Clients and Friends,
As you work to make business decisions in this rapidly changing environment, we would like to continue our commitment of providing you as much support and information as possible. Below is a compilation of the best advice we have heard, summaries of federal legislation recently passed or still in the works, and other considerations. For an additional summary of our macro level economic view and how it is affecting our clients, please refer to the bottom of this article.
Determining whether a business can continue to pay their employees during this time, especially if the business is currently not operating or if operations are reduced, is the biggest challenge facing our clients. This is a hugely complex question and requires considering so many things. We will attempt to address your options from a financial perspective. Legislation and information changes daily. Here is what we know now:
The Families First Coronavirus Response Act takes effect on April 2, 2020 and contains provisions that require employers to pay employees under certain circumstances. Currently, the act includes language allowing the Secretary of Labor to exempt small businesses with fewer than 50 employees if the required leave would jeopardize the viability of their business. Note that several industries (including the dental industry) are lobbying for specific exemptions. We are not sure how a business would become exempt just yet. Since this act would likely not apply to all of our clients, we are excluding the details of the provisions within this correspondence, and instead have summarized it in the attached document.
Additionally, if you continue to pay employees for reasons covered by the FFCRA act, the federal government will bear that cost. Therefore, it may be in your best interest to continue to pay employees if they are eligible under the act. Employers will be provided refundable tax credits against their employer portion of payroll taxes for 100% of the qualified sick leave and family leave wages paid in accordance with the act. We suspect the credit is through payroll taxes as that results in the most immediate cash recovery (opposed to waiting to file federal income tax returns). Guidance is unclear as to how the credit will be funded. We estimate that, since the credit is only on the employer payroll tax portion of payroll (about 8% of salaries), it will take at least 90 days for you to fully recover the qualified amounts paid to employees. Consult with your payroll provider for the best and most up to date details.
Now is a good time to work closely with your payroll company and HR provider. Individual states may impose additional requirements for continuing to pay employees.
Hiring and training staff is a huge expense. Businesses who can quickly meet demand when the world returns to normal will financially recover the fastest. If possible, not fully terminating your staff by way of one of the suggestions below is preferred if you are able to afford it. Pending legislation may allow employers to borrow, via a Small Business Association (SBA) loan, funds for payroll and working capital. The payroll portion of the loan would then later be forgiven. As soon as legislation is finalized and passed, your options may become clearer. See highlights of the legislation later in this correspondence. For now, here are the current options as we see them, if your business is closed, or operations are greatly reduced:
- Continue to pay employees their full compensation. If doing so, option to consider a requirement for employees to take PTO for time not worked but still paid. For many practices, the ability to retain current leadership and quality staff will be one of the best strategic uses of their available capital (cash on the balance sheet, business emergency fund, line of credit, Accounts Receivable) as this will allow for a competitive advantage and continuation of culture upon re-opening.
- If paying full wages is not option, consider a reduction of compensation for all employees.
- Place employees on furlough to allow them to collect unemployment while remaining an employee. To place an employee on furlough is to require a temporary, unpaid or reduced pay leave from work as a cost-cutting measure for the employer. This may be a more accurate description to use when speaking with your employees as opposed to terms such as “layoff.” Please lean on your human resources team or policies for your business; or consult with a qualified human resources consultant (such as CEDR Solutions or HR For Health) for advice on how to appropriately handle employee HR policies during this time. Furloughed employees are generally considered to be eligible to collect unemployment benefits, but each state has different rules.
Unemployment benefits have historically taken 3-4 weeks to be processed and received – although the government has committed to speeding up this process. Pay is typically about 25% of wages, so know that employees will be experiencing a drastic “pay cut” under this scenario. Partial unemployment benefits can be earned in the event that an employee’s salary or work hours are reduced in some states, which may be revised with passing legislation.
We are seeing some employers consider a re-start bonus upon return to keep employees incentivized to come back. This will allow the employee to receive unemployment pay while the practice is closed and will allow the business owner time to come up with capital since compensation won’t be paid during a time the practice may be closed.
Note that under the pending CARES (discussed more later) a portion of SBA borrowings that would otherwise be forgiven, will be reduced proportionately to any reduction in the borrower’s number of employees, and a reduction would also apply if employees’ salaries are reduced by more than 25%.
Other considerations for conserving cash flow:
- Review and cut as many discretionary expenses as you can.
- Put as many of your remaining expenses as you can on a credit card. Call your credit card company and inquire about reducing minimum payments to zero and a temporary reduction in interest rates. We have heard of business cards making these changes for businesses under duress.
- Call vendors (suppliers, landlords, etc) and ask for an extension of time to pay. We have heard of landlords being agreeable to a rent reduction or deferral.
