Blog

What SBA loan should I apply for?

Although small business owners are interested in applying for an SBA loan, routinely they do not know where to start? In this article, we describe the different types of SBA loans and offer a list of lenders who directly fund SBA loans.

By Thomas Tramaglini, Managing Director at BRP Onesta
info@BRPOnesta.com
www.backofficedepot.com
www.thomastramaglini.com
About Thomas Tramaglini

SBA Loans – What type is best for you?

SBA loans have grown in popularity, especially since the pandemic. The number of small businesses who received funding from popular programs such as the Payroll Protection Program and the Economic Injury Disaster Loan, a previous analysis we did suggests that nearly 1 in 2 business owners have received funding from an SBA product.

However, don’t be fooled! Just because you received an EIDL or PPP loan does not mean you will qualify for a traditional SBA loan.

In fact, in 2021 the SBA reported that there were 32 million small businesses in the United States and only about 12,000 received an SBA 7(a) loan. So, about 0.038% of small businesses in the country did not receive an SBA loan. Since only about 12,000 SBA loans (7(a)) were doled out in 2021 it would suggest that banks are not so motivated to lend to small businesses.

Because this number is so low many small business owners choose to borrow using online or alternative lending options.

If you are a small business owner and you want loan options that are similar to an SBA but without the barriers of SBA, contact our team of advisors now.

Yet, if you are going to apply for an SBA loan, you should know what you are applying for.

Here are different SBA loan products which small business owners can apply for:

PPP and EIDL

Before I get into the other SBA loans, at least 5 times a day we are asked by small business owners if they can apply for the EIDL or if there is another round of PPP coming.

Currently, EIDL is still an active program. However, the date for new applications ended on December 31, 2021, and the SBA is only funding those who applied before that date. The majority of the EIDL applications being considered at this time are those who were declined originally and are in the reconsideration process.

If you are a small business owner and had your EIDL application declined: We have a high success rate of working with small business owners getting their declined EIDL applications funded – contact us and one of our advisors will go over your file.

The PPP program had 2 draws and small business owners would love to get another draw of forgivable funds. To date, there are no plans on providing another draw of PPP funds.

Sign Up for Our Secret Sauce Newsletter for Small Businesses and receive the link to 1 Tradeline Who Gives Business Credit for Free Click Here

The difference between EIDL and SBA loans

The major difference between EIDL and other SBA loans is that the EIDL directly comes from the US Department of Treasury and the other loans come from approved lenders. True SBA loans are loans from approved lenders guaranteed up to a certain amount (program dependent) by the federal government.

SBA 7(a) and Express Loan (same guidelines)

SBA 7(a) loans are the most common loan program offered by SBA. The SBA suggests that the 7(a) can be used for business real estate purchases, as well as short- and long-term working capital, refinancing current business debt, as well as the purchase of furniture, fixtures, and supplies. The maximum loan amount for a 7(a) loan is $5 million. Key eligibility factors are based on what the business does to receive its income, its credit history, and where the business operates. SBA 7(a) loans are not forgivable.

SBA 504

The Certified Development Companies/504 Loan Program provides long-term, fixed rate financing of up to $5 million for major fixed assets that promote business growth and job creation. 504 loans are available through SBA’s community-based partners who regulate nonprofits and promote economic development within their communities. CDCs are certified and regulated by the SBA. SBA 504 are repayable over 10 – 20 years and pegged to an increment above the current market rates. SBA 504 loans are not forgivable.

Microloans

The SBA microloan program provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. The average microloan is about $13,000. SBA provides funds to specially designated intermediary lenders, which are nonprofit community-based organizations with experience in lending as well as management and technical assistance. These intermediaries administer the Microloan program for eligible borrowers.

What are the most prevalent banks for SBA loans?

The US Small Business Administration keeps a list of their 100 most active SBA lenders on their website. So, if you are going to apply for an SBA loan, you need to know who to apply for the loan from. While this list changes frequently, here is a list of SBA’s most active 100 banks.

Not all banks are created equal

In 2021, 1,189 lenders funded SBA 7(a) loans. We work with over 100 SBA banks, and it is important that one knows what these banks are looking for. One does not simply just call the bank and apply for an SBA loan. Lenders can be particular in who they want to fund.

