PPP: Now What?
DR. ANDREW P. GRIFFITH
KNOXVILLE, TENN.
The Payroll Protection Program (PPP) is a program administered by the Small Business Administration where businesses including farmers can receive a low interest rate (1 percent) loan that most likely will be completely forgiven. A sole proprietor farm can receive as much as $20,833 depending on gross income to essentially pay oneself. The program is accepting applications through the end of May. After applying and receiving the loan, loan recipients must go through a couple of steps to pay themselves. Once that process is complete, loan recipients may complete a loan forgiveness application, which completes the process to determine if the loan will be partially or fully forgiven.
There have been several farmers who have already taken advantage of PPP. Farmers are using the funds to pay themselves as the funds are supposed to be used, but then those farmers are rolling the money back into the operation for different uses. Some farmers are storing this money as if it does not even exist until they have been assured loan forgiveness. Others are using it as if it was part of their annual operating loan, because it has a lower interest rate than their traditional operating loan. There are still others who are purchasing equipment, new vehicles, other assets, or servicing existing debt.
Each of these uses can be justified in some form and especially in an individual’s mind. However, what is the best use of the money? What should a farmer be doing with the money received from the PPP, or what should a farmer not be doing with these new found funds? The answer really depends on the needs of the operation, the resources available, and the highest value of the funds.
Potentially the worst use of the funds from a financial standpoint is to use the funds to help purchase a piece of machinery/equipment that is not needed and that will not provide a sufficient return on the investment. It is unlikely $20,833 will pay for an entire piece of machinery, which means other resources will have to be included to make this purchase. This may take the form of an immediate cash outlay or financing, which means finding the money to make the payments.
Machinery and equipment are only a good purchase if they contribute to increased returns over the lifetime of the machine.
The second worst use of the funds is sticking it in the bank or burying it in the ground and not utilizing it. It does not matter if the loan is forgiven or not, surely one can invest these funds in some form or fashion and garner a greater return than the 1 percent interest rate on the funds. Investing is not without risk, but any return over 1 percent is a net gain when using someone else’s money.
The purpose of borrowing money is to do something with it that has a greater return than the cost of borrowing the funds. Farmers and many businesses alike have been operating on this principal for many years.
This leads into farmers using the funds to replace some of their operating loan. If operating funds have an interest rate of 3.5 percent then the farmer using $20,833 from PPP at a 1 percent interest rate will be saving 2.5 percent on those funds. This is a really small amount of savings for a person carrying a $500,000 operating loan, but money not spent goes toward profitability. These savings have a larger percentage impact on the farmer with a $100,000 operating loan than a $500,000 operating loan.
There are sure to be farmers using these funds for something other than what is listed here. It may be going on vacation, investing in retirement, servicing family expenses and debt, or remodeling the house. However, the wise way to use these funds is to invest them into the alternative that has the highest return on investment. This is the wisest decision whether the loan is forgiven or not, because these funds should be put to work to generate more funds.
In no manner can the person writing this tell an individual what has the greatest return for a specific individual. However, it would be prudent for each person who received PPP funds to evaluate their alternatives and act accordingly. These funds were made available to meet payroll, not to be buried (unless it is in the form of a seed) or squandered on frivolous endeavors. ∆
DR. ANDREW P. GRIFFITH: Assistant Professor, Department of Agricultural and Resource Economics, University of Tennessee