In an effort to continue supporting you, our executive team has compiled our findings and experiences navigating two Government Relief Packages that grew out of the COVID-19 / coronavirus pandemic. You can find our letter to clients below:
Dear Dealer Teamwork Clients,
We are writing again this week to provide our perspective on the recently passed government relief packages and how those packages could help your business. As mentioned previously, we have been monitoring our client base for impact since late January along with capital markets. The continued downward pressure in public equity and debt markets remain considerable. Our thesis continues to be that short-term sales volume and general consumer behavior will affect dealers in areas where COVID-19 cases have largely been confirmed.
As we enter the mitigation stage of the COVID-19 crisis in North America, we are internally identifying this stage as The Big Pause. The considerable action taken by all levels of government are effectively leading to the short-term pause of daily life—prioritizing social distancing, closing schools, and sheltering-in-place orders. As a result of the pause, both the Federal Reserve and Federal Government have taken extraordinary actions to mitigate the impact of the pandemic. To date we estimate small businesses have access to approximately $400 billion in economic aid between the Small Business Administration (SBA) Disaster Assistance Loans and the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.
Small Business Administration Disaster Assistance Loans
The first relief package announced by the federal government was to authorize a $50 billion Small Business Administration Disaster Assistance Loan pool for counties impacted by COVID-19. Applications can be submitted here.
This program has some significant challenges in delivery that could impact distribution of funds. The primary gating factor is that the program will be administered directly through the SBA and not the national network of bankers that exist in the American banking system.
As a point of reference, Dealer Teamwork submitted our application early Saturday March 23rd. Three days later one of our affiliates filed, and the change in case ID numbers increased by 48,210. This level of volume will almost certainly overwhelm the internal resources at the SBA and, in our opinion, should not be depended on for short-term liquidity. We do however believe this program should be used by our clients, and the key features of the program are important for small business continuity. The maximum loan amount is $2 million with a 3.75% interest rate repayable over 30 years. Additionally, this will not require a personal guarantee by ownership, and the funds can be used for working capital. Another important feature of the program is a bank will not have to assume credit risk like a standard SBA loan. As the big pause will soften balance sheets across the US economy, having the federal government take ownership of the credit risk will allow funding to continue even if business conditions worsen.
Coronavirus Aid, Relief, and Economic Security (“CARES”) Act
The second relief package called the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was formally signed to law last weekend. The total aid contained was approximately $2 trillion, but we will focus on the small business provision called the Paycheck Protection Program (“THE PROGRAM”). The Program authorizes up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis.
The Program is designed to pay up to 8 weeks of payroll costs and benefits but may also be used for rent and utilities. The loan will also be fully forgiven if used for qualified expenses, and all small businesses are eligible.
The Program has been widely discussed, and speculative information has been issued all week as to how this program will be administered. Dealer Teamwork has done extensive research on the Program, and we would like to discuss our best practices for understanding the Program’s rules and eligibility, loan amount calculation, filing process, and documentation standards.
Rules & Eligibility
As you have likely heard, this Program is for all businesses that have 500 or fewer employees, and the loan amount is capped at $10 million per applicant.
Loan Amount Calculation
If your small business is eligible, you must then determine the loan amount your business will request. We examined the actual Application Form to determine how to calculate your loan amount.
As you will see, the formula for Loan Amount appears straightforward; Average Monthly Payroll multiplied by a factor of 2.5. The subjectivity and complexity begins when you review the Average Monthly Payroll definition in the application instructions.
“For purposes of calculating ‘Average Monthly Payroll’, most Applicants will use the average monthly payroll for 2019, excluding costs over $100,000 on an annualized basis for each employee.”
As no specific guidance exists on the calculation other than an individual cap of $100,000, we are taking the position on our filing that Average Monthly Payroll will follow the guidelines identified in the use of funds as described by our SBA lender. Their interpretation is referenced below.
- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
- Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
- State and local taxes assessed on compensation; and
- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
We believe the intent of the Program is to have employees held, as harmlessly as possible, over the eight-week loan forgiveness window. So, your Average Monthly Payroll should closely mirror how the funds are used with respect to payroll forgiveness.
Although the inclusion of these incremental items will materially increase, the total Loan Amount in the application does add a significant layer of complexity to the calculation of Average Monthly Payroll. In our filing we needed to aggregate information from three different data sources with detail down to the employee level for all of 2019. Only then, after all employee level data is aggregated, can the applicant perform the $100,000 test per employee prescribed in the application instructions.
To help our clients understand how we filed, you can request a copy of a draft calculation template here.
Unlike the previously discussed SBA disaster loan, the Program will be administered via the national SBA network of American banks. This should greatly increase the efficiency of processing applications but may lead to very different experiences for applicants. In our case, we bank with a large publicly traded institution that is creating a standalone portal for its clients to submit applications and supporting documentation. We are anticipating a relatively limited number of touch points with bank personnel. This experience will likely be very different than if you currently bank at a small credit union or private bank.
The final part of the filing process for consideration will be around Know Your Customer (KYC) regulations. KYC is, to the best of our knowledge, currently still part of the Program. This is important because if a business is looking to access the Program without an existing credit relationship, they will need to go through the KYC process. This will expand the funding timeline. To the extent possible, we recommend engaging your existing bank for access to the Program.
After the Program loan is funded, we believe the forgiveness process will actually be the simplest part of the greater process. From our analysis we have performed on our business, if calculated correctly, the loan amount should align closely with (or be less than) the amount of payroll and rent paid during the 8-week forgiveness window. Under that assumption, the submission for forgiveness should be as painless as submitting an expense report.
We have specific concerns about the execution ability of all parties involved in these transactions, but we also understand that programs of this scale have not been previously attempted. In terms of best practice, and to mitigate the possibility of an extended economic pause as a result of COVID-19, we highly recommend our clients apply for both programs where possible, and do so with urgency. In these uncertain times forecasting working capital needs beyond existing cash and credit lines is very difficult. To the extent the Federal Government and Treasury are offering financing without traditional pain points, such as a private lender credit risk or personal guarantees, you should strongly consider participation in these programs.
Sean Stapleton | CEO & Co-founder
Gary Cootes | President
Joe Skar | CFO & COO
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