Episode 237:

Agency owners are scrambling to take advantage of the CARES Act, and in particular the Paycheck Protection Program (PPP) loans but there’s a lot we don’t know because there’s a lot that is not set in stone.  

There is a total lack of clarity around this how the PPP works – from application all the way through repayment and potential forgiveness. The 800-page act says one thing and the SBA says another. As I describe it in my conversation with guest Stephen Katz, we are repairing the plane while we’re flying it.

Stephen is the chair of the business practice of Peckar & Abramson, a law firm in New York City with offices in 10 US cities and affiliates in 14 countries across the globe.  I asked Stephen to joins us because of his decades of experience working with the SBA and other government programs designed to serve businesses. He’s spent the better part of a month interacting directly with the SBA, Treasury Department and his legal peers to try to wrap their arms around the CARES Act and specifically the PPP loan.

I knew he‘d provide some answers so that we agency owners can plan for the future and protect what they have now. It is important to know what you’re getting into. And as details get locked down, we’ll have Stephen back to help us navigate this murky waters.

A big thank you to our podcast’s presenting sponsor, White Label IQ. They’re an amazing resource for agencies who want to outsource their design, dev or PPC work at wholesale prices.  Check out their special offer (10 free hours!) for podcast listeners here.

Agency Owners

What You Will Learn in This Episode:

  • How Stephen developed expertise in  business law
  • The economic impact of 9/11 vs. COVID-19
  • Everything agency owners should be aware of as they apply for the PPP
  • What we know about the loan forgiveness provision of the PPP loan so far
  • How to prove you are using the proceeds of your loan appropriately
  • Everything you need  to know about EIDL loans
  • Why bigger banks have been hesitant to fund CARES Act  loans

The Golden Nuggets:

“This is the advice I’d give to all the businesses out there: Be a little conservative and err on the side of caution. That’s rarely a recipe for disaster.” @katzbike Click To Tweet “The PPP is a lifeline designed to keep businesses open that are otherwise going to close. The certifications are not to be taken lightly from a legal or a moral perspective.” @katzbike Click To Tweet “The PPP is intended to help agency owners keep the same headcount at full pay. That is the heart of the act and that is how you should try to understand its nuances.” @katzbike Click To Tweet “Don’t assume that, based on what you know today, your loan is going to be forgiven. Things change all the time and new regulations are being introduced frequently.” @katzbike Click To Tweet “Untamed panic is causing agency owners to rush to the front of the line for the PPP without fully understanding what they’re getting themselves into.” @katzbike Click To Tweet

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Speaker 1:

Welcome to the Agency Management Institute community, where you’ll learn how to grow and scale your business, attract and retain the best talent, make more money and keep more of what you make. The Build a Better Agency Podcast, presented by White Label IQ, is packed with insights on how small to midsize agencies survive and thrive in today’s market. Bringing his 25 plus years of experience as both an agency owner and agency consultant, please welcome your host, Drew McLellan.

Drew McLellan:

Hey, everybody. Drew McLellan here with another episode of Build a Better Agency. I am recording this on April 13th, so the Monday after Easter, and many of you in the US are scrambling to apply for one of the loans inside the Care Act. Predominately, most of you are pursuing the Paycheck Protection Program. And the reality is that there’s a whole lot we don’t know about those loans yet. There are things that have not been decided, there are things where the original law said something and the SBA came out and said something in contradiction to it. Exactly what is going to be forgiven and what’s not is still a little up for grabs. And so I decided that we needed to have a guest who could help us understand all of that.

Before I introduce my guest and we get into it, I just want to remind you one of the things that we do … We have all these amazing guests who have courses and they’ve written books and they’ve done all kinds of remarkable things, and we ask them after their interview if they would like to share some of the things that they’ve created with all of you and then we give them away. So every week, we give away something from one of our guests or it may be something that we have at AMI, it might be my new book, Sell with Authority, sometimes we give away a seat at one our workshops. So, there’s always something cool that we’re giving away.

And all you have to do to be in the drawing for one of those cool things is go to agencymanagementinstitute.com/podcastgiveaway. You just need to fill out a little form, I think we ask you your name and your email address and I don’t think we ask for much else than that. And then you are in the drawing until you win something. And so if you’ve already done it, don’t worry if you haven’t won yet. I’m sure it’s going to be your turn very, very soon. And if not, then head over there and sign up so you can win some free stuff. Nothing wrong with that.

All right, let me tell you a little bit about our guest. So our guest’s name is Stephen Katz, he is an attorney with the firm, Peckar and Abramson out in New York City, and he specializes in business law. So, as you might imagine, super busy right now with his clients and just trying to keep track of what’s happening with the Care Act. And as he and I were talking about before we hit the record button, normally, an attorney has years to study something and they have precedent after precedent that they can go back to and look at to really understand the nuance of a law. And, of course, we have about a week and a half worth of nuance that we can study with the Care Act. So Stephen has devoted pretty much all of his waking hours to learning about this law, interacting with the SBA and The Treasury Department around this law so that he can advise his clients on how they should approach taking advantage of some of the things that are available here in the States.

And I apologize, this is a very US-centric episode. I try not to do that very often, but this one is super US-centric. So, anyway, I asked Stephen if he would come on the show and just explain to us sort of what we know and what we don’t know yet, and some of the ambiguity and some of the places where he’s seen clients misunderstand how these loans work, so we can hopefully avoid some of that confusion. So I am super grateful that he is here. It’s late at night in New York right now, when we are recording this, because it was the only time that he could make it work. And so he’s very graciously carved out some time to be with us and I cannot tell you how happy I am to bring him to you so that we can all get smarter about the Care Act and the loans within it. All right, let’s get right to it.

