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20-0413_COVID-19_24

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Hello. This video is brought to you by the California Lawyers Association, a nonprofit organization of lawyers throughout California. The video is geared for small professional firms, sole practitioners, and clients who have questions about how COVID-19 impacts their own businesses and what financial assistance may available in this stressful and economically challenging time. Please know that the video is intended to provide general information only and does not constitute as legal advice. The information in this video is based on the rules in place as of April 10th 2020 and especially for matters covered here, rules and procedures change frequently. Please be sure to keep yourself updated. Im Ben Root, a partner in the Nola Law group, a small firm specializing in advising entrepreneurs and small business owners regarding securing investment, early stage business organization, merges and acquisition and monetizing events. Before coming to Nalo, I was practicing for 20 years at a large International firm and spent another 5 years as CEO of a tehonology startup. Today i'd like to talk with you, in this session, about the detail of supporting and the EDIL loan valuation. You're basically familiar with the loan program but if you're not then I would direct you to earlier videos in this series that are on the CLA website. In terms of looking at documenting and supporting an EDIL loan, its really the detail and the preparation that makes the difference here. I put this Thomas Edison quotation because it is indeed true in this particular space, that when the preparation is good then the results are likely to be satisfying for you. Looking at that, the question in an EDIL loan is "What injury have you suffered as a result of the COVID-19 shutdown?" In terms of looking at that, I suggest you think creatively, im not talking about imagining things that didn't happen but think expansively about the various ways in which your business has been affected. We all are aware of top-line revenue costs, of course, but there are a number of other ways that we might be affected in terms of clients or new business opportunities for development, and other things that have been impacted by the shutdown. In those cases, we want to develop a story idea that explains how you have suffered loss because in this particular loan you'll be negotiating the amount of the loan with an SBA loan officer and the more that you can document and persuade, the better the results will be on your application. You want to look at preparing documentary support for your position, these could include your profit and loss statements economic forecasts or performance, analysis of growth rates, and a discussion of projects you are prepared to or were preparing to launch. This is all familiar territory to those of us practicing law, you're basically looking at what you would tell the jury and what is the supporting information that will convince them you're right, that process is the same process you'll be using here in supporting your EDIL loan application. The documentation specifically expects you to build a picture of your expected revenue, this can be done by looking at your year over your financials, your growth business income, you can do an analysis of your compound annual growth rate, and you can look at strategic projections including projections for new income, not yet realized but solidly based on assumptions that you can demonstrate were true at the time that the shut down impacted your business. There are also alternative ways to look at this, again im not talking about being an imaginative and creating things that didn't exist but sometimes there are other ways that we measure the growth of our business and the impact of a disaster like we're experiencing now. For example, you might look at the flow of new clients and the rate at which those are developed in the sources, the cost of acquiring a client, and experiment a little bit with how those costs of acquisition have increased or the rate of new client development has dropped. Those are the kinds of things that will build a picture of expected revenue. The next piece in the puzzle is you want to build an expected model of recovery. Once you know what your loss is, the question is how will you recover from that, how long will it take, and what will be necessary? What kind of investment of time, dollars, and other resources will be necessary to restore you to where you would have been had the COVID-19 disaster not occurred and impacted your business. It's important here to be clear about what your assumptions are because you're telling a story to the SBA loan officer and its he or she that will ultimately make the decision on the total loan amount. You want to make sure that in looking at the difference between your expected recovery model and your actual position that you're calculating the difference fully, the full delta because its that that you want to have as a basis for your loan application. In doing this, theres a number of forms and supporting documents that you'll be using. You'll start with this using the SBA Form 5 or for sole practitioners and/or sole proprietors, you can look at Form 5c. Basically, you'll be looking to track your monthly sales figures or your Billings and obviously as you calculate these out monthly they should tie to your bank statements which will show deposits and then as you aggregate them during the year they should tie to tax returns. The SBA looks at sales figures over a 3-year period which will help you show trend lines and further document the loss and time necessary for recovery. Interestingly, on this particular form two things come to mind. The form itself points out that it can be helpful to provide a financial forecast to demonstrate what the income and expenses of the business will be during the period affected by the disaster until the new operations resume. The "until normal operations resume" is the important part here. They're asking you tell them the story that will support what you need and in this particular case, they're inviting you to provide documentation. So think carefully about how you can support your story and tell it in an effective way. Again, at the bottom of the form, they invite you to please submit additional narrative or financial information you feel will be helpful to establish your economic loss. In this particular case, the SBA is already swamped by these applications and is going to become nothing but busier, that means that your loan officer may be a little crabby and will be looking for ways to resolve matters quickly. So the more you can include in your application that tells a story thats effective and can convincing, the quicker that loan officer will be able to work with your application and the more likely you are to get a positive result. Now, a word of caution, there are boundaries to how creative you can be in this area and just recall that we have the False Claims act which is a criminal act to knowingly present a false claim for payment by the government and the people that do indeed can be looking at spending five years in prison. So be careful to think creatively but not imaginatively when you're coming up with your loan application. In summary, to look at the EDIL Benefits and Requirements, this is a loan that can be submitted at the same time as a PPP loan application. In other words you can have both an application for Payroll Protection and an application for Economic loans because of COVID-19 and I suggest that you pursue both of them. In this particular loan, you can also check the optional box if you want to, to be at least eligible for an emergency grant for up to $10,000 dollars. This grant can be forgiven under certain circumstances and of particular interest is that the forgiveness provisions in this section of the CARES act relief, these are somewhat different than the provisions for the Payroll Protection program so its my thought that by pursuing those differences carefully, you may be able to receive forgiveness under both acts. We'll talk a little bit about that in the next section but its an important feature of this loan and you'll want to make sure that you check the box near the end of the form that says you want to be considered for this. It's not clear exactly how the SBA is going to administer this but the word on the street is the SBA regards it up to and may look at it as a functioning number of employees, but as of now the simple guidance is check the box and you'll be eligible for that portion of the EDIL. Remember here that the results are a negotiated result rather than a formulaic result, this is your opportunity to think about building the story and building the firm. So if you do the preparation suggested here I think you'll be very pleased with the outcome in discussions with the SBA. Interestingly enough, this particular loan is a 30 year loan or up to a 30 year loan and is at an interest rate of 3.75. This is working capital that you're getting to redevelop your business, there is nowhere under the sun that you're going to find working capital available at 3.75% repayable over 30 years. I suggest to you that it is important to your business to think about how to use this money in terms of building your financial health over the long-term going forward. Finally, be aware that you're dealing with the government and they're slammed so full funding is likely to be in the fullness of time and we don't know exactly what that will be but it Is certainly not going to be right away. The Emergency Grant provisions are designed to be paid promptly but the rest of this loan is likely to take probably more on the side of months rather than weeks. That's a quick run-through of the EIDL Benefits and Requirements and as you fill out the documents you can expect to be contacted by the SBA for further documentation to tell the story of the amount the you need. That's it and if you're interested in the forgiveness provisions, look into the next video that we do and we'll address how to get forgiveness of this and other elements of the loan packages made available to small businesses. Thank you very much for your attention today and please remember that the information presented here is not legal advice and is based on the rules in effect as of April 10th 2020. And especially for matters covered here the rules and procedures change frequently, be sure to keep yourself updated. Thank you for watching this video and for doing your part to navigate through the COVID-19 pandemic

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Posted by: tyanadiaz on Apr 19, 2020

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