  • Some of the SBA lenders prefer that you do your banking with their bank
  • Some SBA lenders prefer to work with certain industries
  • Some SBA lenders only serve a region or a small area

Almost always better to use an Agent for an SBA loan

Using a specialist may be one of the best ways to attain an SBA loan. Specialists or “Agents” understand what goes into an SBA loan application. Agents like BRP Onesta specialize in both knowing what is needed for approval for an SBA loan and can help a small business owner prepare what is needed for the bank. In the end, small business owners will save a lot of time and money using an agent. If you have any questions or would like to apply for an SBA loan, we will help you.

Do you want to apply for an SBA loan? Do you think you are ready to qualify now? Do you want to find out if you can get pre-approved for an SBA loan before you apply?

If you answered YES to any of these questions, please contact our team at any time for a free, no-obligation phone consultation with one of our specialists. We will set up a time with you and go over what you are looking for, what we think you can qualify for, and what we can do to get you to the finish line.

We also have a host of small business funding opportunities, from equipment loans to small business grants which we keep updated each week (click here)

References

SBA EIDL Loan Data: https://www.sba.gov/sites/default/files/2022-02/COVID-19%20EIDL%20TA%20STA_02032022_Public-508.pdf

SBA PPP Loan Data: https://www.sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-program/ppp-data

SBA Office of Advocacy Data: https://cdn.advocacy.sba.gov/wp-content/uploads/2020/11/05122043/Small-Business-FAQ-2020.pdf

SBA Loan Descriptions: https://www.sba.gov/funding-programs/loans

Dr. Thomas Tramaglini is the Managing Director for BRP Onesta, a company that supports small businesses. By offering a host of important and affordable services that small business owners tend to not have time to do themselves, the team at BRP Onesta can help small businesses grow infinitely. Although located in on the famous Jersey shore, BRP Onesta serves clients in all 50 states, Puerto Rico, Mexico and Canada.

Are SBA Loans Forgivable?

In this article, we tackle SBA loan forgiveness.  We identify what SBA loans are forgivable and how to get those SBA loans forgiven.  This article is part of our series, SBA Loans for Small Business Owners: The Complete Beginners Guide, we share our experiences and expertise to answer questions that small business owners have about SBA loans. 

By Thomas W. Tramaglini, Managing Director at BRP Onesta
info@BRPOnesta.com
www.backofficedepot.com
www.thomastramaglini.com

Sign Up for Our Secret Sauce Newsletter for Small Businesses and receive the link to 1 Tradeline Who Gives Business Credit for Free Click Here

Business Owners Confused

Are you a small business owner that has an SBA loan?  Do you receive an SBA loan in recent years?  Is your loan forgivable?  Are parts of your loan forgivable? 

Business owners are confused and continue to be confused.

According to the SBA, there are over 31 million small businesses in the United States.  Using SBA data, of the 31 million+ small businesses, over the last 5 years approximately 12 million loans have some sort of SBA tag to it.  So, about approximately 1 in 3 small business owners have recently had some sort of SBA small business loan.  We believe the percentage could be closer to 1 in 2 with the number of small businesses that the SBA Office of Advocacy also suggests that many businesses have no employees, or they may be dormant.

Since so many small business owners have a loan associated with the SBA in some way, we frequently are asked if they must pay back their SBA loan. As part of our blog series SBA Loans for Small Business Owners: The Complete Beginners Guide, we provide some simple answers below.

Access to SBA Loans Blew Up in 2020

Before 2020, I am not sure if anyone had ever seen an SBA loan be forgiven.  In fact, according to the Small Business Credit Survey suggests that before the Pandemic, only about 1 in 5 small businesses were actually able to secure an SBA loan of some type. 

So, we know that since April 2020, the number of small business owners having some sort of associated SBA loan is 30%-50% higher.    

Mass Confusion Prevalent

Regardless of your educational level, time in business or the size of SBA loan, it was and still is clear that small business owners are confused about what is forgivable and what is not.  A recent report in the Wall Street Journal suggests that the majority of small business owners continue to be confused about SBA loans.