Stephen, welcome to the podcast. Thank you so much for coming on. And for the listeners, we are recording this at eight o’clock at night so we can sneak it in for this week’s episode, so I appreciate you making the time.

Stephen Katz:

It’s my pleasure and hopefully, I can help and give some good information for your listeners to help them out.

Drew McLellan:

So give everybody a little sense of your background and how you came to be in a position where you have this expertise that you and I are going to dig into in a minute.

Stephen Katz:

Sure. I’m the Chairman of the Corporate Department at a law firm called Peckar and Abramson. We have a little bit over 100 attorneys with offices across the country. First and foremost, I’m a business lawyer. I’ve been an entrepreneur myself and I really feel and know the needs of my clients, who especially are entrepreneurs and business owners. So when something like this hit, which was maybe akin to, I guess, in my career when I was an entrepreneur, we had September 11th happen.

Drew McLellan:

Right.

Stephen Katz:

Something very unprecedented and feeling that oh, my gosh, are we going to have a business? What do I do? Who do I need to talk to? So I think that experience, at least, as an entrepreneur going through that, I think, has informed a little bit about how I’ve approached this crisis, which I think is, frankly, much greater in terms of scope and magnitude. And, really, the way I came to be expert at this was, frankly, thinking and putting my entrepreneur hat on and saying oh, my gosh, if something like this happens, what would I need and what would I think about to survive as a business?

And then I immediately just immersed myself in the CARES Act and, in particular, knowing that your first thing you may look at is your existing loans and what could you do on your own credit facilities? If that’s not available, well, where do you go to one in an emergency? Disaster type loans. And then third, when the CARES Act was passed and these Payment Protection Program loans came out, I delved into that quite extensively and there’s a lot there. It’s a good concept, but the implementation has been bumpy at best.

Drew McLellan:

Yeah, it’s been sort of a train wreck.

Stephen Katz:

That’s putting it mildly.

Drew McLellan:

Yeah. And sort of for context of this, I mean, for most of the things that you have studied and guided clients on, you’ve had years to learn and you’ve had, what, a week and a half to become a CARES Act expert because none of us had heard of the CARES Act before a couple weeks ago?

Stephen Katz:

Yeah. That’s absolutely correct. And typically, I’ll deal with something … For example, let’s say I’m dealing with crowdfunding or an SEC regulation, a private company may need to raise some capital, do a private placement. I have the ability to rely on years of SEC no-action letters. When they’ll put out a new rule, for example, of crowdfunding, there’s a 90 day comment period when brilliant people come up with what if this, what if that? This seems ambiguous. Here, you have the sort of Payment Protection Plan, let’s say, portion of the act, you’ve got 45 pages of an 880 page bill that was written in all of a week. Yes, there are going to be ambiguities, we’ve seen the ambiguities. The questions just abound.

I’d say, if anything, this is so different in terms of … I’d say a lot of the solutions, really, here are … In a way, it’s the pinnacle of crowdsourcing and sharing of information amongst professionals and business owners and different people and trying to come to consensus and saying does this make sense? And if it didn’t make sense, having strong agencies and groups go and talk to the SBA and talk to the legislation and say, “Did you really mean this?” Or in some instances, we have cases where the act said one thing and then the SBA put out a regulation that seemed to completely contradict the act. And then it meant letter-writing and calling people and doing things to where they actually then said, “Yes, you’re right. We didn’t really mean what we said and it should go back to what it was in the first place.”

So there has been, on a daily basis, literally, multiple times a day, when they say, “It’s going this way, so we zig this way and then another interpretation comes out and we zag that way,” and it’s just been a lot of back and forth. And literally, it takes someone like me, what I’ve literally done is I’m checking hourly. Are there updates? What are the regs? What are people saying? What are the great minds who are interpreting this thing doing and saying? It’s really become, virtually, a full-time job trying to stay on top of this and every single change. Just on a daily basis, multiple times a day, different questions come up, different interpretations. It’s just been completely unprecedented.

Drew McLellan:

Yeah, it’s crazy. And one of the things that I am certainly observing amongst the agency owners that I work with is that the fear level, the panic level feels very different than 9/11 or the recession, and I think you’re right, I think it’s because it’s so compounded. 9/11, there were certain industries that were impacted, but there were a lot of industries and businesses that just went on like normal.

Stephen Katz:

Yeah.

Drew McLellan:

And even with the recession, everybody was hurt a little, but everybody wasn’t decimated. And it seems like, in the circumstance we’re in today, commerce has just stopped for the most part, unless you own a grocery store or a pharmacy or some other essential business, which there aren’t that many.

Stephen Katz:

Right.

Drew McLellan:

That commerce has just sort of halted, at least for a moment. And so I feel like there’s this sense of panic. So I have some agencies who are doing just fine. Their clients are still producing marketing materials, the agency is busy, but those people were as quick to get to the front of the line for the PPP loan as somebody who lost 50 percent of their revenue, because everyone is expecting another shoe to drop at some point in time. And so you have this sort of untamed panic that is making everyone run, right now anyway, to the Paycheck Protection Program-

Stephen Katz:

Yeah.

Drew McLellan:

Without probably really understanding all the … Certainly without understanding all the nuances because, as you say, the nuances change. But what are some of the things business owners should be thinking about when it comes to the Paycheck Protection Program that maybe has slipped under their radar screen as they have scurried to apply?

Stephen Katz:

Sure. There are definitely a lot of nuances to it. And as I said before, one of the things that business owners do need to be aware of, in particular, is on the forgiveness portion of the Paycheck Protection Program. And let me maybe take a step back so I can, I guess, maybe clarify the way it’s intended and the way it’s supposed to work.

