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How to Use the Paycheck Protection Program Loan for Your Salon/Spa
April 12, 2020 | By Neil Ducoff | 18 Comments
EDIT: This blog post was updated with new funds dispersement info from the US Treasury at 11:50am on 4/13/20.
EDIT 2: PPP regulations are consistently being updated, and have changed since this blog post was written. We highly suggest you continually monitor the US Treasury’s PPP FAQs page for updates, and again, consult your accountant to discuss specifics to your situation. (5/7/20)
Since it was announced two weeks ago, the Paycheck Protection Program (PPP) has been a hotly debated and confusing topic.
Here are the ultra-condensed PPP details:
- The intent of the PPP loan is to get employees back on payroll.
- The loan amount is based on 2.5 x average monthly payroll for 2019.
- Interest is 1% for two years. No payments for six months. No collateral or personal guarantee required.
- To be 100% forgiven, at least 75% of the loan must be used for payroll in the eight weeks after funds are received.
- Your loan forgiveness will be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
- You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
The dilemma for salon/spa owners
Once owners started digesting the PPP rules, it began a debate over when to put laid off or furloughed employees back on payroll.
Dilemma #1: If you put employees back on payroll upon receipt of funds, your salon/spa may still be closed and cannot service clients to generate revenue.
Dilemma #2: If you delay applying for a PPP loan, the PPP funds may be exhausted.
Dilemma #3: If you take receipt of the PPP loan, but delay putting employees back on payroll until just before reopening, you won’t meet the criteria of using 75% of the loan funds for payroll within eight weeks to be 100% forgiven. That means you risk only a portion will be forgiven.
Dilemma #4: If some employees don’t return, or due to social distancing requirements, you can’t restore the number of full-time employees who were on payroll before February 15, 2020, the amount of loan forgiveness will be reduced.
Dilemma #5: If for any reason you fail to meet any of the loan forgiveness requirements, you’ll need to pay off the entire loan within two years of the loan origination date. Thankfully, the interest rate is only 1%.
Dilemma #6: What if laid off or furloughed employees are making more money on unemployment compared to their normal pay rate? Some employees will prefer to stay on unemployment until it runs out. Remember, you need to restore full-time employees and pay rates by June 30, 2020 for loan forgiveness.
Dilemma #7: Will employees have to file for unemployment again if your salon/spa isn’t allowed to open after eight weeks of receiving PPP money — or if the expected business volume doesn’t happen requiring layoffs? It’s simply impossible to predict these unknowns.
These are the seven dilemmas confronting owners. The question remains, which of the seven dilemmas will you choose or have to deal with?
If you applied for a PPP loan, or have received the funds, consider the following:
- The key language used in the Paycheck Protection Program is as follows: The Paycheck Protection Program (“PPP”) authorizes up to $349 billion in forgivable loans to small businesses to pay their employees DURING the COVID-19 crisis.
- PPP loans are meant to bring employees back to work and back on payroll … whether the business is able to conduct business or not.
- If you cannot meet the qualifications for forgiveness, you will have two years to pay off the loan at 1% interest.
- Monthly loan payments can be high: Unless 100% forgiven, loan payments begin after six months. Monthly payments are based on the total amount of the loan, plus fees and interest divided by 18 payments. Remember, PPP is a two-year loan with no payments for six months.
- You will be responsible for payroll taxes, so be sure you have the funds to cover these.
Here is my challenge to you: It is imperative to process and decide on the best use of your PPP loan. We urge you to consult your accountant to ensure the best course of action for your company before accepting any loan.
BEST CASE SCENARIO: You had two or more months of cash reserve and solid cash management disciplines going into this crisis, you can do what PPP was designed to do — get every employee that was on your payroll prior to February 15, 2020, back on full pay. And do this before the “stay home” orders are lifted. Restoring employees to their full pre-crisis pay level will eliminate significant personal financial stress.
In recent weeks, more owners expressed how gut wrenching it was to lay off or furlough their employees and help them apply for unemployment. PPP allows owners to turn this stressful experience into something special and meaningful.
- If there ever was a moment in time to demonstrate how important and appreciated your employees are to your company — this is that moment.
- The Paycheck Protection Program is a rare gift for small businesses to pay employees at zero cost or risk to you or your business.
MEDIUM CASE SCENARIO: If your salon/spa was profitable, has some debt and just enough cash to fund operations for a week or two.
OPTION ONE: Take receipt of your PPP loan funds as soon as possible.
- Keep employees on unemployment, and delay putting them back on payroll until a week or two before reopening. This will allow you to use the majority of PPP funds to cover payroll the first month or two after reopening.
- The downside is that the PPP eight-week loan forgiveness clock starts ticking upon receipt of funds. The more weeks that pass between receipt of funds to reopening — the lower the percent and probability of loan forgiveness. IMPORTANT: At this time, the Paycheck Protection Program is scheduled to end June 30, 2020.
OPTION TWO: Get approved for your PPP loan but not take receipt of funds until you know when you can reopen. UPDATE: As of 4/10/20, the U.S. Treasury Department now states: “The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.”
WORST CASE SCENARIO: You were never one for financial and cash-flow management disciplines. You’re always struggling to make payroll and stay current on bills and expenses.
If this describes your salon/spa, the best strategy is to view the PPP as just that — a two-year loan at 1% interest with no payments for six months.
- Because you need cash, get your PPP loan funds as soon as possible.
- Pay whatever essential bills and expenses you absolutely must and save as much of the loan as possible for reopening.
- It is unlikely that much, or any, of the loan, based on the requirements, will be forgiven.
- Be prepared to begin making monthly loan payments at the end of six months.
Again, these examples may not fit every company. Please consult your accountant for financial advice specific to your situation.
The Paycheck Protection Program is an extraordinary lifesaver for small business — especially if you meet the requirements for 100% forgiveness.
I keep saying that this is the BIGGEST opportunity in our lifetime to REINVENT the salon/spa industry for the better.
Let this reinvention begin by showing employees just how fortunate they are to work for an employee-based salon/spa.