Practice liquidity during a pandemic: A guide to the small business loans offered through the CARES Act

2020-4-8 iStock-968422468 Practice liquidity - blog.jpg

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed Friday, March 27, provides $349 billion for small business relief, which applies to all veterinary practices with fewer than 500 employees. The purpose of the law’s loan options is to float working capital to businesses as quickly as possible so that they can bring their workforces back to full employment as communities recover from shelter-in-place orders.

At Veterinary Practice Made Perfect, we believe every veterinary practice owner and manager should strongly consider applying for one or both of the new Small Business Administration (SBA) loans available through the CARES Act: the Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program Loan (PPPL).

While both applications have proven to be a confusing and frustrating process in this first week of April, the fact remains that the programs provide cashflow that can be essential during recovery from the pandemic. Because a large portion of the PPPL proceeds may be forgiven and nontaxable to your veterinary practice, the benefits can significantly reduce the trauma of the current economic standstill.

Let’s discuss the options and how to determine the best programs for your practice and their support of your valued employees.

Ideally, your practice management team will collaborate with your certified public accountant (CPA) and other advisors to strategically determine the best plan of action based on staffing, capital structure, local COVID-19 impact, and much more. The loans offered by the CARES Act are potentially large monetary commitments, although much or even all of the funds may be forgiven when the borrower satisfies certain requirements after the loan originates. However, with the pandemic’s impacts being so unpredictable, we advise cautiously planning as if the practice may be on the hook for the entire loan.

This unprecedented time especially warrants seeking and paying for expert assistance. Because of the rapid rollout of the recent rescue laws, the SBA, Internal Revenue Service (IRS), and Department of Labor are scrambling to write regulations and provide coherent guidance that reflects the legislative intent. There continues to be an incredible amount of confusion, misinformation, and conflicting directives. The time involved in planning, understanding, organizing requisite documentation, and successfully completing applications has been substantial. To keep your practice on track for application success, seek help from your practice’s expert advisors.

Our suggestions follow as a path for projecting practice needs and determining how best to use the current SBA loan options available under the CARES Act.

First, evaluate your practice’s current cash position, and tighten the belt

Enumerate all the potential cash reserves and sources your hospital has available to maintain liquidity without taking on more debt. These include:

  • Cash accounts
  • Accounts receivable for which collection can be accelerated or factored to a bank
  • Inventory that can quickly be turned to sales
  • Existing lines of credit that haven’t been tapped
  • Mortgage and other loan payments that can be deferred without penalty
  • Evaluating all discretionary spending and eliminate the unwanted and unnecessary
  • Investigating options for loans from existing whole life insurance policies
  • Considering temporary stops on employer contributions to retirement funding
  • Looking for refund opportunities on tax returns, by evaluating new law modifications through the CARES act with the practice’s engaged CPA
  • Ascertaining the amount of capital infusion practice owners can make
  • Determining if owners can temporarily halt their own paychecks, or reduce them. This will save on employer payroll taxes, too.
  • If the practice facility is rented from the practice owners, find out if rent be forestalled for a few months

Next, determine the minimum amount of daily cash needed to keep the doors open at substantially reduced client activity levels

Evaluate the worst-possible scenario of revenue stoppage, and review fixed and variable costs that must be covered. A great place to start is with this break-even calculator.

As best as you can, predict the number of weeks the practice will be operating on one or two cylinders.

Once you know what you need to break even on a daily workday basis, compare it to the daily revenue (if any) the practice will continue to earn

The difference will be the practice’s projected deficit is during its worst weeks of the COVID-19 pandemic. Compare the deficit to the cash reserves and sources you listed in step one. This difference will be the minimum amount of loan money you will need to maintain your practice operations.

While building your budget for a prolonged shelter-in-place operation, this information also becomes a foundation stone to loan applications. Both the EIDL and PPPL require the borrower to attest to true financial need (under penalty of perjury and threat of fraud punishment), so use your planning time to document conclusions of reasonably projected financial damage. The information backs up your pursuit of any of the SBA loan options to prove the practice has economic need, as do its furloughed and laid off employees.

Apply for an Economic Injury Disaster Loan (EIDL): CARES Act, Section 1110 for EIDL grants

 The Economic Injury Disaster Loan (EIDL) is a low-interest loan designed to cover payroll and operating expenses during the COVID-19 pandemic. EIDLs include the option of requesting an emergency advance grant of up to $10,000 to help cover immediate operating costs. This advance theoretically should be available within three days after applying; however, to date, we do not know of any reports anywhere that funds have been released to applying businesses.

The EIDL grant does not need to be repaid, even if the SBA later denies the actual loan. You can apply for the EIDL loans directly through the SBA website. The application process requires nominal information and takes about 20 minutes to complete. No collateral or personal guarantee is required. There are no prepayment penalties.

After the grant is dispersed, the SBA states that the business does not need to take the offered loan proceeds once approved, even if the business was awarded the grant monies. And if your practice does decide to take on the loan in addition to the grant, the loan comes with a generous payback period of 30 years and a low 3.75% interest rate.

Before you sign the loan papers, ensure that the rules haven’t changed. The CARES Act implies a business can apply for both the EIDL and the PPPL; however, recent conflicting information suggests that might not be the case. Of course, you should read the fine print of the loan documents to understand all covenants. Ensure that there is no conflict with any other bank facilities your practice carries as debt. Don’t risk the mistake of breaching any existing covenants and financial ratio requirements of the practice’s existing lenders. When in doubt, talk with your banker.