Drew McLellan:

Great.

Stephen Katz:

First of all, this act was really geared toward trying to keep America’s employees employed and working. It was an incentive for business owners to keep their people on at at least close to, if not full pay and will also keep their headcounts the same. That’s really the heart and the intent of the act and I think when viewing it, you have to sort of think about it that way.

Drew McLellan:

Yeah. It feels to me like we’re sort of acting like the unemployment department for the government, right?

Stephen Katz:

Yeah, we are.

Drew McLellan:

Yeah. Yeah.

Stephen Katz:

Instead of the public works back in the New Deal era, we’re giving money to private businesses, to your agency owners, and saying, “Hey, look, keep your people on for these eight weeks and if you dedicate this money to payroll, pretty much, at least 75 percent of it, if you dedicate it to payroll and then rent and utilities and a couple other things, we’re going to forgive that loan. We’re going to let you keep that money.”

Drew McLellan:

Yeah.

Stephen Katz:

So what they need to be aware of, though, is the forgiveness provisions. While the act does provide for forgiveness and we have some indication of how it will work, the final regulations regarding loan forgiveness are not out yet. So, I can rest assured, given the history now of this, that I’ve been living with this thing since March 31st, I believe, when it came out, is things are going to change, there are going to be nuances, there are a lot of questions still to be answered. And just don’t assume, based upon what you know today, 100 percent, your loan is going to be forgiven. You really do need to be mindful that there are other regs coming out, there are frequently asked questions that Treasury answers and that will color the nuances.

And I’ll give you sort of one example. There was nothing in the act that says … For example, suppose an agency … An agency owner may also own the property that the agency rents. Now rent is under the CARES Act on the PPP program, rent is a forgivable use of the loan proceeds. However, there’s nothing in the act that says well, what if rent is owned by an affiliate? The owner of the agency may own the real property. Well, now there’s questions out there that get to be answered in the regulations, but the way the wind seems to be blowing now is you’re not going to get full forgiveness on rent if you’re paying that rent to an affiliate, but what you may get is the mortgage interest that the landlord, that the affiliate, pays. It might be limited in that regard.

One of the things that also threw everybody for a loop, and this, I think, was after April 3rd, when everyone could start applying for loans on April 7th, I believe it was, an announcement comes out from SBA that says oh, by the way, 75 percent of the loan proceeds have to be used for payroll costs. Now, there was an understanding that we thought it was 75 percent of the loan forgiveness. If you’re asking for, let’s say, 100 dollars to be forgiven, 75 of those 100 dollars needs to be for payroll costs. But no, the SBA seems to have gone further and they said actually, 75 percent of the use of proceeds of the loan itself has to be used for payroll costs, and that remains to be seen exactly how that all is going to play out and work. Frankly, applications were submitted before people really even knew all the rules.

Drew McLellan:

Right. So on the if I own the building question, what you’re saying is if I, an agency owner, have a separate LLC that owns the building that my agency lives in and I obviously pay rent to that separate LLC, what you’re saying is there’s question about whether or not that rent will be included in the forgivable part of the loan.

Stephen Katz:

Yes, in the forgivable part of the loan right now. And we’re concerned, perhaps it’s not … You may not even be able to use it at all. It may be an improper use of proceeds. It may be just as limited to that portion of rent that would be equal to the interest on the mortgage of the landlord.

Drew McLellan:

So let’s say, again, I’m an agency owner, I own my building. Because when I signed the loan documents and I’ve already been funded because, as you know, some businesses have already been funded. I’ve been funded, so I think I understand the rules, I use some of that money to pay the rent. What would happen to me or the loan when I go back in eight weeks to say to the bank, “Yep, I followed the rules,” and they go, “Actually, Drew, you didn’t,” what would be the consequence of that?

Stephen Katz:

Well, at worst case, they could say you knowingly took this improperly. I don’t think that will happen. And I think-

Drew McLellan:

Right.

Stephen Katz:

In one of the frequently asked questions, and this is sort of an analogous situation, the SBA came out with the form of application for the loan … And this is yet another example of how things are changing so quickly. The SBA came out with the form of the application for the loan that many, many people submitted. Couple of days later, they changed the form of the application. So, people then started asking, “Well, wait a minute, I’ve already submitted the old form of application. What do I do?” And the SBA did, in a guidance, say that we will let you slide if you did things at that time based … Did the application based upon what the current guidance was at that time. So hopefully, at best, people could take the position and say well, I did this because this was what the guidance said.

And as a practical matter, since loans are really, at this point, just starting to dribble out, not being funded, I’d say the practical advice is don’t start spending on rent to your affiliated companies until you know for sure that that’s going to be okay. I think, if anything in this, and this is the advice I would give to all the agencies out there, is be a little conservative and err on the side of caution right now till we know for sure what the rules are. And, again, there are a lot of very specific questions and personally, it’s been a real frustration for me because a lot of times, I have to tell people and clients, “Look, that’s a great question. I understand it, we get it and the consensus is that 50 percent will say it’s one thing and the other 50 percent will say another thing, and the one that matters and the one that counts, the SBA, Department of Treasury, haven’t answered yet.”

So those are ones where I say hold it back and let’s assume the worst and we’ll work backwards from there so we can stay safe, keep you away from fines and penalties because there is real concern … Let’s say people will generally have the best of intentions, but this is going to be an area where I think is going to be rife with fraud as well.

Drew McLellan:

Yeah.