What is considered “Loan Forgiveness?”

The advisors at Brothers Road Partners LTD (BRP Onesta) are asked about Loan Forgiveness every day.  Simply, Loan Forgiveness means that you do not have to pay back the loan.

With this definition, we still live by one tenet set by Managing Director, Thomas Tramaglini: Until the loan is forgivable, the business owner is responsible.  This is good advice considering the confusion surrounding SBA loans.

What SBA Loans are Forgivable?

Below is a list of SBA loans (and we included advances/grants) we have helped our clients get or manage and whether or not the loans are forgivable:

Payroll Protection Program (PPP)

PPP loans were designed to provide an incentive for small businesses to keep workers on the payroll (List of PPP allowable uses).  Like other SBA loans, PPP loans were underwritten, funded and forgiven by approved SBA lenders. So far, there have been 2 rounds of PPP available to small business owners. PPP loans are forgivable if the borrower spent the funds and can provide proof that the funds were used for the intended purposes.  To date, about 87% of the PPP loans have been forgiven.

Getting your PPP loan forgiven is not hard as long as you used the money for what it was intended for.  The SBA has made it easier to apply for forgiveness with the website https://directforgiveness.sba.gov/requests/borrower/login/?next=/ Depending on if the bank the PPP loan was funded from opts to use this portal, this site is easy to apply for the PPP loan through.  Otherwise, each bank either directly has their own process (PNC Bank, Fountainhead) or may use a 3rd party for forgiveness (Scratch).

Is your PPP loan(s) still not forgiven?  Contact us today – we can help. 

Click here to find out here whether your PPP loan or loans are forgiven.

Verdict: Forgivable

Economic Disaster Injury Loans (EIDL)

The EIDL loan program was extended to Pandemic relief under the CARES and American Recovery Acts.  EIDL loans are loans directly provided to small business owners by the US Department of Treasury.  After the initial EIDL loans were provided for 6 months of working capital, the loan was extended to those who qualified for up to 24 months.  The terms of this loan are 2.75% (non-profit) to 3.75% (for-profit) and go out to 30 years.  This direct long-term loan program from the SBA is not forgivable.

List of EIDL allowable uses

Verdict: Not Forgivable

Do you need help with EIDL Reconsideration?  Contact us today – we can help?  We have helped numerous clients with their EIDL loans and loan expansion.

Misuses of EIDL and PPP Loans:  If you are curious about some of the misuses of PPP and EIDL, I wrote a couple of articles on the topic:

The Front-Line Zeroes of the Pandemic: Ranking our top 15 EIDL/PPP SM Business Owners Accused or Convicted of EIDL/PPP Fraud

Fake 940/941s, More Lamborghinis, Rolexes and Real Estate, Oh My.  More Fraud from PPP/EIDL

EIDL Advance | EIDL Targeted Advance | EIDL Supplemental Targeted Advance

EIDL Advances has been rolled out in a host of different ways.  That is, the government has found different ways to provide funds set aside for small businesses.  From $1,000 per employee up to $10,000 for any small business that qualified to more targeted small businesses that mainly drove funds to lower income areas generally, EIDL Advance programs have been intended to not have small business owners pay back funds.  It is important to note that some EIDL Advances were rolled into PPP loans however, SBA guidance is all over the place on that topic, so our disposition is that if you received an EIDL Advance, you likely do not have to pay the funds back.

Verdict: Forgivable

SBA 7(a) and Express Loan (same guidelines)

SBA 7(a) loans are the most common loan program offered by SBA.  The SBA suggests that the 7(a) can be used for business real estate purchases, as well as short- and long-term working capital, refinancing current business debt, as well as the purchase of furniture, fixtures and supplies.  The maximum loan amount for a 7(a) loan is $5 million. Key eligibility factors are based on what the business does to receive its income, its credit history, and where the business operates.  SBA 7(a) loans are not forgivable.

Verdict: Not Forgivable

SBA 504

The Certified Development Companies/504 Loan Program provides long-term, fixed rate financing of up to $5 million for major fixed assets that promote business growth and job creation.  504 loans are available through SBA’s community-based partners who regulate nonprofits and promote economic development within their communities. CDCs are certified and regulated by the SBA.  SBA 504 are repayable over 10 – 20 years and pegged to an increment above the current market rates.  SBA 504 loans are not forgivable.

