How a PPP loan affects your bonding capacity

Did you receive funds from the government as part of the COVID relief efforts? Are you unsure how that money will affect your bonding capacity now? Get up to speed on PPP loans, EIDL loans, and the ERTC on this week’s episode.

Topics we cover in this episode include:

  • Why it’s important to talk to your bond agent about the PPP or other COVID-related government funds you’ve received
  • A crucial cash-saving tip for classifying the employees that you pay with PPP funds
  • The loans and grants that have been helpful to contractors and how to address them now
  • The importance of obtaining forgiveness letters for taxes and bonding
  • How accepting government funding affects your bonding capacity

Visit the episode page at for more details and a transcript of the show.

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Rob Williams, Profit Strategist |
Wade Carpenter, CPA, CGMA |
Stephen Brown, Bonding Expert |



Rob Williams: Welcome to the Contractor Success Forum. Today, we are discussing COVID government stimulus and the effects on bonding and insurance.

At the Contractor Success Forum, we discuss financial strategies for running a more profitable, successful construction business.

And in one corner, we have Wade Carpenter, Carpenter, and Company, CPAs. And in the other corner, we have Stephen Brown, McDaniel-Whitley bonding and insurance agency. And in the other corner, we have Rob Williams with IronGate Entrepreneurial Support Systems.

So how does this COVID government stimulus effect the bonding and insurance? Man, this is, this is a crazy topic, right now.

Stephen Brown: Well, just two quick points I wanted to make. The first one is that if you’re a contractor and your profit last year completely was made up of PPP [00:01:00] money, then you need to talk to your bond agent about how it’s going to affect your bond program for next year, because there’s more work than ever right now that are requiring surety bonds, so that’s an important thing.

And then the second thing was from an insurance standpoint, just simply when you use the PPP money for employees that are working or that you pay with PPP money, you need to make sure you classify those employees under a code 0012 for workers comp purposes. Because you don’t have to pay workers comp on that PPP money. So don’t forget that. That– yes, that could be a chunk of money for you.

Rob Williams: How much money did the Contractor Success Forum just make all those people that didn’t know that?

Stephen Brown: I don’t know, did we get any PPP money?

Rob Williams: Should. I, I–

Stephen Brown: Wade, did you get it, and we haven’t seen it?

Rob Williams: Yes, for all of our employees in the background, on the Contractor Success Forum, we get all of this money. But how much money do we make for our listeners? Just right there. That’s–

Wade Carpenter: That was a great tip, Stephen.

Rob Williams: That [00:02:00] was huge, huge.

Stephen Brown: Now, it’s time for you to kind of debunk all these loans, incentives, tax credits that are going on and what may be a good idea for our–

Rob Williams: I don’t even know what all these are. There’s so many different things and I’ve pretty much left that for the–

Stephen Brown: And they have all these acronyms that you have to remember. All that stuff makes me crazy. So what’s out there?

Wade Carpenter: Well, there’s a lot of things, not just the PPP money. Since COVID hit, there’s been some big things that have come out where the government has either given loans or grants or forgiven loans for things like the PPP money. So I guess we can kind of take those one by one, if that’s all right.

I do think there’s a lot more things to think about. Let’s start with what you said, the PPP money. So the Paycheck Protection Program Act, that basically was a situation where we’re going to pay to continue paying your employees. So if you [00:03:00] continue to do that, then you basically kept your employees, whether they were working or not, you got to retain those employees. They kept a paycheck and you got reimbursed for it.

Well, the reality is a lot of contractors, some slowed down some didn’t. A lot of contractors kept going when we were shut down in 2020. And if you kept your guys working, the reality of it was you just got reimbursed for your labor.

So it was free money. It wasn’t for everybody, but you know, other industries, but for contractors that kept working, you got your labor reimbursed and you got this money sitting over there that eventually became non-taxable. So that’s one starting point on that.

There’s other situations where just sticking with the PPP loan and I’m just kind of spit balling here. But you know, I did have a contractor that had a payroll of about $300,000 in 2019 [00:04:00] and he, two partners split up. Well, the other partner didn’t have any work. So he came in to COVID and he needed cash. And he got the loan for the payroll that he had in 2019. $300,000. But his payroll may have been $60, $70,000.

Rob Williams: Yeah.

Wade Carpenter: So, so what happens when it’s not forgiven? Well, the reality of it is the government made it a loan at 1% interest and you had two years to pay it back. So it propped up a lot of these contractors, and in the situation I’m talking about, even though they had to pay it back, it was cheap money, and it propped up some contractors and helped get them working capital when they needed it.

Stephen Brown: Absolutely.

Rob Williams: Yeah. So, yeah, I guess we can go into another one when you had to pay it back. And when you didn’t, that’s always been pretty confusing.

Wade Carpenter: Yeah. And, as it turned out,[00:05:00] they went through so many different rounds of what’s going to happen with this. And who has to, essentially everybody under $150,000 loan, they forgave it all. There is some, I know Stephen, we were talking about I think the bonding company wants to make sure that it was forgiven.

