Alternatives to PPP Loans
Many small businesses are finding that PPP loans are far more difficult to use than advertised. While businesses fear closing due to mounting debt, rent, and utilities the PPP loans force recipients to spend the vast majority on payroll.
There’s nothing wrong with wanting to keep workers employed during the pandemic when people need money the most, but if businesses close because they can’t pay their rent, workers lose out on employment too.
The PPP loan rules were first drafted early in the pandemic when it was believed that we could simply pause the economy while we ride out the worst of COVID-19 and quickly reopen. But the reality became a long protracted fight with social distancing at its core.
Additionally, businesses must use their PPP loans within eight weeks of receiving it. That deadline is soon approaching for many businesses and they may have to forego the loan forgiveness or forego the loan altogether.
If businesses decide to forego loan forgiveness, they must repay the loan with 1% interest within two years. For businesses like restaurants, experts estimate recovery may take years especially with heightened health risks associated with dining-in. In the case where a business cannot recover quickly, the PPP loan will add to the already mounting debt.
For businesses that determine PPP loans aren’t right for them, here are some alternatives.
One of the alternatives actually involves doing nothing. There is an employer tax credit equal to 50% of every employee’s wage up to $100,000. Any business that did not apply or have their PPP loan forgiven can claim this tax credit.
Other alternatives include:
- Economic Injury Disaster Loans (EIDL) is a loan designed to help businesses during disasters like the COVID-19 pandemic. The CARES Act has also supplemented the EIDL program with forgivable cash advances up to $10,000.
- SBA Express and Express Bridge Loans are smaller loans also under the SBA preview.
- Relief Funds are cash grants that can be offered to qualifying businesses. Many local governments, communities, and private sector companies are offering relief funds to small businesses to help during the COVID-19 pandemic. You can check whether your state government has available grants here and private company grants here.
It may seem counter-intuitive to recommend a different kind of loan that likely has a higher interest rate when businesses may face difficulty paying back a PPP loan but dealing with banks or other forms of government loans will likely give small businesses more flexibility in repayment. Instead of repaying a loan in two years, small businesses may negotiate for 10 or 20 years to repay the loan.
Ultimately, many alternatives to the PPP loan are not necessarily better but perhaps just more flexible in how the money can be spent and the repayment timetable.
Every small business is different, there is no one size fits all solution to avoid economic ruin. Owners must analyze their unique circumstances to figure out what is the best solution for their business.