Verdict: Not Forgivable

Microloans

The SBA microloan program provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. The average microloan is about $13,000.  SBA provides funds to specially designated intermediary lenders, which are nonprofit community-based organizations with experience in lending as well as management and technical assistance. These intermediaries administer the Microloan program for eligible borrowers.

Verdict: Not Forgivable

Implications

Over the past two years our team at BRP Onesta has been hit with many questions regarding whether or not one has to pay back their SBA loans.  In this article, I have provided an overview of different SBA loans and whether they are forgivable. 

If you have any questions, you can contact us or reach out directly to SBA. 

Do you want to apply for an SBA loan?  Do you think you are ready to qualify now?  Do you want to find out if you can get pre-approved for an SBA loan before you apply?

If you answered YES to any of these questions, please contact our team at any time for a free, no-obligation phone consultation with one of our specialists.  We will set up a time with you and go over what you are looking for, what we think you can qualify for, and what we can do to get you to the finish line.

We also have a host of small business funding opportunities, from equipment loans to small business grants which we keep updated each week (click here)

References

SBA EIDL Loan Data: https://www.sba.gov/sites/default/files/2022-02/COVID-19%20EIDL%20TA%20STA_02032022_Public-508.pdf

SBA PPP Loan Data: https://www.sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-program/ppp-data

SBA Office of Advocacy Data: https://cdn.advocacy.sba.gov/wp-content/uploads/2020/11/05122043/Small-Business-FAQ-2020.pdf

SBA Loan Descriptions: https://www.sba.gov/funding-programs/loans

Dr. Thomas W. Tramaglini is the Managing Director for BRP Onesta, a company that supports small businesses. By offering a host of important and affordable services that small business owners tend to not have time to do themselves, the team at BRP Onesta can help small businesses grow infinitely. Although located in on the famous Jersey shore, BRP Onesta serves clients in all 50 states, Puerto Rico, Mexico and Canada.

Thomas Tramaglini

SBA Loans for Small Business Owners: The Complete Beginners Guide

Research over the last 10 years suggests that about 1 in 5 small business owners qualify for SBA loans. Yet, when it comes to loans, small business owners are primarily interested in an SBA loan. In a series of blogs, we explore SBA loans and what small business owners can do to get qualified.

By Thomas W. Tramaglini, Managing Director at BRP Onesta
info@BRPOnesta.com
www.backofficedepot.com

Sign Up for Our Secret Sauce Newsletter and receive 1 Tradeline for Business Credit for Free Click Here

Introduction

For years, BRP Onesta has originated millions of dollars in SBA loans for small businesses. Clients and prospects almost always request SBA loans when seeking funding for their business. Yet, while the small business owners we interact with want an SBA loan, the majority of our interactions yield that they know little about SBA loans.

Why are SBA loans so sexy?

What is so attractive about an SBA loan? Two reasons are that they carry low interest rates and have long terms. Small business owners can use loan proceeds for a host of purposes (equipment, machinery, buildings or working capital). So, when a loan has some of the attributes I listed, of course SBA loans would be the first choice.

What is an SBA Loan?

Although I will spend some time to do a bit deeper of a dive on the subject in future blog posts, it is important to describe what an SBA loan is. Also, for the purposes of this blog I will NOT include Economic Injury Disaster Loans (EIDL) or Payroll Protection Program (PPP) loans in the context of my description. An SBA loan is a loan (from an approved SBA lender) which the majority of the loan is guaranteed by the U.S. Small Business Administration. Guidelines for these lenders to use for SBA loan programs are set by the SBA and once an SBA loan is approved by the bank, it is sent to the SBA for their review and approval.

