If you want to get rich, you might as well learn from the rich. Here are lessons from the rich who took advantage of free government money. In 2020, there was over $3 trillion in government stimulus money. In 2021, there will be at least another $1.9 trillion in stimulus “rescue money.”
Thanks to the additional $600/week in enhanced unemployment benefits, there are now some people who are making more in unemployment benefits than they did while they were working. Although the enhanced benefits are only temporary, this is still great news! Free government money is hard to turn down.
The never-ending pressure in America to hustle has taken its toll. Our bodies are breaking down, mental illnesses are ubiquitous, and our children are being neglected all by the desire to make money.
As someone who stepped off the treadmill in 2012, although I'm sad millions have lost their jobs, I'm also excited that millions will get to experience what it's like to finally be able to stand still in adulthood. May we all experience a period of meditative calmness until the worst of the coronavirus is behind us.
With trillions of dollars of government assistance going to individuals and companies, there will inevitably be some who will take advantage of the system. So long as they are doing so legally, like millionaires receiving health care subsidies or millionaires receiving stimulus checks, people don't seem to mind. There's so much money to go around.
But when mega-millionaires and fake small businesses owned by very wealthy individuals take advantage of government assistance despite knowing the money was not really meant for them, that's where I see many seem to draw the line. Let's have a look at what's going on.
Big Businesses Taking Advantage Of Free Government Money
We are seeing maddening headlines such as Ruth's Chris Steak House getting $20 million (even though the limit is $10 million), Shake Shack getting $10 million (even though the employee limit is 500), and Harvard University, getting $8.9 million in CARES Act grants (even though Harvard has a $40 billion endowment).
These businesses are violating the spirit of the Paychecks Protection Program and the CARES Act. I also highly doubt that helping out publicly-traded companies were at the top of Congress's list for the PPP. It has other stimulus money for them.
But the reality is, these larger and wealthier institutions are likely suffering more than most small businesses in terms of absolute amount of wealth lost. Meanwhile, these large small businesses employ a much larger number of employees who may have lost their jobs.
For example, publicly-traded Shake Shack (SHAK) has lost over $1 billion in market capitalization since the coronavirus pandemic. $10 million is around 1% of its lost wealth. Ruth's Chris (RUTH) lost 60% of its market capitalization, or roughly $300 million. Meanwhile, Harvard University's endowment fund has probably lost at least $5 billion in value. Few businesses are safe during this crisis.
Negative Optics Is The Biggest Issue
It's really the negative optics of applying for PPP funding when so many small businesses are suffering that is likely to haunt Ruth's Chris, Shake Shack, Harvard University, and other large institutions receiving PPP money for the rest of their business days.
With so many poorer businesses still not receiving funding, the millions of small business owners and their employees will never forget. Too bad the government bucketed all these businesses together and couldn’t satiate 100% of the demand.
Harvard's reputation was already getting hit because of how it evaluates different racial groups for admission. Taking $8.9 million from the CARES Act program, when it already has tens of billions is very surprising. Then again, legacy admissions and huge donations to help lower the entrance hurdle have been around for decades. Harvard’s actions are unfair to many good alumni who would never do such a thing.
Let's learn some key lessons from the extremely wealthy.
Key Lessons From The Rich
If you want to get rich, then let's learn how the rich operate. The pandemic is now over, so it's good to review some key events.
First Key Lesson Of Free Government Money
If the money is legally available, take it. The rich think about the negative optics later.
During difficult times, access to capital and free money is highly limited. You must rush to get in line first and get yours before the money runs out. If you don't take the money, chances increase that you will end up losing your business and a lot of your wealth.
Do you think Danny Meyer, the founder of Shake Shack, who is also worth several hundred million dollars, was worried about crowding out PPP funds for small businesses? Of course not. He was focused on getting as much money from the PPP as possible to keep his businesses afloat in order to protect his fortune and pay as many of his employees as possible. During a downturn, it is every man for himself.
Think about all the executives at SVB, Signature, and other failed banks who made millions. Even though they made the decision to invest in long-dated treasury bonds before the Fed hiked rates, they don't have to return their compensation!
Second Key Lesson Of Free Government Money
Change the narrative in your favor.
Shake Shack made sure it got the maximum amount of PPP loan available. Once it got its relief funds, Shake Shack was then able to assess the repercussions of its actions.
Once the public found out, the public went berserk that a publicly-listed, billion dollar company got funding. As a result, Shake Shack strategically changed the narrative by painting itself as a noble knight by returning the $10 million to help other small businesses.
As a result, Shake Shack was able to engender a lot of goodwill amongst the public and receive millions of dollars worth of free publicity. This was a strategically brilliant move by the executives that will likely net them far greater than $10 million in the future.
They created a “heads I win, tails you lose” type of scenario. So sneaky and many unsuspecting patrons will have no idea what happened.