Stephen Brown: Yeah, they want a copy of that forgiveness letter to wipe it off your books as a debt. Otherwise, they’re going to show that in their financial analysis. They have no other choice. They don’t know.

Wade Carpenter: And speaking from our standpoint doing tax returns and things like that on the forgiveness, I mean, we asked for those letters. And a lot of times the banks were horrible about giving those letters or reaching out to the SBA, depending on who your lender was. So definitely go get those forgiveness letters.

Rob Williams: So what happened on those loans when they forgave those?

Wade Carpenter: So like the 300,000, in his case, it was actually a loan.

Rob Williams: Yeah. Well, if you, if you get it forgiven though, you, then you had to pay taxes on that.

Wade Carpenter: Yeah. But eventually, they came out and [00:06:00] finally determined that it is not taxable. But the other question before about this time last year, if you got something that’s non taxable and you got expenses that were used against it, is that deductable?

Rob Williams: Yeah.

Wade Carpenter: Long story short, yes. They eventually made the expenses deductible. And I won’t get too geeky about that, but you know, when those expenses are treated, it can have a difference in your basis and tax ability for the contractor too. So I won’t even go into that part for–

Rob Williams: Yeah, we’ll have a separate episode for that one. That’s pretty interesting.

Wade Carpenter: Well, that would probably bore everybody tears, but anyway.

Stephen Brown: About incentive loans out there, Wade?

Wade Carpenter: Well, so there was other things out there, like the, you see them, EIDL loans. They stand for Economic Injury Disaster Loans. And so there was actually two parts of that as well. Well, a few different rounds of it. When they were trying to first figure out what was going to go on with this, they threw out a program and they said, if you’ve got employees, [00:07:00] apply for it.

And what they ended up doing was, they gave you a thousand dollars per employee, essentially. Up to 10 employees. So they would give you $10,000. And that eventually became, that’s a grant. You don’t have to pay it back. And so, essentially that turned out to be another gimme. It wasn’t huge but it was a nice little shot in the arm for them.

But the rest of it, like the EIDL loans, this was special part of the SBA where they were allowed to make loans where, a traditional SBA loan can cost you a ton of money, and you have to jump through a whole bunch of hoops. Well, basically they made it very easy to get them. And first round they typically could get up to $150,000. You had to apply, tell them what your revenue was. But the terms on these loans are 3.75% interest. And they had a 30 year term.

Stephen Brown: Wow.

Wade Carpenter: So that’s stupid money. [00:08:00] Easy capital. And what I believe it did for the balance sheets of these contractors that got them, you pumped up cash and working capital, but the majority of whatever your loan was, is sitting in long-term liabilities.

Rob Williams: Yeah.

Wade Carpenter: So it definitely pumped up your working capital and it propped up a lot of these contractors at a time they needed it. And I would think it would really pump up your bonding capacity. Stephen can probably talk more about like, base it on working capital and you base it on equity.

Stephen Brown: Right. Only 12 months worth of that 30-year loan would be a ding against your working capital. So definitely it helps you get bonding.

Wade Carpenter: Yeah. It did kind of throw the debt to equity ratios way out of whack for some people. I, I believe people were like, well, Hey, we got this working capital. Reason I bring that up, after they did this first round, they came back and said, we can do some more. And a lot of them took it up to a half a million dollars on these EIDL loans.

[00:09:00] And I saw several do that. Some of my contractors went back and asked for a third round. So they’ve had three modifications on the loans that, 600, $700,000 or, a little more. But it’s been a shot in the arm for some of my contractors that has done it. And I know we’re talking about it now, but we’re getting past the time where, you can’t really apply for these anymore. But those that treated this properly and said, this is permanent working capital got a huge leg up on scaling their company, investing the cash, so many contractors bootstrapped their company and they’re always struggling for working capital.

Well, this was a huge shot in the arm for some people that treated it right.

Rob Williams: Yeah. I think one really interesting question for a contractor that may not know about this is, looking at the bonding companies, how do you guys look at that? Some of the contractors might think, oh, well, I didn’t use any of that. So I should look better. Or these guys used all this [00:10:00] stuff. They shouldn’t look as good as I am. But I believe, Stephen, y’all are good with that. Aren’t you?

Stephen Brown: Yes. Yes. We’re good with giving you credit for that, for increasing your working capital. And again, guys, working capital is current assets minus current liabilities. And it’s your liquidity. And so when you have a long-term debt that provides cash or liquidity to help you with your operating expenses, then you’ve got to decide, how am I going to use that influx of money?

Well, number one, if you were going to have to borrow money from the bank for short period of time to help cash flow a project, well you’ve got the money where you don’t have to pay that interest expense to the bank. There’s profit for you right there. We’ve taught before, if you have a big influx of cash, how do you manage it when you got all that cash sitting around? You should have a firm plan in place for what you’re going to use it for and how you’re going to use it and communicate that to your bonding company. They’ll appreciate it.

