply, right?
Blake Oliver: [00:33:18] Right.
Sabrina Parsons: [00:33:18] To Michael's point, and what he said already - you may be in situations where it just doesn't make sense. If you've already laid everybody off; if you've shuttered; if you can't open for the next two months, you should be thinking of other options. Maybe it's the EIDL, and maybe it's something else. But not everybody is gonna apply for this. It isn't going to make sense for everybody.
Michael Ly: [00:33:44] Correct.
Blake Oliver: [00:33:44] When do the payments start? Do they start immediately? Is the whole amount due in 24 months, or what?
Sabrina Parsons: [00:33:52] No. Oh, the payments for the borrower? You get six months' reprieve.
Blake Oliver: [00:33:55] Okay, got it. Six months, and then I start making payments on principal and interest, if I [crosstalk]
Michael Ly: [00:33:59] Correct.
Blake Oliver: [00:33:59] If it wasn't forgiven.
Sabrina Parsons: [00:34:03] But I really would encourage small business owners to be working with a financial advisor, whether you have someone internally, or you're going to an accountant. Because I really ... The way this loan pans out, you should be getting what can be forgiven. That's what this is for, and that's how you should think about it. That's really, I think, what people should think about calculating. Then, if you need more, go to the EIDL, and then think about how you're gonna deal with the EIDL. If you're gonna go bankrupt, don't get any of it.
Michael Ly: [00:34:37] And if you're hoping or banking on forgiveness, you've got to remember that the whole purpose is for payroll, and payroll costs. So, at least 75 percent of this loan, in order to be forgiven, needs to be spent on payroll costs. You can't be using this for rent, utilities, and other costs that are listed as forgivable costs and have that add up to more than 25 percent of the loan- of the portion you want forgiven. So, you really need to focus on making sure that this is spent on payroll costs, and that you have a way to spend that, and you have the people employed, or people returned from unemployment, in order to do that.
Blake Oliver: [00:35:20] Sabrina, you said I shouldn't get this unless I'm gonna still be in business, but is there a personal guarantee? Do I have a risk, if I take this and then, I go out of business?
Sabrina Parsons: [00:35:29] No. The Payroll Protection Program does not have a personal guarantee, but the whole ... If you're really going out of business, you probably have already laid people off. When you do your calculations, you're gonna see it doesn't pan out ... It's not just to pay yourself. You can do that. There is a independent contractor, and sole proprietor clause to this; nonprofits can also apply. They've also beefed up unemployment, and everybody's getting $650 more per week. So, I mean, you really have to weight it.
[00:36:04] The whole purpose of this program is to help businesses that really can survive and need that extra help to keep their FTE where it is and not pour people into unemployment. Obviously, you can do whatever you want to do, and people are gonna do it, but from a kind of mission of helping small businesses, I really would advise people to think very clearly what their options are and apply for the right programs.
David Leary: [00:36:36] So, I have a question, Michael. You've advised me to ... Or Sabrina [inaudible]. I'm gonna set up a different bank account; I'm gonna make sure I only use this money to do payroll, and my rent, and the qualified expenses. Does that mean in six months, when it's time to get it forgiven, do I have to create some report, and go back to the bank, and show them something, or is this more like an IRS audit situation? Like, maybe, one day, the SBA will show up and want to see justification ...
Sabrina Parsons: [00:37:02] No, you will have to ask for forgiveness. When you ask for forgiveness, there will be a process which is not clear yet because they barely have clarity on how you can apply for it, but there will be a process, and you will want to do that a good 60 days before the six months, because you will have spent all your money in eight weeks. As soon as you spend your money, you should be working with your bank and saying, "Great, what's my process? How do I get this forgiven? Here's all my recordkeeping. It's all in shape, and I have everything I need, and I can prove everything that I need to prove," so that you immediately just get it forgiven and you don't have to worry about.
Blake Oliver: [00:37:41] Now, somebody said that I can get this loan even if I'm a sole proprietor; I don't have a business entity; I'm an independent contractor. I think there's lots of different terms that are all interchangeable, here. So, how is that gonna work?
