As discussed previously, there are a lot of questions still facing restaurateurs in regards to the CAREs Act. But the nuts and bolts of the groundbreaking package is a good place to start when deciding if (and how) your brand should go about applying for aid.
Rewards Network, a provider of marketing and financing services to the industry, which has more than 12,000 restaurants in its base, released an Emergency Loan Guide to help operators navigate the complex process.
It focuses on two areas—the Paycheck Protection Program and the Economic Injury Disaster Loan Program. The guide is intended to serve as a resource as restaurants discuss options with attorneys and accountants and consider whether to apply.
Let’s start with the Paycheck Protection Program, which began accepting applications on April 3.
In practice, the PPP is designed to give small businesses affected by COVID-19 100 percent federally guaranteed loans. However, the borrower must have the same or a larger number of full-time employees on April 27 as it did on February 15.
If your restaurant, as many have, was forced to lay off employees, or is considering doing so, there are still options for partial or full forgiveness of allowable expenses provided in the act.
Restaurants can apply for the loan if they received a 7(a) loan, or had a pending application, before February 15, and the funds are being used for a different purpose.
Before an operator begins the loan process, they’ll need to check if they are eligible. If so, they’ll need to prepare some documents to file for the PPP loan, and then apply here.
How do you know if you’re eligible:
Here’s the criteria, as laid out by Rewards Network.
- Are a business in operation on or before February 15, 2020.
- Employed staff, and paid payroll and payroll taxes for your staff.
- Are a small business with fewer than 500 employees (All statuses: full-time, part-time, etc.). This is on a per physical location basis (think franchise systems).
- Affiliation rules for most franchisees are waived. If you are unsure of your affiliation status, speak to your accountant to learn more, and reference the SBA’s Small Business Compliance Guide Size and Affiliation for more information.
- Are a business that uses NAICS No. 72 (food service sector).
Unlike other 7(a) loans, restaurants do not need a personal guarantee or collateral to take out a PPP Loan. They can also apply for the program even if they have other funding options.
What you need to provide:
Average monthly payroll costs (see below for how to calculate) for the period February 15, 2019 to February 15, 2020.
- Options for newer restaurants include using January 1, 2020 to February 29, 2020.
- Options for seasonal businesses include using February 15, 2019 to June 30, 2019.
A “good faith” certification (a promise) that includes:
- The uncertainty of current economic conditions that makes the loan request necessary to support ongoing operations.
- The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments. For tipped employees, you will need to pay a portion of the loan proceeds to employees to replace tips that would have been earned and retained by the employee.
- Borrower does not have an application pending for a loan duplicative of the purpose and amounts applied for here.
- From February 15, 2020, to December 31, 2020, the borrower has not received a loan duplicative of the purpose and amounts applied for here.
If the operator is an independent contractor, sole proprietor, or self-employed individual, leaders will also be looking for certain documents such as payroll tax filings, form 1099-MISC, and income and expenses from the sole proprietorship.
A key question to ask, though, is what is included in my payroll cost?
Here’s a guide from Rewards Network.
Payroll costs consist of the following:
- Salary, wage, commission, or similar (for individual employees making up to $100,000 annually)
- Payment of tips/gratuity
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Payment required for group health benefits, including insurance premiums
- Payment of retirement benefits
- Payment of state or local taxes assessed on the compensation of employees
What they do not consist of:
- Compensation of an individual employee that is in excess of an annual salary of $100,000
- Payroll taxes, and income taxes
- Compensation of employees who reside outside of the United States
- Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116– 5 127); or qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act
With that in mind, how can a restaurant calculate its borrowing amount now that it understands its payroll costs?
The loan amount is calculated at two-and-half times your company’s monthly average total payroll costs (not to exceed $10 million). The average calculated over the 12-month period between February 15, 2019 and February 15, 2020 (the same above exception applies on $10 million).
Here’s an example from Rewards Network, asking the question, “What is the maximum PPP Loan that I can receive?”
This assumes a FTE (full-time employee) count of 20.33, $100,000 monthly sales, 16 percent tip average, and 30 percent labor cost (no additional costs were considered for this breakdown).
Following that chart from Rewards Network as an example, as the graph shows, average payroll costs of $45,840 would result in a projected loan of nearly $115,000.
But here is the big point at hand to consider. Will the PPP loan be forgiven?
The PPP offers up to full forgiveness for the portion of loan proceeds used to pay certain allowable expenses in the eight-week period directly after the restaurant takes the PPP loan. The amount of the loan that is eligible for forgiveness is calculated, in part, based on the restaurant’s average full-time equivalent (FTE) employees over the past year, and the average FTEs the concept retains through the crisis.