Stephen Katz:

Banks have had to seriously relax their underwriting policies to get … And they’re being pressured incredibly, absolutely incredibly, to push this through. So there’ll be sort of a swinging of the pendulum in terms of ferreting out bad actors and then those who just did things with the best of intentions, but just didn’t … People make mistakes and it happens, and I think with something like this, mistakes are going to be rampant. And not even mistakes, just good faith positions that are then, again, upended by some statement, regulation, policy that comes out that’s … We’re literally, again, ironing this thing out as it’s live.

Drew McLellan:

Right. So to your point about right now, the understanding is that 75 percent of the value of the loan has to be used for the purposes listed, right?

Stephen Katz:

Well, actually, that’s a good question and there’s an enigma within that riddle of a question. Of course there is. And the question, of course, is this, is it 75 percent of the full amount of the loan or is it 75 percent of the proceeds of the loan that you use?

Drew McLellan:

Ah.

Stephen Katz:

But then, also, there’s another question that says well, what happens if I don’t use all of the loan?

Drew McLellan:

Right. And-

Stephen Katz:

So-

Drew McLellan:

Right now, what do we think happens if we don’t use all of the loan?

Stephen Katz:

What would happen then is then, most likely, if you didn’t use the loan in the eight week period, because it’s not going to be forgiven, and if you don’t use the loan … You’re supposed to use the loan in the eight week period after your funding date.

Drew McLellan:

Right.

Stephen Katz:

If you don’t use the loan proceeds within that time, [inaudible 00:20:37] is you give the money back because it won’t be an allowable use of proceeds outside of that eight week period. So as a practical matter, you’re giving that money back. If you didn’t use it, theoretically, you didn’t need it.

Drew McLellan:

Yeah.

Stephen Katz:

Again, this is an emergency type situation, it’s not a windfall and people shouldn’t be kidding themselves about that because I’ll … Maybe I’ll be pedantic for one second here, but there’s some pretty serious certifications here. And because the banks are not really vetting this the same way, this is one where they’re going to say we’re going to give our clients an up rope to hang themselves. You’re self-certifying. You fill out that loan application, there are about … I think I counted eight different certifications that you give, that you calculated your payroll costs correctly, that …

But, first and foremost, I believe it’s the first certification, the economic uncertainty because of the COVID virus is adversely affecting my business. So if you’re thriving now, from a legal perspective, and this is going to be a windfall, this is not meant for you. From a legal perspective, and I’ll take off the cloak and the lawyer robes for a moment and say, maybe from a moral perspective too, that’s not the … This is a loan, this is a program, this is a lifeline to keep businesses open that are otherwise going to close or otherwise literally put people on the street. And, again, not to be too pedantic, but that’s what it is. And then, again, for those of you certifying, you don’t want to be that one that they make the test case out of. They audit and they say, “Look, your revenue’s went up and you certified”-

Drew McLellan:

That you were in trouble. Right. So what other things about the PPP are people not maybe aware of or they’re not thinking about? It seems to me like record-keeping and being able to prove to the bank that you used the proceeds of the loan appropriately is going to be critical to having the loan be forgiven and not getting into a fine or penalty situation.

Stephen Katz:

Yes. And, again, the banks were going to kind of regulate this and we’ll get more on this, but you’re going to need meticulous record-keeping to get that loan forgiven. Just think about it like this. While the loan, even if it doesn’t get forgiven, is only one percent interest and you have to pay it back, but from a bank perspective, they may not make it as easy as you want it to be.

Drew McLellan:

Right. Right.

Stephen Katz:

It’s basically saying all right, we gave you this money, they chase the SBA for it or whatnot, but the record-keeping is going to be very, very important. As much as there was a rush to get the loans, and there is a rush to get the loans … And bear in mind, there’s a finite amount of dollars, this is not an unlimited amount. So one thing people should know is if you’re thinking about getting the loan, apply for the loan.

Drew McLellan:

Right. Absolutely.

Stephen Katz:

This is not the time to sort of vacillate about it. Again, err on the side of caution that it’ll get through, that what you’re asking for is not going to be questioned so you can get the application in and approved. I advise my clients don’t be penny … In terms of overdoing it and trying to ask for too much because if you do, on the backend, on the forgiveness side, you might really get squeezed.

But kind of going back to that point, so that you do really have to be careful about what you’re asking for, what you’re applying for. And, again, on the forgiveness side, the record-keeping is going to require pretty meticulous record-keeping. I’m hearing that keeping copies of checks and pay stubs and W-2 … You’re going to have to justify every dollar that you spent was spent on an allowable cost. So, keeping meticulous records. In some instances, we’re seeing a number of agencies, other clients that I’m talking to, they’re actually keeping that … When they get funded, they’re going to keep that money in a separate account.

Drew McLellan:

Yeah, I’ve heard a lot of people suggesting that as well.

Stephen Katz:

And I think that’s an excellent idea.

Drew McLellan:

Yeah.

Stephen Katz:

Again, you’ve got to account for every dollar that you’re asking for back and if you don’t, I mean, just think about it, the frustration of … You put in a claim for insurance and there was an I not dotted or a code was off by half a number or there was some slip that wasn’t … Think about it like that. I think that’s probably the right way to go. Every I dotted, every T crossed so you don’t have a problem on the backend.

Drew McLellan:

Yeah.

Hey, everybody. I am sorry to interrupt this episode, but I wanted to make sure that you knew about a resource that we are building out to help agency owners and leaders manage through the COVID crisis. So if you go to the Agency Management Institute website, so agencymanagementinstitute.com, and you either search for COVID or on the homepage, there’s a link to the COVID Survival Tools for agency owners. Basically, every week, we are adding new resources. They are things that we’ve created, podcasts, videos, other things like that, and also things we’ve curated, so some of them are from other subject matter experts, some of them are documents around, for example, some of the SBA loan stuff that’s going on right now.