Michael Ly: [00:37:55] Yeah, I believe the application process opens up for another set of borrowers, like self-employed, and independent contractors, starting April 10. That guidance, I think there's gonna be more clarity put out even for that group of people, but they're gonna have to wait until April 10, in order to do that.
Blake Oliver: [00:38:14] I assume then- let's say I'm that person, I'm gonna be the only person on payroll, right? I can do that? They're gonna let me do that, instead of having to go [crosstalk] Go ahead, Sabrina.
Sabrina Parsons: [00:38:24] There's gonna be a process. There's gonna be a process for it of being able to prove, from your taxes and what you filed. People have asked me, "Well, so my 1099 people, they don't count as FTE, if I'm not using them?" They don't. When we're talking for the PPP, if you employ people, it's people on payroll, you pay payroll taxes for. Your independent contractors are eligible, but they're gonna have to apply on their own. Like Michael said, that application date starts April 10, and I almost think that it's because they're not sure what that process is gonna look, and they're just dealing with this one first.
Blake Oliver: [00:39:03] You mentioned that if every small business in America applies for this thing, we're all gonna get $10,000, which, to me, indicates that we've got, what, like 35 million small businesses that might apply?
Sabrina Parsons: [00:39:16] If you look at exactly all the numbers. This isn't enough. I think Michael alluded to ... There's already talk about what's next because this isn't gonna- or maybe, Blake, you asked - does this mean it'll be over in eight weeks? Probably not. So, there's gonna have to be another aid package. They're gonna have to do something else.
Blake Oliver: [00:39:36] Where I was going with that question is - are the banks gonna be able to process tens of millions of loan applications, potentially? I mean, even if it's just in the millions, it's a lot to do all very quickly. How soon is this money actually gonna get out to people?
Sabrina Parsons: [00:39:50] That is a really good question. I have heard from some people that larger banks already have a full online application process, and they're saying you can get your money in 48 hours. I have no idea if that's really gonna be the case, given that-
Blake Oliver: [00:40:07] Well, Chase doesn't. Chase just has a landing page up saying that they're not gonna be done by ... They're saying they're not gonna have it by Friday.
David Leary: [00:40:14] I saw an article on CNBC that says that every bank they've asked has said they're not gonna be ready this evening. This goes live in, what, three hours, two hours? Another hour, right, on the East Coast? Midnight, right?
Sabrina Parsons: [00:40:26] Oregon Pacific Bank will be ready.
Blake Oliver: [00:40:29] All right!
David Leary: [00:40:29] There's one.
Sabrina Parsons: [00:40:29] I know a few other banks that will be ready. U.S. Bank apparently has an online application, and they're one of the ones promising 48-hour return. I don't know how that is possible, but for what that's worth ...
Michael Ly: [00:40:46] Yeah. It's interesting to see how the online and fintech players are trying to get involved, even Fundera and other online fintech players. Although they're not SBA lenders, they're trying to help customers get their documents together and ready. They either must have some kind of referral fee relationship with banks that do SBA lending, or they're trying to position themselves as an agent. There is information about being an agent and how agents get split on the SBA fee. They get a small portion of that fee. It is interesting to see how the fintech players are positioning themselves, in order to take advantage of this application process and help process these loans.
David Leary: [00:41:29] Yeah, I'm on my bank website, right now, BBVA Compass, or it used to be Compass. It's just BBVA. They are a national preferred lender by the SBA, but it says nothing of the PPP on this website, in any way, shape, or form.
Sabrina Parsons: [00:41:43] Wow.
David Leary: [00:41:45] Blake, you said there's just a holding page on Chase's, right now?
Blake Oliver: [00:41:48] Yeah, it basically said that they're not accepting applications at this time, but just check back. Then I read another news story, where they said they're not gonna be ready by tomorrow.