A borrower is then eligible for loan forgiveness equal to the portion of the loan the borrower spends on the following allowable expenses during the eight-week period directly following the loan origination date:
(The PPP requires 75 percent of a businesses’ loan be allocated to labor costs for it to be converted into a grant)
- Payroll costs (using the same definition of payroll costs used to determine loan eligibility)
- Interest on a mortgage obligation incurred in the ordinary course of business
- Rent on a leasing agreement
- Payments on utilities (electricity, gas, water, transportation, telephone, or internet)
- For borrowers with tipped employees, additional wages representing tips paid to those employees
- Note: the loan forgiveness cannot exceed the principal
Another point brought up by restaurateurs involves part-time staff. How can you calculate total FTEs in that case, which is pretty much always the case for restaurants?
Here’s an example from Rewards Network:
Your part-time staff works an average of 20 hours a week each.
This means your part-time staff contribute 1,600 hours to your restaurant each month (20 staff x 20 hours x 4 weeks = 1,600 total hours worked).
Assuming full-time staff works 120 hours per month, we can now determine how many full-time staff it would take to do the job of your part-time staff (1,600 / 120 = 13.33).
Add the above to your number of full-time staff to get your Full-Time Equivalent (13.33 + 7 =20.33 FTE).
Now perform the above exercise for each month from February 15, 2019, to February 15, 2020 (or as allowed above), and calculate the average FTE by adding together each month’s total and dividing by 12.
The amount of loan forgiveness a restaurant is eligible for is reduced if the company reduces its average FTEs, or cuts wages more than 25 percent.
Rewards Network illustrated this, too:
Calculating Potential Loan Forgiveness:
- Growing business: Average of 17 FTE pre-crisis | Average of 20 FTE post-crisis= 117 percent FTE Growth | 100 percent Loan Forgiveness Eligibility.
- Stable or slightly declining business: Average 22 FTE pre-crisis | Average 20 FTE postcrisis = 90.9 percent | 90.9 percent Loan Forgiveness Eligibility | 9.1 percent to be paid back as a loan over a maximum term of 10 years.
So what happens if there was already an employee reduction, but employees are reinstated? Reductions in employment or wages that occur during the period beginning on February 15 and ending 30 days after enactment of the CARES Act shall not reduce the amount of loan forgiveness if, by June 30, the borrower eliminates the reduction in employees or reduction in wages. In other words, you need to return to pre staffing levels or raise wages back to where they were before cuts.
Economic Injury Disaster Loan Advance
As Rewards Network explains, SBA’s Economic Injury Disaster Loan fund is not COVID-19 inspired. They’ve been around for a while. The coronavirus made (in theory) EIDL’s available across the country. They come directly from the U.S. Treasury, and there is no cost to apply or fee associated with taking the loan offer if the application is turned away.
Unlike the PPP, the loan does not offer any forgiveness, however, and must be paid back. Yet the long-term, low-interest offering makes it a desirable option for a lot of companies unable to get a PPP loan or need additional funding outside of the uses PPP Loans allow. Say you need more than 25 percent of the PPP loan for something other than payroll.
If you already have an existing SBA disaster loan, you can still apply for one here.
- Businesses in operation on or before January 31, 2020
- Small businesses with fewer than 500 employees
- Businesses directly affected by COVID-19 or in an industry likely to be harmed by the COVID-19 crisis (restaurants)
- Businesses with a credit history acceptable to the SBA
- SBA must determine that business will have ability to repay the loan as well.
The terms, per Rewards Network
- Low-interest loans up to $2 million used for any expenses that you would have incurred and paid if COVID-19 did not happen.
- Low-negotiated interest rates with terms up to 30 years.
- Loans under $200,000 will NOT require collateral (raised from the traditional $25,000). For loans over $200,000, the SBA will take real estate as collateral when it is available. The SBA has signaled it will not decline a loan for lack of collateral, but it requires borrowers to pledge what is available.
Can restaurants get assistance from more than one program?
“If you believe you have COVID-19 related expenses and a PPP Loan or EIDL won’t cover your injury, you should speak with your lawyer, accountant, or tax professional about the potential to apply for multiple loan programs,” Rewards Network said. “Keep in mind that you won’t be able to use multiple loans to cover the same expenses.”
The company added operators should keep in mind that Emergency Economic Injury Grants have been backdates to January 31, 2020, which should make EIDL applicants eligible to receive an EEI grant. Full details here.
Also, here’s an in-depth chart from the SBA that breaks down all the options, beyond the two programs discussed.