See Different Loan Opportunities for Small Business Owners to Take Advantage Of

Most Small Business Owners Do Not Qualify for SBA Loans

Indeed, SBA loans are sexy to many small business owners. Yet, a small number of small business owners get funded with an SBA loan. One dataset and report that I love to comb through comes from Fed Small Business, a workgroup coming from the 12 Federal Reserve Banks and small business partners (about) (Small Business Credit Survey). Each year, the group conducts a survey of small business owners from all 50 states. Questions vary from borrowing to organizational health. Results provide a generalizable set of data for researchers to paint a picture of the status of small businesses. In laypersons terms, their survey is a measuring stick of that describes different aspects of small business health in the United States with approximately 90% accuracy.

In the last SBCS survey that provided an accurate description of small businesses and SBA loans, around 1 in 5 businesses were able to secure SBA loans as compared to other sources of borrowing capital. Considering how sexy SBA loans are to small business owners it is disheartening and eye-opening that such a low number of small business owners actually can secure such funding.

We Curate Small Business Grant Opportunities Here

Small Business Owners Need to Know More About SBA Loans

Clearly, there is a disconnect of some type considering the high percentage of small business owners who tell us they want SBA loans but in reality, qualify for one. So, we decided to write a series of small business blog posts that address this gap. We aim at better educating small business owners and provide ways that small business owners can prepare for applying for an SBA loan. The focus will be to answer many of the questions that we are asked each day at BRP Onesta.

Some of the topics that we will explore will include:

  • What types of SBA loans are there?
  • Are SBA loans forgivable?
  • Where to apply for an SBA loan?
  • How do small businesses qualify for an SBA loan?
  • What is the SBA loan process?
  • What options are there for small business owners who do not qualify for an SBA loan?
  • How can the typical small business owner get pre-approved for an SBA loan and what pitfalls they should avoid?
Is There Hope?

Yes, of course there is hope. Up front, no, all small business owners will not qualify for an SBA loan. However, while only 1 in 5 small businesses seem to be able to qualify for an SBA loan, with support organizations like ours (www.backofficedepot.com), our ratio is much higher. From January 2016 – present, about 62% of our clients were able to qualify for SBA loans after work we did to support their application process and applying at the right bank. The bottom line is that in 2020 the SBA reported that there were 31.7 million small businesses in the United States and there is plenty of funding out there for small businesses to use to grow their brand, their products, services, and their customer base and we want to help small businesses find their way forward with the best possible margins.

Contact Our Team Today To See If You Qualify For An SBA Loan
Do you want to apply for an SBA loan? Do you think you are ready to qualify now? Do you want to find out if you can get pre-approved for an SBA loan before you apply?
If you answered YES to any of these questions, please contact our team at any time for a free, no-obligation phone consultation with one of our specialists. We will set up a time with you and go over what you are looking for, what we think you can qualify for, and what we can do to get you to the finish line.
We also have a host of small business funding opportunities, from equipment loans to small business grants which we keep updated each week (click here)

Dr. Thomas W. Tramaglini is the Managing Director for BRP Onesta, a company that supports small businesses. By offering a host of important and affordable services that small business owners tend to not have time to do themselves, the team at BRP Onesta can help small businesses grow. BRP Onesta serves clients in all 50 states, Puerto Rico, Mexico and Canada.

Spot Checks: No-Nos and Uh-Ohs of EIDL.

Tales from recent spot checks SBA performed on our clients.

By Thomas W. Tramaglini, BRP Onesta

info@BRPOnesta.com

www.backofficedepot.com

Recently, two of our clients’ EIDL applications for additional funding initiated a spot check by the SBA.  The SBA reviewed how they used their EIDL proceeds.  We take their experiences and use previous survey data from our clients to write this article underscoring the importance of using EIDL in compliance with code.  Implications are provided at the end of this article.

SBA can and (actually) does check on how small business owners used proceeds

When the COVID-19 Pandemic hit, immediately small business owners began to seek relief.  In several bills passed by Congress and signed into law by former President Trump and current President Biden, billions of dollars went to small business owners who needed help.  According to the SBA, the Economic Injury Disaster Loan program disbursed over $88 Billion dollars through November 2021 through EIDL.  There were also grants provided to small businesses under the same program guidelines.

With so much money being loaned out to small business owners, there are cases, albeit rare where the SBA will either spot check or audit how proceeds are used.

