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PPP loans: What advisors — and clients — need to know

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Financial advisors are scrambling to tap into new loans offered by the federal government to help small businesses struggling during the COVID-19 pandemic.

As part of the Coronavirus, Aid, Relief and Economic Security Act, a $2.2 trillion stimulus package signed into law March 27, the Small Business Administration is offering a $349 billion Paycheck Protection Program for employers to retain workers during the global shut down.

The PPP comes as welcome relief for many advisors and their business-owning clients — but the program has struggled since going live on Friday.

While some banks aren’t participating in the program, those that are have been crushed by a tidal wave of new applications. Bank of America received 177,000 applications for a total of $32.6 billion — 10% of the entire amount allocated by Congress — over the first weekend,according to CNBC. And Wells Fargo announced Monday it would stop accepting applications after it received enough to account for $10 billion.

Banks are also implementing their own rules on who can apply, says Peter Huminksi, founder and president of Thorium Wealth Management. Bank of America, for example, requires applicants to have an existing account, requiring Huminksi to look into alternatives for some of his clients.

In the days after the PPP was introduced, the SBA made changes to what the loans cover, what is forgivable and the interest rates banks can collect, making a headache for advisors.

“People really need to make sure that they’ve got their head on a swivel right now and that they can pay attention to the releases and the guidance,” says Jeffrey Levine, director of advanced planning with Buckingham Strategic Wealth and a Financial Planning contributor. “I’ve never seen information coming out as quickly as it's coming out now.”

Some ambiguities remain around whether employers can include independent contractors on their payroll, and if payroll taxes should be included in the amount of the loan, Levine adds.

While most small businesses should qualify for the PPP, accepting the loan isn’t always the right decision, says Carson Wealth managing partner Paul West. For example, companies that take advantage of the program won’t be able to defer payroll taxes. If borrowers want loans forgiven, at least 75% needs to go towards payroll rather than utilities, mortgage or other business expenses. Otherwise they have to repay at 1%.

There is also a moral component, Levine says. Just because every small business could apply for a loan, doesn’t mean every loan should — especially with a limited amount of available funds. A company taking a loan to ease a profit pinch could prevent another that truly needs the money to survive.

“If there is X number of cookies in the cookie jar and everyone is hungry but others are a lot hungrier than others, who gets to take the first bite?” Levine says. “If you’re an advisor and you’re thinking you need to go out of business because you see a 20% decline in the market, you probably didn’t have a viable business to begin with.”

He acknowledges that the answer is different for every firm, especially commission-based advisors who may not be able to sell products or close deals right now. Advisors with slim margins could easily make the case they need a loan to avoid cutting staff, and with applications already in process quickly eating into the allocated $349 billion, there’s reason to apply before every last question is answered.

“The last thing you want is to wait and all of a sudden you can’t get a loan because there’s no remaining funds allocated,” Levine says.

If an advisor or client wants to go forward, Huminski says the first step is to determine which bank will accept an application. Loan applications, a checklist of the information and documentation the bank will need, and a calculator for how much one could potentially qualify for can all be found on the SBA’s website.

He also recommends advisors set realistic expectations for when relief funds will arrive.

“You don’t want people to think they can go into the bank today and have money in their account tomorrow,” Huminki says. “It’s not going to be a rapid turnaround - at least a week, maybe longer.”

Advisors can work as an accountability coach for clients, ensuring they have documents and financial information in order and follow every rule. There are steep fines for providing misleading information, and advisors can help clients avoid future trouble following the letter of the law to a T, West says.

“For us, it’s been following up with [clients],” he adds. “Did you talk to your banker, did you get all your financials, do you need help — those are the types of things advisors should be doing with their business clients right now.”

While the complexity underscores the value of working with an advisor, Huminki admits the ambiguity surrounding the new PPP prevents anyone from being a true expert. Still, he recommends every business with fewer than 500 employees — including financial advisors — should make an attempt.

“The unknowns around [the pandemic] are so significant, it’s foolish to at least not apply,” Huminksi said.

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