So we’re just trying to gather up anything that we think will be valuable for you and organize it in a way that will be easy for you to sort through and access. No email required, no firewall, we’re not going to send you a drip campaign or try and sell you anything. I just want you to go there, take what is useful to you and ignore the rest. We are in this together, we are going to survive this together and we are going to thrive again together, and this is just one of the ways that we’re trying to do that is to put those resources in a place that’s easy for you to get to. So, again, agencymanagementinstitute.com, either search for COVID or click on the link on the homepage and it will take you to the resource page. Okay.

So, I mean, the Care Act, obviously, includes more than just the Paycheck Protection Program and the other loan I’m hearing a lot of business owners talking about is the Economic Injury Disaster Loan, the EIDL.

Stephen Katz:

Yeah.

Drew McLellan:

So what do we need to know about that?

Stephen Katz:

Well, the EIDL loan, actually, is … That’s a little different, that’s actually a loan.

Drew McLellan:

Right. Yeah, there’s no forgivable anything on that.

Stephen Katz:

It’s not forgivable and you have to pay it back. And the thing with the EIDL loan that people really need to understand, you can’t use the proceeds of an EIDL loan for the same thing that you’re doing a PPP loan.

Drew McLellan:

Right.

Stephen Katz:

What we were telling most clients at the beginning was look, if you’re getting the EIDL loan and you’ve got the EIDL loan, you could actually use the PPP loan to refinance an EIDL loan.

Drew McLellan:

Hmm. Because it’s not going to be a one percent.

Stephen Katz:

The EIDL loan, no. I think it’s at 3.5 percent now.

Drew McLellan:

Yeah.

Stephen Katz:

And there’s a term [inaudible 00:28:03]. For businesses that are really desperate, there is a 10,000 dollar cash advance that you can get on an EIDL loan and that’s actually forgivable, even if you don’t get the EIDL loan. If you qualify, you can get the 10,000 dollar advance.

Drew McLellan:

I just read that they just changed that to … It used to be that everyone would just get 10,000 dollars, but now it’s 1000 dollars per employee up to 10,000 dollars. Is that correct?

Stephen Katz:

Yes. Yes. Actually, that is a very, very good correct detail. They have to slow it down. I think, really, they have to slow it down a little bit because, literally, they’re just handing out money. And, again, at this point, the PPP loan, if I were the entrepreneur, I’d go for the PPP loan first now and get that going and get that in. And then you could circle back, if you needed the EIDL. The details are still coming out for larger companies who have over the 500 employees, and I’ll speak a little bit about calculating the number of employees that people should know about in a minute.

But the Main Street loan, what’s called the Title Four of the CARES Act, that’s still being developed, but rest assured, that’s going to be a real loan. That’s not going to have the forgiveness factor, there’s going to be, effectively, a 90 percent employee retention rate, I understand, on that. Without getting too into that, because that one is in its sort of more nascent stages, things will change. If, for some reason, either one, you don’t qualify for the PPP loan or you get closed out, maybe the Main Street loan too. And there’s also a way, if you have an existing credit facility, that you might be able to tack the Main Street Lending loan onto your existing credit facility.

Drew McLellan:

Is the Main Street one the one that’s for the bigger businesses-

Stephen Katz:

It’s for bigger businesses, yeah.

Drew McLellan:

Got it.

Stephen Katz:

I think it’s up to 10,000 employees.

Drew McLellan:

Yeah. Okay. So you don’t have to have over 500 employees?

Stephen Katz:

No, no, no. It just may not make economic sense because it’s much more restrictive and there’s … There are a lot more strings attached to that one. They are bigger and more stringent loans and probably more underwriting. It’s intended for bigger companies. But if you don’t mind, one thing, I guess, also that you said what people need to know about and understand with these PPP loans, and this is a question I get asked a lot about, a company will say, “Okay, I’ve got 400 employees. Am I good to go?” And I say, “Maybe. The wonderful lawyers … It depends.”

Drew McLellan:

Of course. Right.

Stephen Katz:

And here’s what it depends on, and this is something, especially … You may certainly have a lot of your agency listeners. If you are owned by private equity or venture capital, there are affiliation rules. And portfolio companies of private equity firms are kind of getting screwed here because if a private equity firm owns companies X, Y and Z, I add up all the employees of PE firm and company X and company Y and company Z.

Drew McLellan:

Oh. So I could be over the 500?

Stephen Katz:

And if the total is over 500, you’ve got an affiliation problem. You might qualify if the revenue’s are low enough, you could qualify on other standards. But that has been a big issue. Certainly, there’s been a lot of lobbying to try to get that rule lifted and changed, but right now, as it stands, that’s a big problem. So while you might have a company that says, “Yeah, I’ve got 10 employees,” and then we find out but they’re owned 51 percent by private equity, then we’ve got a bigger issue. And the affiliation rules, without getting too, too, too deep in the weeds here, elements besides just ownership of a majority, there are other elements that may indicate affiliation. Common officers, common directors, certain rights that private equity or venture capital firms may have that give them enough control that they be deemed to be affiliates, so it’s a-

Drew McLellan:

So that’s why, on the PPP loan, they asked you if you owned other companies and how many employees you had-

Stephen Katz:

That’s exactly right.

Drew McLellan:

In those companies. Ah.