Third Key Lesson Of Free Government Money
Keep your company private and yourself private for as long as possible.
There's no point being rich if you are a constant slave to others.
One of the main reasons why Shake Shack and Ruth’s Chris got outed for taking millions in PPP money is because both are publicly-listed company. Once you become public, every move you make is scrutinized by thousands of shareholders and the SEC.
If you want to throw big boondoggles, use company funds to buy a private jet, or hire all your friends and relatives, it's much easier to do so as a private company. Uber and WeWork had a ton of fun as private companies.
No matter how unfair you believe Harvard's admissions process is, there's nothing anybody can do about it because Harvard is a private institution. It can admit whomever it wants based on whatever criteria it wants. Harvard can continue to favor legacy applicants and accept massive donations in exchange for admittance. Harvard doesn't owe the public anything.
Finally, by being stealth, fewer people will judge you and snoop around your business. Although the threshold for accepting rich people has increased over the years, there is a point where after a certain amount, you are simply too rich. I'm guessing that threshold amount in 2020 is anything more than $10 million per person.
Fourth Key Lesson Of Free Money
Always develop good relationships with financial institutions and people with money.
So long as you have access to capital, you can live to fight another day. Without access to capital, if you find yourself in a temporary bind, you may be forced to shut down at the worst possible time.
Besides having at least six months of liquid cash to pay for all expenses, consider having at least two banking relationships and multiple lines of credit. Worst case, you can always depend on The Bank Of Mom & Dad if you're completely down on your luck. That said, at least try and develop a good relationship with them long before you need the money.
Fifth Key Lesson
Take out just enough debt to help you get richer in good times, but not enough debt to blow yourself up. Even if you have good relationships with the institutions or people who have money, relationships are fickle.
You would think that after going through a 10+-year bull market, most businesses would be able to last for longer than two months. But the reality is, margins may be thin or operators are often pumping money back into their businesses for hopefully more growth. And then the big negative surprise hit.
Sixth Key Lesson
Know the money rules. Although there are plenty of moral grey areas with the rich taking advantage of government benefits unlikely meant for them, the rich are diligent in knowing all the rules necessary to save and make as much money as possible.
I know one hedge fund guy in San Francisco who sold his stake in his business and moved his family to the Cayman Islands just so he could avoid U.S. taxes. His hobby was reading about tax law every day, which most of us won't care to do. Most people won't bother reading a personal finance site like this one until a financial problem arises. That's just human nature.
Lawmakers wrote the PPP text in a very specific way to allow this exact scenario to happen. The bill was debated in Congress for days. If there is a problem, the problem is with the rule-writers, not the people who played within the rules.
The Business That Benefits The Most From PPP
Now that we've learned some key lessons on getting rich by the rich, let's do a quick analysis of which type of business benefits the most from the PPP. This type of business will also be “most acceptable” by the public. However, you'll see from the exercise that even this type of business need to be cautious regarding how to act once the economy recovers.
The best businesses eligible for use of PPP funds are the ones with low operating profit margins, are people-intensive, and regularly pay salaries close to or greater than $100,000. I'm talking nonprofits. Let's use a nonprofit school as an example.
As the founder of a nonprofit school, your mission is to educate the children of America to one day become outstanding citizens. You strongly believe education is the key to a brighter future. You aren't running a nonprofit school to get rich like Shake Shack. Your rewards come from community admiration, your salary, and your retirement benefits.
Let's look at how a nonprofit school benefits from the PPP. A key assumption is that all revenue is paid out each month towards salary, rent, and benefits.
How A Nonprofit School Benefits
1) In March, the school asks all parents to pay April tuition, despite school being closed. Proceeds: $80,000. But all rent and payroll is paid as well. Net proceeds: $0.
2) In April, the school also asks parents to donate to the school to help pay for rent and other operating expenses given the uncertainty. Proceeds: $40,000
3) In April, the school furloughs all teachers and staff effective May 1, so they can benefit from the extra $600/week in unemployment benefits at least through July 31, 2020. Given there is no tuition for May and no payroll expense either, the net school benefit is $40,000 from donations minus rent. Net proceeds: $30,000.
4) On April 3, the school applies for the PPP loan and receives 2.5X monthly payroll expenses on April 30 due to all the backlog. The PPP money enables the school to fully pay for May, June, and half of July payroll. Starting May 1, the school must pay for at least eight weeks of payroll for the loan to be forgiven. The school has until June 30 to hire everyone back and start the 8-week clock. PPP proceeds: $200,000. The total benefit is now $230,000 (PPP + donations).
5) School is back in session on June 1. All teachers and staff are hired back. All previously enrolled students return. Full tuition is paid. June expenses are 100% covered by June tuition. The teachers were able to earn $4,200 in unemployment benefits for May, which is good, but $2,450 less than they would have earned if they had worked ($80,000 average salary). Everything goes back to normal.
