Dispatch #26 - Don’t Count on the Government to Cash Flow Your Business
The Economic Injury Disaster Loan (EIDL) and Paycheck Protection Program (PPP) loan programs are off to a rocky start, which is not surprising given the size and rapid launch of the programs. I support our clients’ efforts to apply for one or both loans, but offer a few words of caution:
Do not count on the government to cash flow your business. The loans are not a panacea. Getting funded is uncertain, as is forgiveness of the PPP loan. Don’t let them distract your company from essential activities to get through the COVID-19 disruption. Bill everything possible, cut expenses, and extend the runway for as long as you can.
Do not debt finance losses. Debt financing losses is a survival tactic of last resort after you have maximally cut expenses. If EIDL and PPP loan funds are obtained, don’t use them without a sound strategy. And on a tactical note: one interpretation of the PPP loan rules suggests that if a company is planning to lay off employees and/or cut salaries it should do so before April 26th to maximize loan forgiveness potential.
There are some hidden downsides to EIDL and PPP loan programs, and I question (and you should too) their policy wisdom.
Using EIDL funds to retain idle employees makes the contractor pay for unemployment benefits twice: once through payroll contributions to FUTA and SUI and then again through an erosion of equity via amplified losses.
The PPP is well-intended but “too little, too late, and too risky” for the contractor in the way it shifts the burden of unemployment benefit administration to the employer.
There are more effective ways for the government to protect employment during a crisis. See, for example, this opinion piece in the New York Times. The authors write, “This dramatic spike in jobless claims is an American peculiarity. In almost no other country are jobs being destroyed so fast. Why?”
Leverage federal, state and local programs, to be sure, but don’t let the loan frenzy caused by the EIDL, PPP, and other such programs displace important “back to basics” financial best practices. Control what you can control.
Need help with this or other financial matters faced by construction contractors? Let’s talk!
David Stern CFO makes every effort to provide useful and accurate information. This content, however, is not intended as a substitute for specific business-related financial advice. We disclaim all warranties and liabilities from its use.