Today I'm doing something I've never done before: sending you two back to back emails. There's so much information that has come out since President Trump signed the CARES Act (Coronavirus Aid, Relief and Economic Security Act) on Friday, and it's a lot to digest.
Typically I don't meander into practice financing except to the extent that it impacts personal cash flow, but right now I want to prevent the opposite flow of capital: personal finances going into practices to keep them running during the COVID-19 crisis. So in this email, I'm sharing with you the myriad (and some pitfalls) to the emergency practice and personal financing options available.
My second email is going to be on the cash payments to individuals that the CARES Act had set up. These won't apply to most practice owners, but they may be very valuable to your staff, friends or relatives, so feel free to share as needed.
A big disclosure: some things I list below may change. This isn’t legal or tax advice, but rather my perspective as a personal financial advisor. While I do touch on some business ownership aspects of this bill, I am not a business or practice management expert and have listed some credible resources below.
As you make decisions about how to proceed, take a step back and think about the intent of this bill. The past few weeks, the US economy has come to an almost-stand still. The government is using this program to keep dollars moving through the economy so that the wheels don’t get completely jammed. Do take advantage of programs available to you, but also consider how you can do your part to contribute to the long-term economic well being of our country.
Practice Financing/Cash Flow Aid:
This is probably THE most discussed portion of the bill for practice owners. This falls a bit out of my area of expertise, but I’m going to overview the most attractive to least attractive options from former banker's perspective (mine). But first: if you have not already made a list of your practice expenses coming up, do so as soon as possible. As you look at financing options available, this will be an important exercise.
Two really fantastic resources are the Small Business Committee’s Business Owner’s Guide to the CARES Act—it’s a very easy read for being published by the government, and IDOC’s Facebook live session yesterday, where they spent an hour (and probably could have gone two) outlining the Working Families Relief Act and the CARES Act as they relate to optometric practice owners.
The PPP Loan
The Paycheck Protection Program is a federally guaranteed cash flow assistance program for small businesses (like most independent optometric practices). Basically, it’s a 10 year loan, capped at 4% interest with no loan fees and no repayment penalty. Payments are allowed to be deferred 6 months to a year after the initial loan.
Assuming a business was open as of February 15th, 2020, their max loan would be 250% x the average monthly payroll costs (capped at $100,000 per person plus some other exceptions) between January 1st, 2020 and February 29th, 2020.
PPP loans are slated to be FORGIVEN for the following costs incurred between February 15th, 2020 and June 30th 2020:
- Payroll costs (with the above exceptions)
- Group health care costs
- Interest payments on mortgage obligations (but not principal) or rent
- Utilities
- Interest on other debt obligations (I read this as equipment loans, etc)
This is by far the most attractive loan option out there, but it may not be available for 6 to 8 weeks. Which means you either need to have the cash on hand to cover these costs, or defer the costs you can then pay them when you get your PPP loan (example: calling your landlord about deferring rent payments).
If you have access to other sources of credit, especially SBA loans, be extremely careful about using those loans to cover the above costs—it may negate the forgive-ability of the PPP Loan.
Any bank that does SBA 7A loans is able to do PPP loans, so start with your regular banker to get your application in.
I have not seen whether PPP loans require collateral or personal guarantees. Be sure to ask before you close.
The SBA 7B Disaster Loan
I spent a LOT of time this week working through the SBA disaster loan site, and good news—they pulled the online application mid-week and are just having borrowers upload some basic information to be followed-up on. Although there are some conversion provisions, a disaster loan might interfere with the PPP loan when it comes out, so if you’re not in an absolutely dire cash flow position and get this money, hold off, or just use it for other expenses than those listed above.
I suspect based on the application that disaster loans will request collateral, personal or otherwise, but that may be waived for the sake of speed and efficiency during this difficult time.
Bank Lines and Loans
If you can get a bank line or loan, I don’t think it can hurt, but since loan applications take a few weeks on average to close, keep a close eye on how those loan proceeds might affect your PPP Loan forgiveness eligibility.
Credit Cards
While it might be tempting to run a lot of practice expenses on credit cards right now, I would only do so to the extent that you have replacement lower-interest credit secured (like an SBA disaster loan). And again… until all the kinks are ironed out, be very careful about using other sources of credit to cover the expenses that can be allocated to a PPP loan.
Personal Resources
Last week I wrote about not using personal resources like your savings account and home equity line of credit to fund your practice, and I maintain that stance. Use your personal resources to take care of yourself and your family, ESPECIALLY with bankruptcy protected assets like your IRAs, 401k plan and home equity. I can't promise every practice that runs out of money will be able to re-open when this crisis clears up, but almost every small business is in the same boat, and there's a lot of support out there to try to prevent small business closings from happening. Take care of yourself first- just in case your practice isn't there to take care of you later.
Personal Options:
Lender Deferrals
If personal cash flow gets tight, most lenders have 3 month payment deferrals and loan extension options available to borrowers who need it. If you aren’t able to pay yourself, this is a good first step to reducing what's probably one of your biggest personal expenses.
Unemployment Benefits
If you are a practice owner and have a documented, historic, W-2 salary and have to stop paying yourself, you should be able to apply for unemployment. As a “wealth” advisor, I have to admit that I am unfamiliar with the ins and outs of unemployment benefits, but I would suggest leaving that resource as a last resort for folks who have an appropriate safety net and the ability to defer big expenses like mortgage payments.
Other Personal Expenses
Just like with your practice, many providers are willing to work with their customers to make arrangements to keep things running smoothly. Review your big bills like insurance companies, credit card companies and car lender and call to see what your options are. The worst they can say is no! But it's much better to call and make a plan than simply not pay and hope for the best.
Investment Accounts & Retirement Accounts
If you haven't looked at the stock market lately, it's not a pretty picture. While it might be tempting to take everything and hide it in the back yard, resist! Selling low and buying when things feel better is usually a very bad investment strategy (with the note that past performance is not a guarantee of future results). And if your account balances are giving you heartache, it's time to do a risk tolerance review to make sure your portfolio is structured in such a way that allows you to sleep at night... once the market has recovered.
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