6) On July 1, 2020, the $200,000 PPP loan is 100% forgiven because all employees were hired back before June 30 and eight weeks have gone by. The school also gets to keep $40,000 in donations. Thanks to the PPP loan, the nonprofit school gets to boost its balance sheet by $230,000. $24,500 of the funds will be used to pay their 10 furloughed staff for the income they lost in May (regular salary – unemployment benefits). The remaining $205,500 can be used to pay the owners a higher salary, the teachers a higher salary, or keep the money in reserves just in case there is another lockdown in the future.
7) Given the school is still up $205,500 after making all its staff whole, it could also decide whether to refund the $40,000 in donations from the parents. It could also decide to refund the $80,000 in tuition parents paid in April for no school service. Even after refunding $120,000 in donations and tuitions, the school would still be up $85,500 thanks to PPP.
Most people will not understand the math and logic in this example. It is confusing. However, the school will still need to tread carefully on what it does after the worst is over. Many people will still be hurting financially.
All Eyes Will Be Watching Small Business Owners
Once the worst of the downturn is over, attention will be focused on how small business owners will act towards the people who supported and sacrificed for their business. Free government money is nice, but it's best to be put to use.
There are situations where businesses will get donations from parents, clients, and good samaritans during the lockdown. There are also plenty of situations where many staff will take significant pay cuts during the lockdown as well.
Honorable small business owners will use any surplus they receive to at least make their staff whole if they were furloughed or laid off. A thoughtful small business owner will then reach out to all its donors and ask whether they would like to have their donations refunded. I'm sure most donors will say no. But it is the right thing to do to ask just like offering to pay for the meal when asked out is a common courtesy.
These two actions will engender tremendous loyalty and respect from the community, thereby likely improving the business's chances for future survival.
Reputation is important and incredibly difficult to restore once tarnished. Big businesses that took advantage of the PPP designated for small businesses must act publicly and decisively to use their PPP money for good. Otherwise, they will forever be remembered as the vultures who took advantage of poorer people during a global pandemic.
Related: 10 Reasons Why You Should Start An Online Business Today
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Readers, what other lessons can we learn from rich people and large business owners who took advantage of free government money? Do you see other situations where a small business end up more profitable with a PPP loan than without one?
If my sole proprietor, therapy business was not financially impacted other than paying rent through July on an office I could no longer use, am I still eligible and able to receive some amount of loan forgiveness? Otherwise, most clients switched to telegraph with me and I have not suffered financially. Should I still apply?
I filed my taxes early this year and in my rush I missed a dependent care deduction that would have lowered our AGI by $5000. (I partially blame turbo tax for burying the deduction in menus). We were already right on the border with our AGI of Close to $200k… so we hardly got any stimulus outside the $500 for our child. I Amended our returns… and was curious if the government will go back and adjust our stimulus payment for the new 2019 AGI. Or if there was anyway to request they do so easily. It’s probably not worth my trouble for the extra $200-$250 in total. But free money is free money… government has no problem taxing me more if they can! Ironically I’m currently taking a 20% salary cut while I work from home… something the stimulus bill doesn’t take into account at all.
Ha, maxing my 401k allowed me to receive a stimulus check! I made $109K in 2019. Too much to qualify for stimulus money. Fortunately, I maxed out my normal and catch up contributions which reduced my adjustable gross income to $84k. Yay, another reason to save. $750 in stimulus.
I don’t care if my family can earn 500k a year, I would still stand in line for an hour or so if it would mean I get 1k. Leaving money on the table is just dumb, especially during a crisis situation. Were people thinking about anyone else when they decided to hoard toilet paper and sanitizer? No, they were thinking inward. That is humanity. We cannot expect people to leave money on the table if it is there legally. It is the politicians job to decide who is allowed to get the money. If you are angry at anyone, look at them, not the businesses that are trying to do what they can to survive.
That is humanity indeed. It’s one of the reasons why the rich who fight for publication education still won’t send their kids to public school.
It’s only rational that everyone looks after themselves, especially during a pandemic.
But I’m going to do my best to continue writing and sharing through this difficult time. I think we can learn the most during times like these, even if our mental health and our wealth are hurting.
I agree with you. Initially we decided not to apply in Canada (For our version of emergency benefit)- but have since changed our minds. My husband was eligible so he applied. We can always ask questions later at tax time.
Great post as usual, Sam! I have never received much financial assistance from anyone or otherwise. But your point about taking money legally if it is available makes a lot of sense. I also agree with Simple Money Man’s point about the rich having access to lawyers to make the best decisions. I think that helps a lot with being able to take advantage. Thanks for the read.