Michael Ly: [00:41:56] Yeah, and many of the [crosstalk] I'm just gonna say, many of the larger banks have emailed, and I've seen emails from clients that they've received these emails, have said, specifically, "Do not go to your branch. Do not come in. We will provide information. Your branch, your lender at the branch, will not be able to help you." So, many of the banks are not ready and will not be ready tomorrow.
Blake Oliver: [00:42:17] So, we'll find out. I think we'll see just how many of them are on the ball with that.
Sabrina Parsons: [00:42:22] And I would say this is a great time to reach out to your community bank. The reason I joined a community bank board is that community banks were created to really be a part of the community. They're smaller. They can be more nimble; not all of them, but there's a couple other community banks here locally that I know are also ready. They don't have as much of the sort of big infrastructure and all the organizational structure to get through to be less nimble when something like this happens. I would say think about, if you're not banking at a community bank, just reaching out and seeing because they may be very happy to help you.
Blake Oliver: [00:43:06] That's great.
Sabrina Parsons: [00:43:06] They won't do it in person, though. Do not go to the branch!
Blake Oliver: [00:43:09] And this is good because we should all be social distancing. It would be ridiculous if millions of small businesses showed up at their banks to have to fill this out. Michael, I want to make sure, before we go, that we talk a little bit about the practical aspects of handling this for your clients. You said you have, what, 150 clients? How are you going about helping your clients with this? Do you have a- did you email them a service offering? What's the workflow? What documents are you getting together? Is this driving you insane? Are you up all night?
Michael Ly: [00:43:41] Me, and my team have been working a lot. Definitely. One is we've- I personally got on the phone over the weekend and over the past few weeks and actually contacted all of my major customers that I had a relationship with and just talked to them by phone, just checking in on them, making sure they were okay and their families were okay. Then, I'm letting them know about their options that we were aware of and then helping them prepare the documentation in order to work with their bank.
[00:44:09] Oftentimes, we would ask, "Hey, if you want us to interface with your bank, we're more than happy to be the direct communication line so that you don't have to be involved other than going into your bank, and signing, and approving that you do wanna do this loan or do wanna go through this process. We're also helping just calm anxiety and fears with our customers who are worried if they can even still be in business, or maybe they're doing really well, and they're trying to assess, "How do I continue to grow during this time when most of my friends and peers around me are not? How do I have enough empathy and also take advantage of the opportunities that this pandemic is providing some of my e-commerce clients and other clients, where industries are growing and doing very well?"
Blake Oliver: [00:44:52] Yeah, that's a good point. In every economic downturn, there is opportunity, and some businesses will fold, many will fold, but many giant successful businesses came out of downturns. If we can help them, like you're doing, then that's ... We're doing some good there.
Michael Ly: [00:45:10] Yeah, exactly. I've been spending almost every day with a few other accountants that many of you know; we're doing a daily update on Facebook Live for our peers, and also for clients that we can send video formats to. I'm also engaging a local [crosstalk] chambers. Yeah?
Blake Oliver: [00:45:26] Tell us about that group. Where can Sage Intacct chamber that tell you. Where can people listen in or join?
Michael Ly: [00:45:35] Yeah. I'm doing a daily Facebook Live on my Facebook page. Just search for Michael Ly on Facebook. Michael Ly, spelled L-Y. I'm doing that with Jacob; Jacob Schroeder, Amy Walker, Chris Macksey, and Dan Luthi, who all are accounting firm professionals, and accounting firm owners. We're providing that daily update at 5:00 p.m. Eastern, 2:00 p.m. Pacific, every day. We'll continue to, as we go through this pandemic, until we get out of it, just so that we can continue to provide recorded and live advice and answer questions for people.
Blake Oliver: [00:46:13] Sabrina, thank you so much for joining us. If people want to connect with you, find out more about the Oregon Pacific Bank- did I get it right?
Sabrina Parsons: [00:46:21] Yep. Oregon Pacific Bank.
Blake Oliver: [00:46:24] Where can they connect with you?