- Call your lenders. If they will answer your call (they are incredibly busy right now), request deferral of payments or interest only. Clients have had success with deferring payments from 60-90 days. Some are not accruing interest during this time. At a minimum, stop any automatic payments on loans so you can control when and how much is paid toward loans.
Opportunities to borrow additional funds:
We recommend clients immediately review their options for borrowing additional funds for working capital. The timeline for approving and funding loans is always longer than we would like it to be, and we expect lenders to be overwhelmed by increased demand. Here are some options:
- The fastest way to cash flow is likely through increasing an available line of credit or obtaining a new line of credit through your existing banking relationships, although you probably would be limited to $50,000 – $100,000. Consider the impact of having other financing available to you for qualifying for SBA loans below before proceeding (see below).
- The Small Business Administration is offering designated states and territories low interest (we’ve seen 3.75%) federal disaster loans for working capital to small businesses suffering from economic injury caused by COVID-19 through SBA Disaster Recovery Loans. These loans can be used to pay fixed debts, payroll, and other bills that can’t be paid. They cannot, unfortunately, be used to refinance existing debt. Amortization of the loan can be as long as 30 years, subject to qualifications (making your payments very low to repay).
- Small business owners in all U.S. states and territories are currently eligible to apply for a low-interest loan due to Coronavirus (COVID-19). You may apply for the loan here.
- Businesses with credit available elsewhere are not eligible. We are not sure what this means, or how they would verify this, but does it mean if you have asked your bank for a line of credit, and been approved that you would forego this loan? This is not yet clear but consider waiting for complete guidance before applying for anything. For now, begin to gather the information any lender would require (tax returns, personal financial statement) so you are ready.
Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provisions related to loans:
This most recent piece of legislation is expected to pass the Senate, in some form, early this week. It will then proceed to the House. The House is out of session the last week of March, so they have to either agree to pass the Senate bill by unanimous sense or reconvene and allow remote Congressional voting for the first time. One of the most relevant parts of the bill for our clients is a proposed SBA loan expansion and opportunity for future loan forgiveness for businesses with less than 500 employees. As currently written:
- The loan mount will be limited to four times the business’s average monthly expenses (payroll, mortgage, rent, payments on debt obligations) for the preceding year, or $10 million, whichever is less.
- Loan proceeds may be used for (1) debt obligations incurred before March 1, 2020; (2) payroll support; (3) employee salaries; (4) mortgage payment; (5) rent; and (6) utilities.
- A borrower who receives an SBI loan to pay employee salaries, payroll support, mortgage payments, and other debt obligations may not also receive an SBA economic injury disaster loan (EIDL) for the same purpose. This is important and may cause clients to consider applying for anything until this legislation passes.
- The bill also would seek to streamline processing by delegating authority to make and approve loans to qualified lenders (thus eliminating the need to go through SBA), waiving both fees for both borrowers and lenders, and limiting consideration only to whether the borrower was in operation on March 1, 2020, and had employees for whom the borrower paid salaries and payroll taxes.
- The bill provides that loans will be eligible for a complete payment deferment for up to one year, as well as forgiveness for the total amount borrowers spent on payroll costs between March 1 and June 30, 2020, and payments made between March 1 and June 30, 2020, on debt obligations incurred prior to March 1, 2020. However, the total amount of potential loan forgiveness will be reduced proportionately to any reduction in the borrower’s number of employees, and a reduction would also apply if employees’ salaries are reduced by more than 25%.
- Additionally, Sen. Tammy Baldwin has offered legislation that will forgive the outstanding balance of SBA disaster loans if the borrower maintains all its employees at full pay and full benefits for the duration of the disaster declaration.
Unfortunately, most of our clients are being forced to make decisions TODAY. The provisions of this bill would be critical data inputs in making these decisions, which makes the timing of the passing of the bill so critical. Our advice would be to hold out on borrowing new funds as long as you can until we hear more. You can, though, begin to get organized with your financial documents, making the application process faster when we do know more.
- Our previous advice to contact your insurance agent and inquire about any business interruption insurance and details of the policy still applies. We have heard there are rare cases when coverage may apply.
- This article from our friends at Barnes & Thornburg has been helpful in understanding options.
Considerations for personal finances:
- Interest on federal student loans will be waived until further notice.
- The U.S. government will postpone the April 15 tax-payment (and now filing) deadline for 2019 income taxes still due until July 15th.
- Coronavirus Aid, Relief, and Economic Security Act (CARES Act) proposes any estimated tax payments may be delayed until October 15, 2020. (pending legislation)
- Several mortgage companies have agreed to defer mortgage payments.
- Consider calling credit card companies for a deferral of payment and interest.