Stephen Katz:

They want to know the 20 percent owners, they want to know that and they’ll kind of … I guess, in some way, there’s a big computer up there and maybe cross-checking this stuff and whatnot. I’d say in clients I’ve spoken with, thank goodness, for the vast, vast majority of them, they’ve been okay, but I’ve had to deliver bad news to a couple that didn’t … Again, if you look at the … You read the newspaper, you read the press. If you have under 500 employees, you’re fine.

Drew McLellan:

Right. Yeah. Yeah. There’s no asterisk there, like there-

Stephen Katz:

Right.

Drew McLellan:

Should be.

Stephen Katz:

But read-

Drew McLellan:

Right.

Stephen Katz:

Do the stuff I’m paid to do, read the fine print.

Drew McLellan:

Right. Right. So on the EIDL loan, one of the things I haven’t seen … I know that they had an online version where you uploaded P&Ls and things like that, and then they went to one where you don’t have to upload anything really, you just have to make some statements. But what I haven’t seen is how they’re deciding who gets that loan and who doesn’t. What’s the criteria, do you know?

Stephen Katz:

You’re certifying that you satisfy it, but it’s really in the eyes of the SBA and who’s processing it and which regional office. It’s a bit of a black box. And frankly, going back to the PPP application, that was really one of … These loans, money was supposed to start flowing on April 3rd.

Drew McLellan:

Right.

Stephen Katz:

Steven Mnuchin was up there speaking and saying, “Oh, money’s coming.” No money was coming.

Drew McLellan:

No. Right. So we’re recording this on the 13th and it’s only been in the last few days that anybody that I’m working with has been funded and most of them still have not been funded.

Stephen Katz:

And I would venture to guess that most of the ones that you’re talking to have been funded are with these local or regional or smaller banks.

Drew McLellan:

Yeah. Not one big bank has funded anybody that I know of yet.

Stephen Katz:

And I’ll let you in on why, and I think this is important for your agency clients because I can only … Actually, I not only imagine, I’m dealing with it myself. We’re dealing with it with our firm and our application. We were with a larger bank and it’s literally like turning the Titanic.

Drew McLellan:

Right.

Stephen Katz:

Because as bad as and as mysterious as the rules and regulations are to business owners, the banks are asking tenfold those questions.

Drew McLellan:

Sure.

Stephen Katz:

They need to know if I’m giving out literally billions of dollars, how is the SBA 100 percent guaranteeing this? If I use my form of loan agreement or my form of note, is the SBA going to turn around and say, “Uh, uh, uh, uh, uh. You needed paragraph four of this regulation and you didn’t have it. Therefore, we’re not giving you the guarantee and the funding and we reject it”? And banks have literally teams and teams of compliance and lawyers and people pouring over this, and that’s why you’re seeing with the bigger banks, they’re nervous and they’re not going to lend until they’re ready to lend. And maybe they don’t want to lend because there’s not much [inaudible 00:35:44] in it for them.

Drew McLellan:

Right.

Stephen Katz:

They’re not getting paid a lot. They’re basically getting a breakeven and may even be losing money because of all the compliance, so understanding that. But as a practical matter, we have seen the more local and regional banks are able to move and fund a lot more quickly and-

Drew McLellan:

Or are willing to, anyway.

Stephen Katz:

Or willing to.

Drew McLellan:

Yeah. Yeah.

Stephen Katz:

They’re a little bit adept and a little more adroit to do that. So yeah, I think that’s something to look at. And I could tell you from experience of literally in doing this and researching it and forums that I’m on and groups that I’m in … Somebody put out there, and as recently as today, put out there, “Has anyone been funded yet?” There are about 170 responses. Three have been funded.

Drew McLellan:

Yeah.

Stephen Katz:

Again, I don’t want to bash the banks because I don’t … Again, they’re giving out-

Drew McLellan:

They’re caught in the middle, right? Yeah.

Stephen Katz:

They’re caught in the middle. They’re caught, again, in this hurricane of here’s a regulation, we’re going to give out hundreds of billions of dollars, but here’s 20 pages, go figure it out.

Drew McLellan:

Right. Well, and we want to use your money and we don’t want to pay you very much for it. And oh, by the way, you’re about to have a tsunami of people knocking on your door.

Stephen Katz:

That’s exactly right.

Drew McLellan:

Right. Right.

Stephen Katz:

Literally, I’m living it, eating and breathing it. You might even hear the pinging of the emails coming in. That’s literally dealing with our lender. That’s that sound in the background. But on April 3rd, we were ready to go with our application, we wanted to be first, we were assured we would be and then, “Oh, wait, hold on,” and then it became we want this piece of … We want the 2019 payroll reports and then it became oh, no, we want payroll reports up through March 31st. Then it went back to 2019. So, again, it just goes into all that uncertainty and everything.

I will say, though, not to sound the alarm too much and to really give some calm to people, it is starting to coalesce around a way of … There is starting to be a consensus on the way things are being done. In the PPP applications now, banks are taking the submissions on. The process seems to be, for the most part … Now there may be outliers. You’ll submit the application online, you’ll get, basically, a preliminary kind of approval, a loan number or whatnot. Then the bank will send you their actual loan documents and the SBA was good enough to say, “Thanks. Yes, you can use your own form of loan document,” and I think that was a big hurdle that the banks had to get over.

Drew McLellan:

When did they say that?

Stephen Katz:

I believe that was in an FAQ from … Answer from Treasury on April 10th, I think that was.

Drew McLellan:

So Friday?

Stephen Katz:

Or maybe April 8th.

Drew McLellan:

Okay. So late last week?

Stephen Katz:

Yeah, it was late last week.

Drew McLellan:

Yeah.

Stephen Katz:

Again, days are becoming-

Drew McLellan:

It’s a blur.