This is only lesson from the rich over the years!
Once money becomes the conditioned stimulus (CS) for personal happiness, you are stuck in the vicious money hamster wheel!
I was surprised by the Shake Shack example esp because CNBC did their best to portray this as a mix-up that SS discovered and wanted to give back. We really only heard the positive side of that story. Honestly, it says more about CNBC and the MSM than it does about SS.
I will say that the counterpoint of these lessons is that lower and middle class values + a little bit of hypnosis about how the world really works contribute to these situations and the great divide. I would contend that most people are generally well-intentioned but would want to remain ignorant of these abuses unless they were served through normal channels like the MSM that doesn’t rock their world view.
I keep hearing dont be “too leveraged” or “dont blow yourself up with debt” But havent seen some numbers or ratios associated with it.
Is it in relation to equity like Debt to equity? Is it in relation to net operating income? The personal side is it Debt to income?
Real Estate Example: What if I offered you 100% seller finanicing on a rental property in your area. Net Cashflow after all expenses to me (PITI +vacancy and repairs) is 4k. Would you be willing to be responsible for 1.1M in debt?
Some guidelines on debt might make for a good blog post in times like this.
This question seems more subjective because it depends not only on the risk/return profile, requirements from the lender but also what makes each person sleep well at night. Some folks hate debt even though it might be good debt at a really good interest rate because it makes one sleep well at night, some approach it a different way.
“Readers, what other lessons can we learn from rich people and large business owners who took advantage of the government?”
I’m curious if poor people and small business who are getting stimulus checks or PPP grants are also taking advantage of the government?
Congress created the rules. The rules are the same for everyone.
The application of the rules is not the same for everyone.
I’m curious if companies knowingly pushing the envelope to take should be punished?
It will not happen, but as the article points out, there was already money set aside for “big business”.
I’m always curious how people define a line within “following the rules” where it becomes “pushing the envelope.”
But on another note, all this uproar shows is how behind the general public is in understanding the system and dependence on the media to feed them the information. I watched the bill as it was debated live on the floor, and I had discussions with people about this exact scenario happening before the bill was even voted on, let alone signed, just like they did on the floor, live, publicly available on the internet.
All you had to do was read/watch the source, spirit, context of the stimulus be debated live and you would have seen all this coming. Senate, Congress and the President didn’t miss that this could happen, numerous Senators & Congressman specifically stated that this would happen and maybe worse yet, argued for specific language that allowed it to happen. This wasn’t an accident or oversight.
As I mentioned in my other post, people need someone to blame for their hurting, and Harvard and Shake Shack are the easy targets on the news. What people need to remember is that there are specific individuals that wrote the text in a very specific way to allow it to happen. The problem is with the rule-writers and rule-enforcers, not the people who played within the rules.
Actually, the rules are the same for everyone. What’s different is companies relationships and worths to the banks. I get it though. In my business our largest customers always are first in line. I’m still waiting for my PPP grant while larger customers of the bank have already got their money. Is this fair? Depends who you ask. I realize I’m a small fish. At our local bar I’m a big fish. I tip big and get my beer first. Is that fair to other patrons? Depends who you ask.
We shouldn’t be surprised that the Harvard”s of the world get the money first and the little guys have to wait. That’s how the world works. I can either complain or I can work harder to build a better relationship with my bank. I’ll do the latter.
Wow! I haven’t been able to keep up with the news, so thanks for raising awareness on this. I had no idea that so many large companies were getting enormous PPP loans. Harvard is the most shocking to me especially with the size of their endowment. I didn’t even think about businesses like Shake Shack or Ruth’s Chris being considered eligible and getting PPP loans of that size. I’ve just been thinking about the mom and pop barber shops, consignment stores, local eateries, etc who feel each and every less customer.
Ok, I’m 99% sure that Harvard didn’t actively apply to get relief. It was formula based and they were provided that amount to help the students.
So it’s a bit disingenuous to say that they took advantage of the system. I mean, indirectly, I guess they did given that they could’ve just sent the money back.
Your response goes back to Key Lesson #1 and how the rich can get richer.
If a greedy billionaire worth $40 billion receives $8.9 million in government assistance, he crowds out many others will not get assistance because funding is limited.
But let us be frank. Harvard and its $40 billion doesn’t need the money. I’m glad they are returning it.
Your School Non-Profit PPP payroll forgiveness calculation does not make sense to me. The total payments for payroll over the eight weeks after the loan is disbursed may be forgivable.
If the School received PPP funds on April 30th, only those Payroll expenses paid through June 25th will be forgivable. If the school is closed and employees are on unemployment through May, only the first Payroll of June will be forgiven since the 8-week period will have lapsed by the time a 2nd June payroll is posted.