If your practice already locked into an EIDL between February 15, 2020, and April 3, 2020, the principal balance can be rolled into a Paycheck Protection Program. At one point, guidance suggested this might be reasonable. Consider, though, that you’ll be converting a 30-year payback period into a 24-month maturity. Calculate the payments and measure against projected cash flow for the 2-year recovery period in question. This may be more than you wish to take on.

If you are lucky enough to receive the $10,000 grant, it is not taxable. If you subsequently gain the PPPL (next), the $10,000 grant will reduce the amount of PPPL forgiveness.

Compare the EIDL option with the Paycheck Protection Program (PPPL) (CARES Act, Section 1102)

While we believe that both loans can be made at the same time, there is current confusion as to whether this is still the case. If any doubt, practice owners will likely choose the PPPL over the EIDL.

The Paycheck Protection Program loans of up to $10 million are made through an SBA-accredited bank. By now, you have almost certainly renewed acquaintances with your business banking source. Banks are choosing to work only with those customers with strong histories of banking relations, and in some cases mandating the borrower have more than just a checking account. Preferred customers are those with bank credit cards, existing lines of credits and loans, and merchant card-processing services.

At this point, you should have a good understanding of the specific documents the bank requires in your application. Additionally, you’ll need to ensure you correctly compute payroll cost in the 12-month period your bank specifies. For some banks, this is the 2019 year. For others, the most recent 12 months. The loan will be based on the average monthly payroll cost you compute multiplied by 2.5.

For either 12-month period, you will submit supporting documents to prove the computation: 2019 practice income tax return (or drafts, if not complete, plus 2018 return copy), 2019 W-2 and W-3 forms, quarterly payroll tax returns (Form 941), annual Form 940, practice financial statements, owner tax returns, and so forth. Different banks require different documents. Obtain a list from your banker as soon as you can, since it takes some time to collect, organize, and collate all the files into a single PDF document for uploading during the application process. It does take some time. Be ready.

From a logic standpoint, since the PPPLs are intended to support full employment of your practice team for what would be foreseen as the worst eight weeks of the pandemic’s impact on practice revenue, you’d likely prefer to time receiving PPPL proceeds to when you see the practice on the brink of recovery and you are bringing employees back on board from furlough or layoffs. But most everyone anticipates earmarked funds will be exhausted quickly. So, urgency trumps strategy, and everyone will apply as soon as possible.

Already, an immense number of loans have been reported made, and many anticipate Congress will need to authorize more money to fund the program.

Assuming success and loan origination, try to re-establish the workforce numbers and hours as soon as possible. From that origination date, eight-week measurement of employee numbers and wage payment determines how much of the loan will be forgiven. The formulaic approach dictates that when the practice falls below benchmarks for employee headcount (full-time equivalencies) and wage amounts (less than 75% of pre-COVID amounts), loan forgiveness will be reduced. 

Even if the practice is unable to achieve full staffing, it will likely be eligible for some portion of loan forgiveness. At the opposite extreme, the maximum amount forgiven cannot exceed the full value of the loan when it is made, less any amount of grant made through the EIDL.

As for the application process, the practice will need to produce all documentation necessary to prove headcounts and payroll dollars during the eight-week measurement period.

Although the CARES Act states a loan maturity date of up to 10 years, the SBA settled on 2 years, with a 1% interest rate. Monthly payments are deferred for 6 months, during which interest accrues. Guidance on the loans is changing daily, from both the lending banks and the SBA, as lenders struggle to understand SBA requirements and the SBA struggles to issue coherent guidance.

Keep in contact with your practice’s banker/lender, who will likely provide any SBA updates they receive. Some banks appear to be handling this better than others by providing timely, candid, and mostly accurate communiques. Others seems to be lacking these, thus increasing everyone’s confusion. Regularly check the SBA site on your own for updates.

The IRS website provides information on many other coronavirus tax-relief issues.

As a final and important warning, fraud and scams are rampant. Do not fall victim to shady offers and schemes. Be extraordinarily careful about how you electronically transmit documents. Warn your employees of the risks they have for being targets, as well.

Each practice and hospital team have their own unique circumstances. You can refer to the exact text of the law here, and please do consult with your accounting team and bank before making any decisions.

Both the EIDL and the PPP loans (potentially partially or fully forgiven) are gleaning intense interest and demand, so we recommend that all practices act fast to ensure they can take advantage of these programs.


Marsha L. Heinke, DVM, EA, CPA, CVPM, has dedicated herself to the veterinary profession through her accounting and consulting practice, Veterinary Practice Made Perfect, and is the author the practice management guide, Practice Made Perfect. Her firm serves veterinarians, veterinary practice managers, practices, and industries supporting the veterinary profession with business consulting, valuation, planning, taxation, accounting, bookkeeping systems, internal control reviews and onsite reviews, strategic planning, and more.

Jennifer M. Braid, CPA, EA, is the lead tax accountant and senior data analyst at Veterinary Practice Made Perfect. She has more than a decade of experience consulting on accounting and tax services for veterinary practices. Braid earned her Associate’s Degree in Applied Business in Accounting from Cuyahoga County Community College, and her Bachelor’s of Business Administration in Accounting from Cleveland State University. 

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