Stephen Katz:

A blur at this point. And then given the twists and turns of this, I forget which sort of sea change was which day. But yes, late last week. So that should ease things, things should start moving. But the idea is when you submit your application, first that SBA form that asks you the eight certifications and questions and the calculate your payroll costs and put your number of employees and all your 20 percent shareholders, that’s the start of the process. Fortunately, we have seen the loans are relatively streamlined, it’s pretty much a promissory note. And then some certifications about your calculation and loan forgiveness. And then once you submit that final loan paperwork, you should be funded quickly after that. Again, experience from the smaller and regional banks who put that out, you could be funded within a day after that.

Drew McLellan:

Yeah, that’s been what I’ve been seeing is a day or two or three at the most.

Stephen Katz:

Yeah. I can’t speak for the larger banks because as far as I know, when I literally was hitting refresh every half hour on our bank to [inaudible 00:40:17] to get our funding, we get, “We’re sorry, we know how important it is, but don’t upload anything, don’t send us anything. We’re figuring it out.”

Drew McLellan:

Yeah. Right. Right. So what should we all be watching for? And as this is changing, is there a place that we should be going to that, in layman’s terms, tells us if things are changing as they’re changing?

Stephen Katz:

Yeah. There actually are two very good resources, and I say look, you can get … This is where you can get the stuff straight from the horse’s mouth. One is on the SBA website, at sba.gov, and if you click on the COVID resources, it is actually pretty good and you can get to the PPP loans and it explains it. But, actually, equally as good and maybe even better is on the Department of Treasury website … Separately, I could send you-

Drew McLellan:

That’d be great.

Stephen Katz:

Share that with everybody. On the Department of Treasury website, if you click on their COVID resources, it’ll lead you to a list of available things. And I think the things that you want to look at there are the interim regulations and then the frequently asked questions. There are a couple of sets of interim regulations. I think there are two up there now. One is a sort of main set of interim regulations, there’s a set of interim regulations about how they calculate affiliates and answers some questions on that. But then the frequently asked questions. There’ll be a date on that and that date keeps getting updated. So it says April 8th. The last one I have, if I reach to my right over here, I can grab, I think it’s from … Oh, this is April 8th and then there’s another one, April 10th. There are about 21 questions there and they’re good, and they answer those questions in lay person’s terms.

Drew McLellan:

Okay. Good.

Stephen Katz:

The other thing that’s really very important, this is not something you want to just guess at and do it yourself. This is where, I think, most importantly, talk to your accountants. The accountants are living, eating and breathing this stuff and they’re numbers people and they’re deep in the calculations. And talk to your accountants and talk to your attorney, talk to your business attorney, your trusts and estates attorney and your litigation attorney. They know this stuff, the ins and outs of this stuff. Talk to a solid business attorney as well. And I’ve certainly done … I mean, literally have turned my practice into … I almost feel like the cartoon, Lucy, on the helpline.

Drew McLellan:

Right.

Stephen Katz:

I’ve been on just a nonstop treadmill of conference calls with accountants and clients, and answering questions and then to the extent they don’t know crowdsourcing and bouncing those ideas with other professionals. Speaking in podcasts like this and getting these questions, I think that helps a lot. And the other thing that I really suggest clients do is actually sit down when you do the application and then when you’re thinking about the loan forgiveness, run the examples, do the math. I have visions of, I guess it one of my seventh grade, eighth grade algebra teacher saying, “Do the problems. Do the examples.”

Drew McLellan:

“Show your work.”

Stephen Katz:

Yeah, “Show your work.” Because in theory, you could read these provisions and, “Oh, yeah, that makes sense. Yeah. Great. Great. Great.” Now when you go down and put yourself in … I’ll put myself in the CEO’s shoes. All right, we’re going to ask for this amount of loan. Now I got to make payroll, I got to do payroll next week, I got to do rent, and then there’s the 75 percent rule. Well, how does this work? What should we be doing?

Drew McLellan:

Right.

Stephen Katz:

Until you actually do the math and run the examples and run the samples … What if I lay off this person? Well, if I have a reduction in headcount, that could reduce my forgiveness. If I have a reduction in payroll of more than 25 percent for employees to make less than 100,000, that’s a reduction in forgiveness. So you got to run the examples and run the math. And then to make things more complicated, there’s this nice little provision for rehire. So if you rehire people by June 30th, the forgiveness you may have otherwise lost, you might be able to recapture. And, again, there’s some math there and formulas that can make your head spin, but that’s why I say your professionals, your accountants, your lawyers will know how to do that. And in the frequently asked questions, in the regulations, they actually do give examples and the formulas for how to do that stuff. But I say don’t just make assumptions here because with a law written this quickly, sometimes logic and assumption don’t necessarily meet what the answer is.

Drew McLellan:

Right. Right. What else are you warning your clients about? What cautionary words are you giving them, other than don’t spend the money in the wrong place, make sure you do the math? Is there any place else where we can get ourselves into trouble? So, for example, let’s say somebody does quit on their own and so the business owner says, “Well, I have to make up their payroll somehow.” Can they give everybody else raises, can they give themselves a raise? Are there rules about all of that somewhere?

Stephen Katz:

The regulations are silent on all that stuff. They just take average payroll costs. So-

Drew McLellan:

Okay.

Stephen Katz:

Presumably, I’d say in the vast majority of cases, we’ve seen where people have already reduced payroll. But yes, let’s say you reduce people’s payroll by 10 percent across the board and then somebody ups and quits, the headcount issue, you still have to deal with.

Drew McLellan:

Right.