- CARES Act proposes immediate payments to taxpayers up to $1,200. Joint filers would receive double these amounts, and any qualifying children would increase these amounts by $500 per child. These benefits would phase out for individuals reporting more than $99,000, or joint filers reporting more than $198,000, on their 2018 tax returns. (pending legislation)
- CARES Act proposes waiving the 10% excise tax on early withdrawals from retirement accounts (401ks, IRAs) for those individuals diagnosed with COVID-19, who have a spouse diagnosed, or who suffer adverse financial consequences from quarantine. Withdrawals may be recontributed to the account within three years without regard to annual limitations to avoid income taxes on the distribution. (pending legislation)
- CARES Act proposes employers and self-employed individuals may delay payment of the employer’s share of payroll taxes, with 50% of such taxes due by December 31, 2021, and the other 50% due the following year. (pending legislation)
Macro Level Economic View
Skytale Group has been closely monitoring the COVID-19 pandemic and would like to share additional considerations to keep in mind. Overall, while we have heard everything from comparisons to 2001, 2008, and various depressions, we see this as a healthcare crisis that will absolutely and adversely affect the economy, and already has. Unlike 2008, credit facilities themselves are well-funded so we are optimistic about our ability to get through this crisis and realize the opportunities that will be available on the other side.
Our expectation is for there to be a one to two-week period where results and effects will start coming in to give us a better idea of how many people are infected and impacted within the United States. We expect this to be a difficult week as testing becomes more readily available, cases start trickling in, and mortality rates are actualized. If we look to China as a forecast or guide, the impact did not start to flatten till the 2-month mark whereas they also were late to initiate guidance, mandates and social distancing. With our current precautions on the earlier side and at best case, we anticipate loosening restrictions in United States not likely till end of April. This situation is fluid and we will need to continue to keep a close eye on analysis as well as the various regional actions taken in your location are trending the way we hope as different states and the nation take stricter measures. Regardless of the macro trends and what we are seeing in terms of a timeline for restrictions to loosen, it is extremely important for you to review your industry and sub-sector and abide by state guidelines. A couple of examples, for our healthcare clients in Oregon, the restrictions on various healthcare sub-sectors are currently in place through June 15, 2020; for our Washington clients they are currently in place through May 18th. Here in Texas legislation has come out with restrictions through April 21st, 2020.
From an employment effect point of view, we have seen more than a 40% drop in the number of hourly employees going to work in the United States over the past 15 days. We are seeing some statistics shared that hotels are letting go of a significant amount of staff. There are 54,000 hotels in the United States. For a healthcare example, we have 100,000 dentists in the United States with an average employment of approximately 10 people. This statistic accounts for 500,000 employees and dentists with a significantly different income than just a week ago and many now without income. This has various effects, including a delay in spending as time goes on and as unemployment or underemployment levels increase. We will all need to take this into account as we forecast out what our businesses will look like when doors are fully open. Looking at it through a lens of opportunity, there will be highly qualified people looking for work, which could be an ideal match for a business that has successfully weather this storm.
Looking at financial sponsors, from family offices to private equity groups, we are seeing somewhat of a pause in activity. However, as with banking, this is not 2008 and investors should not be hit as hard by overexposure to certain asset classes as they were in real estate in 2008. Overall, we are seeing a greater diversification here and a stronger capital position than 2008. We still expect financial sponsors to continue to invest once the new landscape created by COVID0-19 is better understood. While there is dry powder, for the most part, we are seeing groups hold their fire before shooting all their bullets. We are currently seeing potential challenges when it comes to future funds. Private equity fundraising we expect to slow down. Opinions vary from the optimistic view that due to this being a global healthcare – and not financial – crisis, people should be going out and spending in relatively short order to others who view the uncertainty as being a bit longer as the nation and world adjusts to the new normal and digests this uncertainty. That written, it will affect certain funds more than others. According to PEI Data, US PE funds and Mezzanine funds raised approximately $310 billion in 2019 which was a record amount of capital raised in US history. This is what we mean when we state that we see a lot of funds with dry powder that we expect to get back to investing once the dust somewhat settles and the landscape becomes clearer.
While macroeconomic factors are largely out of our hands, we do have the opportunity to decide how we want to react and adjust. What we can control is how we lead our organizations through this time. Once the decisions have been made, we can then decide how to deal with our office closures and ourselves: whether that be on a personal level by spending more time with family, reading, exercising, and any other personal initiatives or on a business level. Are there internal processes and procedures you have been too busy to tackle? Have you been meaning to beef up your compliance? Have you been too busy to dig a bit deeper in to how the overall business is performing and why? Is the business structure the way you like it? These are the things we can control and once this situation ends the business can be relatively stronger than when we came into this.
Skytale firmly believes it is important to keep up to date with the macroeconomic trends as it will trickle down to our specific decisions that we will need to make based upon the data received.