Sabrina Parsons: [00:46:25] The best place to send people is just my email address: firstname.lastname@example.org. I usually am a huge advocate of work/life balance, and now that we're just stuck in our homes all the time, I have lost all sense of it. To be honest, I feel like closing the door of my home office and pretending nothing else is going on outside of my house, which is a typhoon of teenagers on Xbox, eating everything in sight. I'm available a lot. So, just email me! Sabrina@paloalto.com.
David Leary: [00:47:03] Sabrina, I feel like, in the past, you've always advocated ... Not work/life balance; you've [inaudible] work/life integration, and I think you've achieved [crosstalk] at the peak of this, right now, right? We've achieved this now. It's your dream, Sabrina.
Sabrina Parsons: [00:47:19] Oh, God, I don't know if this is my dream, but, yes, I certainly have always advocated integrated life. I don't think I quite imagined this, you know? I say to all of you who have little, little kids, I get it. It's really, really hard. But I will see your little kid and I will raise you by two teenage boys, any day [crosstalk] how do we trade?
Blake Oliver: [00:47:47] Maybe you can ship your teenagers over to me and you can take my five-year-old, who's bouncing off the walls because they closed the pool at the complex we're staying at. It's a challenge for everyone, right?
Sabrina Parsons: [00:47:58] It is. It is
David Leary: [00:48:00] So, thank you both for joining, because I feel like I have a little better plan of attack on Saturday, when I sit down to decide some calculations of what I think I want to do or not do. Hopefully, any accountants and bookkeepers listening will- they'll maybe reuse what you're saying when they communicate with their clients, because I think even accountants and bookkeepers, this has been changing so dynamically and so fast that they can't keep up with it. If they can't, for sure, the clients can't.
Blake Oliver: [00:48:25] Michael is ... You're really on the cutting edge; you were on this from the beginning. I think a lot of accountants- I mean, we're all so busy. It's the worst possible time this could happen in that it's tax season and the deadline wasn't even extended until, what, last week? I mean, I don't even know what ... I don't know even when things are happening anymore. They're happening so quickly, and nobody has had any time to wrap their minds around this. So, thank you so much, Michael and Sabrina, for joining us and helping us get some clarity, because now I feel like I understand at least the PPP a lot better.
Michael Ly: [00:48:59] That's great. Well, thank you. Thank you for having us on. You're right, accountants, this is your opportunity to shine. I've even seen accountants send emails to their clients that said they're available to help after July 15th, so I'm just amazed by that, and going, "This money, and their business will be gone by July 15, without your help." Accountants, this is your opportunity to shine. Your tax returns are delayed. Go and reach out to your customers and give them some help on this process.
Sabrina Parsons: [00:49:28] Anyway, March was 8,000 days between now; and July 15, it's gonna be another 20,000 days before we even get there.
Blake Oliver: [00:49:37] Well, it's because we're living on an exponential timeline now, right?
Sabrina Parsons: [00:49:40] Oh, God!
Blake Oliver: [00:49:40] Every week is twice as long as the week before. We're never gonna get to the end of the year at this pace.
David Leary: [00:49:50] All right, well, we should let everybody get back to the application process because it opens in a few minutes, so we should probably wrap up.
Blake Oliver: [00:49:55] Yeah, I'm gonna be furiously checking all of my bank websites that I have relationships with, seeing if they are ready. If you're listening for the first time, this is The Cloud Accounting Podcast. This was a very specific episode on the PPP program, and the SBA loan options for clients. Normally, it's a weekly news roundup of all the latest accounting news with a bias towards technology. So, come back and join us for one of our regular episodes. If people want to reach you, David, online, where can they do that?
David Leary: [00:50:26] The easiest place is gonna be probably Twitter, or LinkedIn. I'm just @DavidLeary.
Blake Oliver: [00:50:30] I'm @BlakeTOliver. Michael, Sabrina, thanks again so much for joining us, and we'll talk to you soon.
David Leary: [00:50:36] That's a wrap.
Sabrina Parsons: [00:50:36] Thank you so much.
Michael Ly: [00:50:38] Bye, everybody.
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