Stephen Katz:

And that might be a problem. So let’s say you had 10 employees, one quit, you’re on 90 percent, so you will get some reduction there. But you can at least, if you wanted to, you do … Again, it’s run the example, do the math.

Drew McLellan:

Right. You could make everybody whole-

Stephen Katz:

If you increase 10 people’s payroll by that 10 percent, enough to make up that lost cost, that might be a way to do it. Again, it’s very, very fact-specific and specific to each company and that’s why I say don’t just read it and say I assume I got this. You got to make these decisions.

Drew McLellan:

Yeah. As you and I were saying before we hit the record button, this is the strangest moment in time for most of us, professionally and personally. And so-

Stephen Katz:

Yeah.

Drew McLellan:

It does feel like we are repairing the plane while we’re flying it.

Stephen Katz:

Yeah. I think that is a brilliant analogy, and literally hanging on for dear life and some pretty nasty headwinds, for sure.

Drew McLellan:

Right. Yeah. Yeah.

Stephen Katz:

And one other thing, by the way, that does come to mind, also to think about, is a lot of companies have their existing working capital lines of credit. Most likely, these CARES Act loans could very well be a technical default under your working capital line of credit. Now the good news is most banks are clearly being reasonable about this. They certainly don’t want a credit to go out of business, that’s bad for everybody. But it is something to be mindful of, also, is look at your existing line of credit and at least be talking … If you have an existing line of credit, at least be talking to your bank and saying, “Hey, look, we’re getting a CARES Act loan. You’re going to be cool with this, right?”

Drew McLellan:

Right.

Stephen Katz:

Because you don’t want to have sort of into the frying pan, into the fire sort of situation. But I’d say most banks are taking this and being reasonable about it. And just another word in terms of working capital lines of credit, I’ve been hearing a lot of companies have basically drawn their line to the max. But you have to be careful because there are covenants in there and financial covenants in there based on your receivables, which very well will change for a lot of-

Drew McLellan:

Right.

Stephen Katz:

[crosstalk 00:48:17] business and things go. What are your eligible receivables? If you start allowing clients to stretch payment over time, do those receivables slip from the eligible category to the non-eligible category? The CARES Act stuff is great, but the other side of this too, you need to be thinking about your existing line, especially if you drew it in full, because did you all of a sudden … If you’re out of compliance, did you all of a sudden draw down a couple million that now has become a demand loan, that the bank could say, “Pay me back tomorrow”?

Drew McLellan:

Right.

Stephen Katz:

In these times, you hope that the banks wouldn’t do that-

Drew McLellan:

Right. But you sure don’t want to put yourself at risk.

Stephen Katz:

Yeah. And, again, as a practical matter, if they started doing that, they’ll just throw themselves and the country into a complete banking meltdown because then every loan they have will just go into the vault.

Drew McLellan:

Right. Right.

Stephen Katz:

But it is something that … I’ll say it’s brewing, it’s out there and something you should be cognizant of and certainly something, if you … You should be seeking the appropriate waivers and at least addressing it and dealing with it.

Drew McLellan:

Yeah. Yeah. This has been fascinating. A little frightening, but fascinating. Thank you for sharing your expertise. I know everyone is rushing into these loans and really not taking the time, and frankly, a lot of the answers aren’t there even if they did take the time, to sort of figure out what they’re getting themselves into. So, your clarity around some of these things or even just pointing out where there isn’t clarity yet is super valuable. So I know you’re crazy busy, so I really appreciate you carving out the time to do this. Thank you very much.

Stephen Katz:

My pleasure. And thank you. And hopefully, I could be some help and encouragement to some people out there that these loans will come. It is a good lifeline. If you’re careful and do it right, it can be a very, very good thing and you could certainly save a lot of businesses that won’t be able to exist and for that matter, businesses that are limping along and have been severely impacted by this, it could provide some welcomed relief. And, again, it is an act done with the best of intentions and hopefully, the implementation, while it’s been very difficult, will start to smooth out and it can provide the aid and relief that businesses and these agencies need desperately right now.

Drew McLellan:

Yeah. If folks want to learn more about the law firm and your work, where should we point them?

Stephen Katz:

Our website is www.pecklaw.com. And if people have specific questions and want to reach me, you could reach me on my email, which is skatz, that’s [email protected] [email protected]

Drew McLellan:

Stephen, thank you so much for sharing your expertise. I am very grateful that you carved out the time to do this, so thank you.

Stephen Katz:

My pleasure. Anytime.

Drew McLellan:

All right, guys, this wraps up another episode of Build a Better Agency. Ooh. This is a lot for us to think about, it’s a lot for us to be careful about. I know that for many of you, these loans are critical and I know that you are chasing after them with all of your energy. But, also, know what you’re getting yourself into and, as Stephen said, certainly as you get funded, make sure that you’re keeping the kind of records that you’re going to need so that the forgivable part of the loan can be forgiven. If you have more questions, I’ll put Stephen’s contact information in the show notes. And we may be checking back in with Stephen in a few weeks as all of this changes and maybe as some of this stuff locks into place.

In the meantime, many thanks to our friends at White Label IQ for being the presenting sponsor of the show. They’re the ones that make it possible for us to bring you this kind of information, so check them out at whitelabeliq.com/AMI. And I will be back next week with another guest to help you build your agency to be stronger, to protect the agency, which I think is what Stephen helped us do this time around. So in the meantime, you can always track me down at [email protected] All right, I’ll be back with you next week. Thanks for listening.

That’s a wrap for this week’s episode of Build a Better Agency. Visit agencymanagementinstitute.com to check out our workshops, coaching packages and all the other ways we serve agencies just like yours. Thanks for listening.