Get a 7(a) Loan, Lay off, or Furlough?
Is it Preferable to Lay Off or Furlough Staff and Send Them to Unemployment or Keep Them on the Payroll and Get a 7(a) Loan?
There are two viable approaches that you can take. The first is more conservative and less disruptive and the second more aggressive but probably better for most.
If you have not already let your staff go and think that doing so will be difficult in terms of employee morale, then consider taking the 7(a) loan at the beginning of the loan application process, as early as the end of next week (April 3). The benefit of this loan is a tax-free gift, via loan forgiveness, to pay 8 weeks worth of your payroll costs, rent, interest on your debt service and utility bills.
$349 billion has been allocated to this program, and it’s conceivable that this money will be depleted before the last day these loans are authorized to be made. If that happens, Congress will likely authorize another round of funding, but that is never guaranteed.
The best way to handle this for most practices will be a two-part approach that takes advantage of unemployment benefits and the 7(a) loans. This is more disruptive to the practice as it requires furloughing or laying off the employees. However, if you’ve already done this, then that is a non-issue:
1. If your practice is shut down or largely shut down, then furlough staff and have them apply for unemployment. Thanks to the CARES ACT, they will get traditional unemployment benefits plus a $600 kicker. This will replace all or most of their normal pay, and in some cases give them a raise.
2. When you are ready to reopen your practice, rehire your staff then, and obtain the 7(a) loan then. Just do this by the June 30 deadline — better yet, a couple of weeks before then in order to give yourself a cushion. You will use the loan proceeds to pay your overhead when the practice reopens. You should get the benefit of loan forgiveness for the 8 weeks following the date you take your loan (so into July and August). And, so long as the employees are rehired by June 30, the loan forgiveness will not be reduced. In this way, you are taking advantage of unemployment insurance to cover your employees’ wages during the shutdown period and also getting the tax benefits of the 7(a) loan once your practice reopens.
Contact us if you have any questions or need further advice or information!