So if they received $200,000 in PPP funds, the average payroll is approximately $40,000; and that is all that will be forgiven (not including rent & utilities). The maximum forgiven for non-payroll expenses is capped at 25% of the loan amount, or $50,000 in this example. So the Non-Profit school in your example should expect a $90,000 grant & $110,000 loan at 1%.
I know, it’s confusing due to the 8 weeks and the 2.5X multiplier.
A small business gets 2.5X their monthly payroll in PPP loans. 100% of that amount is forgiven if payroll stays the same after 8 weeks, not the number of weeks that 2.5X monthly payroll covers.
The confusion is why I think so many business will 1) either apply for LESS PPP funding than they were eligible for, 2) hire accountants to apply for them.
In the original PPP post, there was a debate on the max PPP loan amount. Look in the comments. An experienced lawyer thought it was $8,333 X 2.5X, where $8,333 comes from the monthly salary of a $100,000 annual salary.
So that’s what he applied for. The real limit per employee looks to be closer to $8,333 / 75% = $11,110. Then X 2.5 = $27,775.
Obviously, I could be wrong as the loan forgivness process has not yet been forgiven. But if I am wrong, the interest rate is only 1%. Let’s see what happens.
I think from your previous comments, you are a small business owner. If so, how did you run your PPP loan calculation and did you get it yet? thx
My bank provided an excel document to assist me in determining my max PPP loan.
It included an additional sheet for me to enter ongoing Payroll, State & Muni taxes, Pensions, Healthcare, Mortage Interest, Rent, and Utility payments; as well as an FTE headcount adjustment.
I had been working with my banker the week leading up to the launch of this program, and they had my completed application before the bank opened on the day it was available. However, I was not the only one and the bank submitted loans to the SBA for approximately an hour before running out of liquidity; my loan did not get entered that morning. The following Thursday, 4/9 my loan was submitted to the SBA and funds deposited into my account on Tuesday, 4/14.
Both my accountant and my banker have said that only compensation that is actually paid within the 8-week period can be forgiven. This post is the first I’ve seen suggesting the payroll portion is 100% forgiven if payroll is restored at the exact point of the 8-week mark. The calculator to estimate loan forgiveness I received from my bank does not mention that final payroll, but “Total Compensation”.
The interesting calculation is going to be the Forgiveness Reduction based on a reduction in FTE headcount. If I’m understanding it correctly, payroll forgiveness for my business will be for expenses through June 9th, but I will need to keep all employees on Full-Time for an additional three weeks in order for the amount to be forgiven.
If the business has not bounced back by June 9th, I will either have to bite the bullet and employ everyone on a full-time basis unnecessarily in order to maximize the forgiven portion of the loan, or lay off a portion of my staff and pay some portion of it back.
Got it! And yours is the first example I’m hearing where the entire PPP money given to a small business will not be forgiven after 8 weeks post funding, if all payroll stays the same.
I believe the 75% = payroll only is to allow for small business to pay for other important expenses like rent from the PPP funds, given the government realizes businesses have other costs to consider as well, while mainly trying to protect the employee from getting laid off.
If what you say is true, then only $8,333 X 2.5 will be forgiven. But I have many examples of small business owners who got approved for more. If what you say is true, it wouldn’t make the best sense for their loans to be approved b/c the government might inadvertently hurt more businesses by submerging them into more debt.
Think about a restaurant situation where a large part of its cost is rent in addition to people.
Time will tell who is right. And if I’m wrong, paying back 25% of the PPP loan at a 1% interest rate is not that big of a deal.
After a little research, Published by the SBA on Wednesday, April 15th, 2020 includes the following.
“The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the
eight-week period following the date of the loan. However, not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs. While the Act provides that borrowers are eligible for forgiveness in an amount equal to the sum of payroll costs and any payments of mortgage interest, rent, and utilities, the Administrator has determined that the non-payroll portion of the forgivable loan amount should be limited to effectuate the core purpose of the statute and ensure finite program resources are devoted primarily to payroll. The Administrator has determined in consultation with the Secretary that 75 percent is an appropriate percentage in light of the
Act’s overarching focus on keeping workers paid and employed.”
To examine the Rules more closely use the search function on the SBA’s website for “PPP Interim Final Rule”
Bingo. So I interpret that as 100% loan forgiveness if all my payroll costs are the same for 8 weeks after funding.
You interpret that as only 75% of the loan will be forgiven if everything stays the same after 8 weeks. I’m sure plenty of other business owners and accountants believe what you believe as well.
Let’s see what happens. Either way, 25% not forgiven at a low interest rate isn’t terrible since 75% was forgiven.
That reads to me like 100% of the PPP funds will be forgiven if you keep payroll the same for 8 weeks.
RE DLO:
It reads to me like only the actual expenses paid during the 8-week period following loan funding are forgivable; up to 100% of the loan. Any money left unspent at the end of the 8-week period becomes a loan.
