This article was update on June 15 with new guidance regarding previous felony convictions and how they impact a PPP loan application.
I think it’s safe to say there are limits to the Paycheck Protection Plan (PPP) loan program, particularly for those who are self-employed or have few employees. In other words, loan amounts will be pretty small for those businesses that don’t have a large payroll—and may or may not provide a lot of value for some small businesses. Nevertheless, it’s important that you make sure your paycheck protection plan loan application is accurate.
What the PPP Loan Does Well
The PPP loan program was designed to keep people on the payroll. For small businesses where the biggest monthly overhead expense is payroll, the PPP may very well be a lifesaver. And, keeping people on the payroll during several weeks of downtime could help ensure that a small business’s best employees will still be available when the business climate improves—when the business needs them the most.
A restaurant, for example, probably didn’t need a full complement of staff during the recent shutdown (even if they were still doing curbside or drive through business), but a restaurant owner could potentially repurpose employees for cleaning, painting, or other similar duties during those times because their payroll was covered by the PPP loan.
Earlier in my career, I often spent the offseason painting and repairing the facilities we worked out of. I appreciated that the business owner I worked for was trying to help me out with a way to continue earning some income during the off season (because my income was commission-based), and those things needed to be done. If I were a small business owner right now, had been able to secure a PPP loan to keep my employees on the payroll, and could use my employees to do things like that while they continued to be on the payroll with nothing else to do, I’d probably do something similar. It seems like a pretty reasonable request to make of employees.
Over the last few months, I’ve heard about several companies that have needed to temporarily reassign employees to other tasks to avoid laying them off. Friends of mine in this situation have expressed their gratitude and relief at being able to keep their jobs, even if it meant doing something that might not have been in their wheelhouse to get through the current crisis gainfully employed.
The PPP loan does well in this scenario.
What the PPP Loan Doesn’t Do As Well
If your business only has a handful of employees (or even if it’s just yourself), the limitations of the PPP and how it was intended the funds be used, may not provide as much value to you as the previously described scenario. That’s not to say there is no value, but a business with two or three employees that needs working capital to keep the business afloat likely won’t benefit as much from a loan designed to keep his or her employees paid.
If you’re looking for an influx of working capital, the PPP loan isn’t going to do that. The Economic Injury Disaster Loan (EIDL) is likely a better fit for those looking for working capital.
What Does this Have to Do with an Accurate PPP Loan Application?
That’s a good question. Let me give you a candid anwer.
I have a number of friends who run their own small businesses and we have discussed the above two scenarios several times. They lament that the PPP funds are needed in their businesses, but not to make a payroll. They need funds to meet other financial obligations while they are shut down, but because they don’t have a large payroll, even if they diverted PPP funds for other things and opted to take the 1% interest rate loan, it wouldn’t be enough to meet their obligations because their payroll is too small.
Casually, one of them mused, “Hypothetically, what if I fudged the number of employees on my application? I could get more PPP funds that way, couldn’t I?”
I, not so casually, reminded them that they would be certifying that the information on any loan application was accurate and that knowingly falsifying anything on the app would be punishable by law. The specific language on the updated PPP loan application is as follows:
“I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.”
I know my friend wasn’t really serious and just wanted to see where I would go with this, but I have seen comments online where people have admitted to fudging the numbers to get a bigger loan amount—basically risking anywhere from a couple of years to 30 years in prison and fines that could go up to $1 million. If, like me, you feel that the coronavirus has had a negative impact on small businesses (maybe even yours in particular), think about what a few years in federal prison would do to your business. Fudging on the numbers is just NOT a good idea.
Federal Investigations Have Already Begun
Just this morning an article written by Zachary Warmbrodt, published in Politico discusses the efforts of Secretary Mnuchin and the Treasury’s efforts to discover and prosecute PPP loan fraud.
“The Justice Department has launched a review of the $670 billion emergency loan program that Congress created to avert layoffs at small businesses, as the Trump administration ratchets up scrutiny of whether certain borrowers should have received funding,” writes Warmbrodt. “The department’s inquiry has already turned up potential fraudulent activity by businesses that sought the so-called Paycheck Protection Program loans, a spokesperson confirmed.”
Even though it probably doesn’t feel that way, the speed at which the SBA is moving to get PPP loan funds into the hands of business owners is unlike anything they have done before. As in much faster. To do this, a lot of the due diligence lenders typically go through was not required to make capital available faster than the SBA normally works.
In light of SBA loan fraud that took place in previous disasters, it shouldn’t be a surprise that the Department of Justice would become involved in investigating fraud related to the PPP.
Complete your loan application including factual information that is true and accurate in all material respects. Whatever shortcomings exist within the PPP, they do not justify the risk of finding yourself in front of a judge trying to explain why you falsified your loan application.
Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on this for your financial decisions. We encourage you to consult with your lawyers, CPAs and Financial Advisors. To review your real-time funding options with one of Nav’s lending experts, please contact us.
This article was originally written on May 1, 2020 and updated on June 15, 2020.