These entrepreneurs are just about out of their paycheck protection funding. Here's what's next - CNBC

Lisa Hess and her daughter Lucy enjoy a cup of coffee in San Luis Obispo, California.

Shannon McMillen Photography

Lisa Hess, owner of Lucy's Coffee, has started the long climb to restoring her business in a post-coronavirus world. But her well of emergency funding is about to run dry.

The crisis came at quite possibly the worst time for the San Luis Obispo, California, shop.

"We're a college town, and February through June are our busiest months," said Hess, who's operated her café for three years. "The timing was terrible: We literally started breaking even three weeks before the shelter-in-place order."

She borrowed close to $23,000 from the Paycheck Protection Program in the beginning of May. The federal forgivable loan program, which first opened on April 3, was originally intended to cover eight weeks of payroll expenses, mortgage interest, rent and utilities.

Hess used the money to pay her full-time employees but now, as California begins to gradually reopen, she has about two weeks of funding left.

Sales are a far cry from what they used to be — and Hess doesn't know when things will be back to normal.

 "There's anxiety about paying the employees going forward," she said. "And with the colleges canceling for the rest of the year and not having students coming back, I'm highly concerned about how things are going to go."

The predicament is a familiar one to owners of restaurants, bars and those in areas that depend heavily on tourist travel. Stay-at-home orders mostly forced them to close, and even as restrictions lift, sales and foot-traffic are still down — and the pot of PPP cash is nearly dry.

"The difficulty is that some of my restaurant clients were also early in line," said Todd Koch, CPA and partner at John A. Knutson & Co. in Falcon Heights, Minnesota. Restrictions have started to lift in the North Star State, with bars and restaurants starting to serve clients outdoors only on June 1.

"I'm concerned for these people and that industry," said Koch. "Revenues are way down.

"It's difficult just to get started, and now you have this on top of it."

Problems with timing

Though small businesses were in desperate need of the cash infusion from the PPP, the biggest stumbling block they had faced was the rapidly changing rules underlying the program.

For starters, businesses were able to borrow enough to cover eight weeks of payroll, mortgage interest, rent and utilities. For the loan to be forgivable, they had to apply at least 75% of the proceeds toward paying workers, and no more than 25% for other expenses.

This created a conundrum for businesses in the hospitality and leisure businesses: Many of their employees were furloughed or laid off and collecting unemployment — which might have paid them more due to the $600 a week enhancement the federal government provided.

In other cases, employees wanted to come back, but stay-at-home orders kept those establishments from fully reopening.

To meet the 75% threshold for forgiveness, employers shelled out hazard pay to employees or paid them to stay home if they couldn't reopen at all.

Jennifer George, who manages Mountain Tees in Breckenridge, Colorado, reduced hours for employees but paid them in full after the gift shop received a $140,000 PPP infusion. Restrictions on retail businesses in Colorado began to lift on May 1. Though sales are far from where they would be normally, they have been rising since Breckenridge opened a nearby pedestrian plaza, George said.

"I didn't tell people to go on unemployment, but we gave our good employees an end-of-season bonus and asked for their loyalty to come back when the doors opened," she said.

The Paycheck Protection Program Flexibility Act, which President Donald Trump signed into law on June 5, relaxed the spending requirements. Firms now have 24 weeks to spend their loan proceeds, and they're eligible for forgiveness if at least 60% of the money goes toward paying employees.

Lisa Hess at Lucy's Coffee in San Luis Obispo, California.

Shannon McMillen Photography

Partial forgiveness is also on the table for those who don't meet this threshold.

However, the additional time doesn't do much for businesses that have already spent down a large chunk of money.  "The period that's covered by the PPP has been extended, but the amount received doesn't correspond with the extension," said Sheneya Wilson, CPA and founder of Fola Financial in New York.

Her clients include a small barbecue restaurant in the city, which is only beginning to reopen.

"If a business has low margins, maybe they were able to keep 10 employees on, but can they sustain these employees?" Wilson asked. "Or will they have to let them go?"

Not just more time, more money

Senator Jeanne Shaheen, D-N.H., speaks at U.S. Capitol press conference about seniors facing higher prescription drug prices if Obamacare is overturned.

Michael Brochstein | SOPA Images | LightRocket | Getty Images

Senate Democrats are trying to give cash-strapped PPP borrowers another shot at funding.

The Prioritized Paycheck Protection Program Act is sponsored by Sens. Ben Cardin, D-Md.; Chris Coons, D-Del.; and Jeanne Shaheen, D-N.H. Under this bill, firms with 100 or fewer employees can borrow more money from the PPP, provided they've exhausted or are close to exhausting their initial round of funding and if they've had a revenue loss of at least 50%.

In the meantime, accountants are at the drawing board and thinking of ways to help clients stretch out a few more dollars.

More from Smart Tax Planning:
Thinking of being your own boss? What it means for taxes
Why businesses aren't rushing to claim the $130 billion PPP pot
Five key takeaways for small business owners, post-PPP

Local grants for entrepreneurs, as well as other small-business loans through the SBA, are a possibility, said Wilson at Fola Financial.

For now, all business owners can do is adapt and wait.

Hess, of Lucy's Coffee, has cut back her menu and trimmed her hours to 7 a.m. to 3 p.m. – she used to operate from 6:30 a.m. to 6 p.m.

"I felt like it was getting warmer and people were getting out a little bit more, and my staff started coming back," she said. "I just hope we can push through until things get back to a new normal."

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