“the Act provides that borrowers are eligible for forgiveness in an amount equal to the sum of payroll costs and any payments of mortgage interest, rent, and utilities”
I’m not sure the example illustrated for the private school is entirely correct. The verbiage I have reviewed stated that the clock starts immediately upon receiving the PPP funds and that the clock for paying 8 weeks of payroll cannot be delayed until the economy reopens. This makes it very difficult for businesses that are closed to have the loan money forgiven. Can you verify the source for which you determined the start of using the funds and having them forgiven?
The source is the SBA.
As an employer, you have time to rehire by June 30. You can’t just force your employees to come back to work the very next day. What if they went away? Or what if they don’t want to come back? Or what if they are receiving unemployment benefits that are enough for them for now?
The 8-week clock starts once you receive the money. Employers need time to get their workers back.
Are you an employer or an employee? If you are an employer, I’d like to know your plan to get workers back ASAP without a grace period.
I agree with you Matthew that it’s highly unlikely that the entire loan will be forgiven. The 8 week clock has to start within 10 days of the loan approval per the SBA FAQ so only part of the April Payroll, April rent and May rent will be forgiven as there was no May payroll paid, presuming the rent is less than 25% of the total amount forgiven. Payrolls in July clearly can’t count as all expenses must be incurred by June 30 (for loans that get approved in late April starting their 8 week clock later).
Your school example does not sound accurate. Yes, employers have until June 30th to rehire staff. However, the 8 week period does not necessarily start on June 30th. It starts on the date of the loan disbursement. Banks were required to disburse funds within 10 calendar days from loan approval.
So in your example, assuming the school applied for the loan on April 3rd and the bank processed the application in 48 hours, they had to disburse the funds no later than April 15th and the 8 week period would start then. Of course, many banks were overwhelmed by applications so 48 hours may be generous, but surely not April 30th. Banks had to process applications as fast as possible because everyone expected the funds to run out quickly.
The question then becomes… is a single month of payroll costs (in this case June) enough to guarantee full loan forgiveness? That may or may not be the case. The $100,000 annualized salary cap per employee still applies. The school would likely have to consider rehiring staff before June 30th, take a smaller loan amount to ensure the whole loan is forgiven, or take the full loan amount knowing that a portion may not be forgiven.
There was a lot of confusion about this program from the start. I hope this helps clear up a few points for you and your readers!
Ryan,
By definition, the 8-week clock starts on April 30, because I decided in my example that that is when the funds were disbursed. This is my illustrative example.
It’s important to realize that only a small percentage of companies have received their PPP loans (less than 15% who applied so far). And then the initial phase of the funds ran out. So to assume two weeks is aggressive.
What type of small business do you run? And How fast did you get your PPP money?
Let’s focus on the message, not the spelling.
I work for a community bank and have been processing these loans for our customers. The last of our approved loans will be disbursed this week and every loan within the 10 calendar day requirement. I hope other banks can say the same but realize that is probably not the case. It is sad to hear that only 15% have received funds so far and I hope that number increases quickly.
The main point I wanted to make is that step #4 in your example makes it seem like the 8 week period begins June 30th, but as you said in your reply, it actually would start April 30th assuming that is the disbursement date.
As you point out in Matthew’s comment, the PPP loan requirements put businesses in a difficult position if they are currently closed or their employees furloughed. It would be nice if the SBA issued additional guidance to address those situations before round two of PPP funding is finalized.
This is why I don’t feel guilty at all about the personal stimulus check. Businesses are getting a lot more than I am. $2,900 is a tiny drop in the bucket and I’ll spend it on local businesses.
Can you get PPP for Financial Samurai?
The Rich also have lawyers and advisors that help analyze and dissect regulations to see how things can become favorable. At the end of the day, it’s all about how educated and informed you are that can give you the edge….in this case, it being free money!
Steak Shack returned 10 Mil $ to other businesses. Read this info again. You cannot return the check, but you can give it or some of it to others that need help. Thank you for this informative article. It all makes sense.
Indeed. See from the article below.
Second Key Lesson: Change the narrative in your favor.
Shake Shack made sure it got the maximum amount of PPP loan available. Once it got their relief funds, it was then able to assess the repercussions of its actions.
Once the public found out, the public went berserk that a publicly-listed, billion dollar company got funding. As a result, Shake Shack strategically changed the narrative by painting itself as a noble knight by returning the $10 million to help other small businesses.
As a result, Shake Shack was able to engender a lot of good will amongst the public and receive millions of dollars worth of free publicity. This was a strategically brilliant move by the executives that will likely net them far greater than $10 million in the future.
Agreed! I will certainly patronize them and hope others will as well!
Doh. Not my intention. My goal was to highlight how the company was able to create a “heads I win, tails you lose” scenario.
