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Small practices in the pandemic: Borrow to survive

Many of Missouri’s small law firms are spending this week helping businesses apply for a share of the new federal stimulus funding while trying to take advantage of the same programs for their own needs during the COVID-19 pandemic.

Solo and small firms make up roughly two-thirds of all law practices in Missouri, according to The Missouri Bar. For those firms, the best programs to consider in the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act passed last month by Congress are the Paycheck Protection Program and Economic Injury Disaster Loans, said Blake Markus, a partner at Carson & Coil in Jefferson City.

Blake Markus

Blake Markus

Interest is so high in the payroll program, Markus said, that if businesses have not already submitted an application to their bank before the program opens on Friday, April 3, it may be too late for them to get a portion of the $349 billion allocated for the program.

“Banks I’ve spoken with are pre-entering all the information to be submitted at midnight, so the queue with your bank starts now,” Markus said this week.

State Rep. Wes Rogers, who is of-counsel at BG Law in Kansas City, said payroll program recipients will be decided on a first-come, first-serve basis. A fourth round of stimulus will likely be necessary as demand outweighs available funding, he added.

Payroll is the biggest expenditure for many firms. The Paycheck Protection Program allows employers with fewer than 500 employees and up to $10 million in revenue to defer up to eight weeks of payroll costs and other expenses such as rent, utilities and taxes. It is retroactively available so employers can rehire employees laid off since Feb. 15.

“If you spend all that money for what it’s earmarked for, it ends up being a forgivable loan, basically a grant from the government,” Rogers said.

Wes Rogers

State Rep. Wes Rogers, D-Kansas City and an attorney, works in his office April 2, 2020. Rogers has been poring over the fine print of the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act. Photo by Scott Lauck

Loan forgiveness requires employers to rehire or otherwise maintain the workforce, with new employees earning at least 75 percent of the person they replaced. If the workforce is reduced by 20 percent, only 80 percent can be forgiven. Funds that aren’t forgiven initially were set to be repaid over 10 years at 4 percent, but that schedule has changed to two years at 0.5 percent, Markus said.

“It’s a mess, and subject to change at a moment’s notice,” he said. “With the last-minute changes, rush for cash, and vagueness of the bill, we can almost guarantee that there will be problems for uninformed business owners who take funds and do not understand what they can be used for or what must be repaid.”

Loan amounts are determined by the total average monthly payroll from March 2019 to February, multiplied by 2.5, or the maximum amount of $10 million. The program does not include annual compensation over $100,000 for individual employees. The average payroll for months of 2020 will be referenced for businesses that have opened since last year.

But questions remain unanswered about the program, such as payment due dates and interest accrual amounts during referral periods, Markus said.

“The general idea is that you have to keep all of your employees or rehire them, but we still haven’t seen the exact language for what it means to rehire or keep all of your employees,” he said. “What happens if an employee quit two weeks before the bill was passed, or you’ve got one more employee in the previous year than you had this year?”

Small law firms also may be interested in seeking fixed, low-rate Economic Injury Disaster Loans from the Small Business Administration. They offer up to $2 million, with as much as $200,000 available without a personal guarantee or collateral, and they no longer require borrowers to show they can’t get credit elsewhere.

Repayment terms will be determined by the borrower’s individual abilities. While those loans offer more money for a longer period of time, they aren’t as sought-after as the payroll protection because they aren’t forgivable, Markus said.

“If you’re a small firm trying to get by in the short term, I think those disaster loans are going to be pretty appealing,” Rogers said.

Firms can apply for both loan programs, but they must use the funds for different purposes and keep them in separate accounts, he said.

“As soon as you comingle those monies, they become one, and you’ve got to pay a portion of it back,” he said.

Rogers said he views the stimulus package as one of the fairest plans to come out of Congress in a long time, noting that it offers opportunities to regular people rather than just big business.

“I rarely say this, but I’ve got to say to the people in D.C. that most of that was a job pretty well done,” Rogers said. “No matter what situation is, you’re probably going to find something that will help your business or law firm.”

Markus, however, said the payroll program may need to provide for more than eight weeks of protection to be effective.

“If this goes on to four to six months, I think you’ll see a significant number of businesses closing, those funds never being returned to the federal government, and you’ll just have a bunch of written-off loans and employees that got a couple extra paychecks out of it before they got laid off and put on unemployment,” he said.

Coronavirus crisis

This item is part of Missouri Lawyers Media's free coverage of how the COVID-19 pandemic has affected the legal community.

READ: Financial & business resources for solo, small firms | COVID-19 resources from The Bar Plan | Notary rules suspended | Attorneys cope with working from home | See full list

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