Rob Williams: Yeah. So when somebody comes with you, they don’t need to try to kind of cover up that their [00:11:00] cash was from this. Just lay it out there. I–

Stephen Brown: It’ll show up on your financial statement. Certainly.

Rob Williams: Yeah. I was talking to a guy and he was talking about this and I felt like he was sort of hiding that from me, recently. Don’t hide that, you–

Stephen Brown: It’s no embarrassment to borrow money at 3.75%. Because of inflation, who knows what it’s going to be next year.

Rob Williams: Yeah. When I saw the profits, let’s say this guy had a really good profit thing, but if you took that government money out, he wasn’t profitable. But you guys are looking at that as, this was COVID. You probably can’t tell one company to the next, was it really, did they suffer something from COVID. But this was profit, and that’s what you all care about. They got profit.

Stephen Brown: Well, and you don’t get the loan unless you have the sales to substantiate it. The amount. So the two go hand in hand.

Wade Carpenter: Yeah. One other part on the PPP, going back to that, there was a second round of that, essentially it turned out the same way. If you got the second round, that was if you could show that you were hurt or, down by 25% in one of the [00:12:00] quarters in 2020.

So there was a lot of people that got a second round of that. So they got a second shot in the arm on that. I’ve seen some abuse of that, but you know, the government has done a fair job of trying to crack down on that stuff.

One of the other things that you’ve probably seen out there is the Employee Retention Tax Credit. You may have seen ERTC or ERC. And there are people hyping this thing, because quite frankly, it’s stupid money. It’s a government giveaway. Now there are some rules around that. And what it was designed to do was help these industries where people were really devastated. Restaurant industries, hotels, things like that to where they were basically reimbursing the payroll. It became like up to 70% of their wages. There was a couple different rounds of that. It’s now stopped, but it may not be too late to go back and claim some of that.

Now this is a little different from the PPP where you can still deduct the [00:13:00] wages against the PPP loan. You can’t do that with the ERTC, but when you’re getting 70% of what you’re paid back as basically free money, and people were getting $40, $50,000, $60, I mean, some of the bigger companies were getting a hundred thousand.

Now, the one thing that I would point out for contractors, a lot of the contractors did not qualify. So if you’re seeing these out there, your CPA firm is hyping these or trying to shove some of this down your throat, you really need to ask, did you really qualify? Because one of the most overlooked provisions of that is the fact that you had to demonstrate that you couldn’t, say, pivot and go work from home. Or, a lot of contractors could keep going. They were working out in the field. I did see some shutdown, doing like interior build out, or like doing something for a city that shut them down, but by and large, a lot of the contractors did not qualify because of that. But that was another huge shot in the arm [00:14:00] where they’re getting money. It cut into their tax deduction but it was another huge injection of working capital when some of the contractors needed it.

Stephen Brown: Well, our listeners just need to be aware of everything that’s out there right now. Best place to go for advice on that is your CPA, I would say without a doubt. Who do I contact to learn more about this and what I’m eligible? Well, you need to contact your CPA.

Rob Williams: Yeah. So any more points on this, Wade?

Wade Carpenter: Well, I have one more point. There was one other provision of the ERTC that I have one person that was able to take advantage of. And even contractors could do this. If you started a business after February 15th, 2020– and don’t quote me on that date, but it’s somewhere around that– and you had payroll, there was a special provision for startup businesses around the ERTC. You didn’t have to provide proof of anything. So for third and fourth quarters of 2021, [00:15:00] you could get up to 70% of your wages. There’s some provisions about the owner pay and family and stuff like that, we did not count but, again, it was additional working capital that even contractors could get. You didn’t have to prove any of that stuff. So these were huge capital injections.

And what I’m hoping is a lot of the contractors took it to heart and didn’t just go buy that a hundred thousand dollar Ford pickup truck that Stephen was talking about earlier. Don’t waste the opportunity. This is a huge opportunity for you to grow your bonding capacity, your company in general and get to that next level.

Stephen Brown: Good point.

Rob Williams: Well, those are some great points. Is that the wrap-up today, Wade?

Wade Carpenter: I think so. I mean, like I said, I was just kind of talking off the cuff on some of these programs. So I know there’s a lot of things that I may have left out. I left out a lot of points, so definitely go talk to your own CPA about these programs. If you’re trying to qualify for them now, you may be a little [00:16:00] past the date. But you know, back to the SBA loans. The day you got those forgiven, that makes a difference for tax purposes. So get copies of those forgiveness letters and that’s all I got to say on that. I hope everybody benefited from that and–

Rob Williams: Well, it’s a huge point for just about everybody these days. Or regret, if you didn’t get them.

Wade Carpenter: Yeah.

Rob Williams: All right guys. Thanks a lot for listening today. Go to our show notes and go to ContractorSuccessForum.Com and you can see links to all these great things, how to get in contact with us, or how to ask us questions or get more information on these episodes. Each episode has its own little section out there too. So thanks a lot for listening and we’ll see you on the next Contractor Success Forum.

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