Much better to support your local mom & pop burger joint instead!
I personally would find this a reason to not patronize them. If they had not been called out, do you seriously believe they would have returned the money?
I find the news coming out of the US is just sadder on a daily basis. I am in Mexico so it is quite possible I have missed something, but I have yet to see a big tech company step up to the plate and make a difference. As an example, Yandex, the Russian equivalent of Google, just offered free Covid testing for anyone in Moscow. Of course, that buys them a lot of free publicity but unlike Shake Shack their actions might truly make a difference. All Shake Shack did was shake down the govt (excuse the pun) and then give the money back. And whatever happened to all of the Google engineers working on a testing solution that Trump discussed more than a month ago?
I will not be patronizing them from here on. Tone deaf move.
No. Don’t. Shake Shack took advantage of the system.
How so?
I watched the bill as it was debated live on the floor, and I had discussions with people about this exact scenario happening before the bill was even voted on, let alone signed, just like they did on the floor, live, publicly available.
All you had to do was read/watch the source, spirit, context of the bill get debated live and you would have seen all this coming. Senate, Congress and the President didn’t miss that this could happen, numerous Senators & Congressman specifically stated that this would happen and maybe worse yet, argued for specific language that allowed it to happen. This wasn’t an accident or oversight.
There are specific individuals that wrote the text in a very specific way to allow this exact scenario to happen. The problem is with the rule-writers and rule-enforcers, not the people who played within the rules.
The bill might has been packaged and sold to help “mom and pop” businesses, but the specific language and carveouts for larger corporations didn’t happen by accident.
On a sidenote, anyone notice that 13.12% of loans (the highest sector) were issued to construction companies, an essential operation in most jurisdictions. That’s a lot of money going to essential businesses that are still operating at near pre-COVID-19 capacity. No one is questioning all the multi-million dollar private construction companies taking loans…
Very astute observations. We do need to focus more on the rule-writers and rule-enforcers. I’ve added a Sixth Key Lesson thanks to your comment.
There is no such thing as a “loophole”. There is only legal or illegal. I have no animus for companies that legally took free money. In fact it shows they are nimble, smart adaptable businesses that I would be more likely to patronize. Any animus over this matter should be directed at our incompetent overlords in Washington, DC.
True. First Key Lesson From The Rich: If the money is legally available, take it. Think about the negative optics later.
Lots of vendors complain about Amazon all the time. Solution: buy Amazon stock.
Same thing with Google and other monopolies. It’s so hard to beat them. So you join them and that’s how society evolves.
Now if we can buy some Harvard stock. But I’m not sure how many more negative reputational hits it can take when education is now free. Universities are in a structural decline.
Please explain how Ruth’s Chris got $20 million if the explicit cap is $10 million?
Two separate operating entities.
Since you were talking about schools and pre-paying tuition, did you really have to pay April’s tuition for your preschool? We did not (we live in Pennsylvania) and they have said they will not charge until they reopen.
Yes, we had to pay 100% of April tuition with no school and we are also being asked to donate as well. Let’s see if there’s a credit once our school gets PPP.
Take a look at what your contract says. Parents cannot be required to pay while a daycare is closed unless the contract specifically addresses extended closures due to a pandemic or a public health emergency, at least in California, according to the Child Care Law Center. Perhaps report it to your state attorney general’s price gouging hotline.
You’re probably right. But I feel it would be cruel to bring this type of stress up during a crisis since we can afford to pay the $1,950 for April and not get any service, for now. My hope is that they will refund the tuition once they get the PPP and once the school is back up and running (not now given the uncertainty).
However, if my family really needed the money to survive, I absolutely would bring this up and ask for a refund now or at least when the school gets their PPP funding. I’d ask them to be transparent and consider families who are also financially struggling.
So this is another example of a grey area. I want to be a good member of the community and help as much as possible. If I cannot help, then at least I don’t want to hurt someone or an organization.
The school isn’t there to get rich. I think my son’s teachers and all the teachers are his school are WONDERFUL. I know they are experiencing massive uncertainty, just like us.
In fact, I reached out to my sons two teachers and checked in to see if they were doing OK. I was going to send them $500 each to help pay for rent. But they said they were OK and will be getting compensated by the school.
I want to come back to our previous discussion on preschool payment during the pandemic. So ours (Goddard School) did charge for March, but offered (through guilt) a 50% refund if one asked. We did not. They did not charge for April or May, and have indicated they hope to start back in June. They have now asked us to pay registration fees for the 2020-2021 school year, which is normally done in April. They issued a new agreement. What they didn’t point out though was that the new agreement states that we would have to pay in the event of a state mandated closure. I hate seeing that, because now we would definitely owe the $1950 / month if they were closed starting in September 2020. Further, they didn’t say anything about this addition to the contract, while they did highlight the late fee clause, which has always been there. I suspect that all daycares are adding this clause.
