Q: My MSP has several clients who are unable to pay because they now have customers who aren’t paying them. I’ve thought about applying for a loan through the CARES Act. Do you think this a good idea?
Before we say anything else on this topic: if you have even a modicum of interest in funds available via CARES, read this and act immediately. Now, for the backstory:
This is an interesting topic, and one of the most challenging issues I’ve had to tackle because the guidance is continually changing. A government official I spoke with said that “the economic crisis brought on by COVID-19 happened so fast that the CARES Act is like trying to assemble a plane from scratch, while it’s airborne.” That’s what trying to write about it is like, too!
With most businesses shut-down because of the coronavirus pandemic, the reports from MSPs are a mixed bag. Some MSPs have seen business actually increase as companies rely more on outsourcing IT to service their networks. Clients can cut employees, services and hours, but paring down their networks is often not an option if they wish to reopen their doors after the pandemic passes. Many businesses have also moved their public-facing operations to online-only, which makes the network needs even more acute.
MSPs, however, that have portfolios that are weighted towards customers in the hospitality industry, like hotels and restaurants, that are feeling more of an economic pinch. The CARES Act may well provide some needed breathing room.
The CARES Act was designed as a two trillion dollar lifeline for small businesses. The roll-out, however, was quickly inundated with business owners who need the funds to keep their businesses afloat. According to published reports, before running out of money, the SBA processed and approved 1,661,397 loans. For context, the agency approved more loans in 13 days than it had in the past 14 years combined!
Smarter MSP asked Foster Williams, an accounting consultant in Dallas, Tex. who counts several MSPs as clients, about the pros and cons of tapping into CARES.
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His first bit of advice is crucial since the program officially ran out of money on April 16, but as of today, April 27, funds are expected to be available any day. Congress approved an appropriation that will fund the loans again but most experts think the funds will be depleted in a matter of days, possibly hours.
“Use this lull to get your paperwork in order now so that when the program comes back online, you are ready to go immediately, because those funds may not last long either,” Williams advises. “And if you have a good relationship with your banker, don’t wait for the program to come back online, make sure they have your paperwork now.”
One of the most popular parts of the CARES Act is the Paycheck Protection Program (PPP), which allows for the loan to be forgiven if the money is used for payroll and operating expenses.
Williams says that loans can be taken out that are 2.5 times average monthly payroll costs.
“This is a great option for MSPs who employ full-time staff, and are suddenly finding their cash flow drying up,” Williams adds.
As long as you use the money for payroll and retaining employees within eight weeks of receiving the loan, including yourself, the funds can be forgiven. The forgiven amount is tax-free. Documentation of these forgiven expenses will be required, and Williams says to expect to see forms rolled out in the coming weeks for that purpose. So, if you managed to obtain PPP funds, make sure you document how you are spending the money. Save receipts and paperwork, Williams advises.
If you choose to use the PPP funds as a loan, you can purchase new equipment and software, or make other investments in your business. This may be a very viable option for an MSP that is not having problems making payroll but needs to increase capacity if their workload is growing, but their funds are not.
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Foster said his clients that have successfully navigated the Paycheck Protection loan program have told him that lenders do not require collateral or a personal guarantee. Terms include deferred payments for six months, and a 1 percent fixed interest rate, with the loan being due in two years.
The Economic Injury Disaster Loan (EDIL) is also part of the CARES Act and has similar terms as the PPP, but the key is that you can’t co-mingle the funds. This means that you can apply for both, but you can’t use both loans for the same expenses.
Many local SCORE chapters are offering assistance in navigating the PPP process. Since the availability and guidance are constantly changing, this may be a good option for an MSP.
Many MSPs retain technicians as independent contractors and issue a 1099 at the end of the year.
“1099 employees, unfortunately, have to apply for PPP funds individually,” Williams points out. So if you have nine techs working for you, you’ll have to help nine people navigate the process. The loans are available via most, but not all, banks. The bank has to already be an approved SBA lender. If you already have an account with an SBA lender, that’ll save you some hoops to jump through, and you’ll have preexisting goodwill with the bank.
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As a general rule we are hearing that bigger banks are not acting as quickly in processing the loans. Your best bet is a smaller community bank or credit union. They seem to processing the loans far faster and giving better customer service, but generally only to existing customers. If you don’t have an account with a smaller bank, you can apply for the funds through some non-banks like PayPal or Square.
Here are some helpful links that Williams recommends to navigate the PPP process. The program is new and the only certainty is that guidelines are changing, so keep your CPA or favorite banker on speed dial.
SCORE (Service Core of Retired Executives): Offers free assistance navigating CARES.
List of sba-approved lenders: PPP loans can only be obtained from lenders on this list.
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