Very interesting! Seems illegal/morally not right to make a parent to agree to pay for tuition if the school is closed during a second lockdown this winter.
Man………. homeschooling seems more and more like the best way to go. Free, efficient, more time with the kids, less bullying, more knowledge, etc.
The problem with Shake Shack and others is that all those that didn’t get a loan are hurting, and when we hurt, we need someone or something to blame. Right now that is Shake Shack, Ruth’s Chris, China, WHO, the past Administration, etc.
We all know the National Restaurant Association and numerous other groups were lobbying for specific provisions and carve-outs in the bill. This Stimulus bill has so much crap in it that I am surprised the strings were as tight as they even were on the funds, but then again, as you mentioned there were significant funds in other places for the “big boys” to have free reign.
But to be fair, these companies employee more than 10k people combined and if the $10M each keeps them fluid and their doors open, then the $2k/employee cost maybe isn’t so bad, the cost per employee for the smaller businesses is probably significantly higher. Tom Colicchio (of Top Chef and Craft fame) wrote a really good article about 5 weeks ago that really spelled the likely outcome on the restaurant industry due to COVID-19 for both small and big restaurants/groups.
The concerning group that no one talks about is the fluid small to medium-sized business that have the funds to weather the storm and are still a functioning essential business, but took the funds anyways. Companies that are working, billing and being paid, even at 95% YOY can access the same pool of money. And in two months, the $1M they took and used to pay their payroll is forgiven. A lot of companies that people know nothing about may be significantly more profitable this year, assuming things don’t get drastically worse.
And in the end, everyone becomes a financial expert and assumes they understand Shake Shack’s or Ruth’s Chris financial health when they know absolutely nothing. If Ruth’s Chris didn’t have access to the funds and had to shut their doors tomorrow and let all 6,000 employees go, I wonder what the headlines would read.
(Full disclosure, neither my self-employed parents who applied, nor the company I work for received our loans; we were both told they are waiting on this next round of funding–probably because big bad Shake Shack took it first.)
One rule that could have been implemented for PPP is: If your 2020 revenue is up over 2019 by more than your PPP loan, then you must pay the loan back. The terms can be equally as generous, such as a 1% interest rate over 2-10 years.
If the vast majority of small businesses got their PPP first and then the big guys got their money, there would be a much smaller uproar. But the anxiety of a small business wondering whether it can survive one more month, while being in PPP limbo when they see large companies get millions is unsettling.
“Harvard did not apply for, nor has it received any funds through the U.S. Small Business Administration’s Paycheck Protection Program (PPP) for small businesses. Reports saying otherwise are inaccurate.”
See the @Harvard twitter account.
Your comment is exactly what I was hoping for.
Check out my article:
“Harvard’s reputation was already getting hit because of how it evaluates different racial groups for admission. Taking $8.9 million from the CARES Act program, when it already has tens of billions is shameful.”
Harvard is changing the narrative, Key Lesson #2. As a result, people are now believing Harvard is honorable for not taking PPP money.
However, the fact remains that Harvard took $8.9 million of free government money from the CARES Act that could have gone to another organization more needy. When you’ve got $40 billion, you should probably use it. In this case, Harvard is 30X larger than Shake Shack.
My hope is that Financial Samurai readers will continue to develop the ability to slice through money’s mysteries and see what’s really going on.
This gets into “legal vs. ethical vs. moral vs. …” (laws vs. personal vs. religious).
Since it seems everyone has an opinion on just about everything (money, food, HCQ etc.), I’ve decided to stick with science, legality etc. (e.g. want to reduce environmental pollution? then change the rules instead of relying on “niceness”).
Churches etc. leave too much up for individual interpretation. We need real laws.
I’m curious how Harvard hasn’t been written off completely due to the racial antics. Especially in today’s society.
All ivy leagues use racial profiles for admissions, otherwise they’d be full of brilliant Asian students.
Be slightly evil. Good advice! Is this something a 1099 Independent Contractor can take advantage of?
I agree Sam that Shake Shack masterfully handled what could have been a big debacle. A lot of goodwill was created by returning the money. I wonder if Ruth Chris will follow or not.
I’m sure there were a lot of billion dollar privately held companies that received benefit that can keep things more under wraps and never get the ire of the public.
The government should have had some limitations in place if they truly wanted to help small businesses owners. The fact that there is a loophole to get around the 500 employee or less stipulation because of individual franchises rather than the whole company is just bad planning to allow it in first place
“The fact that there is a loophole to get around the 500 employee or less stipulation because of individual franchises rather than the whole company is just bad planning to allow it in first place.”
The cynical tech sales guy in me would say, “It’s not a bug, it’s a feature.”