A Wide Range of How Small Business Owners Spent or Intend to Spend EIDL Proceeds

As helpful as some of those funds were to many small businesses, the allowable uses of small business loan funds were confusing to many.  For instance, in our survey of small business owners, nearly 70% (69.7%) of small business owners identified that they were unclear at that start of the program of what funds were to be used for and then in a subsequent question, 46.2% of the business owners in the same survey said that they would like to receive expansion funds provided by SBA for expansion.  Amidst the confusion shared by so many small business owners, small businesses owners are still responsible for using their funds adequately or face possible implications of misuse of funds as laid out in their SBA EIDL Notes.

Purpose of EIDL Proceeds and How Small Business Owners Used or Will Use EIDL

The SBA describes the EIDL program1 purpose: “The purpose of EIDL is to provide financial assistance for small businesses to meet financial obligations and operating expenses that could have been met had the disaster not occurred.”  In our survey, small business owners said they used or would be using the EIDL funds for the following:

New Equipment – 29.1%

Refinance or Pay Off Debt – 54.2%

Payroll – 67.1%

Working Capital – 81.2%

New Hires – 39.6%

Operating Expenses (rent, utilities) – 24.7%

Expansion – 46.2%

Other Uses – 80.4%

As you can see, the data suggests that small business owners used EIDL funds in various ways. 

Significantly, this survey was completed before the SBA revised allowable uses on September 21, 2021, to include paying off previous debt (“Working capital to make regular payments for operating expenses, including payroll, rent/mortgage, utilities, and other ordinary business expenses, and to pay business debt incurred at any time (past present or future”).

EIDL Spot Checks

Recently, two of our clients were spot checked by the SBA for their EIDLs.  Both were spot checked during their application review for EIDL expansion.  The SBA asked the following to be submitted:

  • How first time EIDL proceeds were spent.
  • Backup/receipts/bank statements demonstrating what proceeds were used for.
  • How the first time EIDL funds were not sufficient for the business owners and to show cause for needing additional funds.
  • One of the two business owners were asked to provide additional records, including financials.

It is important to note that both of our clients were not fully prepared for the spot check.  While both clients have our company doing their books and have clean books, many business owners do not keep or have someone keeping their books.  On the contrary, any taxpayer would want to make sure that any small business who was provided Relief Funding would want the proceeds to be used for an appropriate purpose. 

One area on the horizon for small business owners to take note: Taxes should match your records.

One note that needs mention but is not the subject of this article is that SBA in their spot checks asked for transcripts of FY 2019 Taxes.  The implications of doing so are important.  That is, numbers on original applications should match the same numbers from the 2019 IRS tax forms which are appropriate for the type of entity type.  From our experiences, many of our clients were denied additional funds because their tax amounts in areas such as Revenue and Cost of Goods Sold were not in alignment.  Furthermore, if one is to defend themselves on how they expended their EIDL proceeds, it is important to make sure that those expenditures match what is on the FY 2020 or FY 2021 taxes submitted.  Just to ponder extrapolation of discrepancies between tax forms and EIDL forms is unsettling.  The bottom line is that small business owners should be conscious of this occurrence and the implications, inferred or not.

What if SBA spot checks or audits my EIDL loan?

If you are spot checked by the SBA or more importantly, audited, you should be prepared to provide backup of how you spent the funds.  Experts suggest that you keep business records for up to six years after your loan was received however some states have specific laws that govern business records that some business owners should be aware of.

Regardless, if you have an EIDL loan you should be ready for an EIDL audit.  Specifically, you should keep a record of the EIDL deposit, payments, and keep all receipts of expenditures that you utilized using the funds. 

What can I use, or should I have used my EIDL loans for?

For those who received EIDL proceeds, you probably misused EIDL proceeds if you used the funds to expand your operations.  Remember, EIDL proceeds were provided to help you maintain your operations during the Pandemic.  As previously stated, some of these costs include payroll, benefit costs for employees, rent, utilities, fixed debt payments, repairs and replacing inventory.  Any working capital would need to be verifiable and align to EIDL appropriate uses.

EIDL Restrictions

If you used your EIDL funds to expand or do new things for your business, you probably misused proceeds.  Some of the other misuses include refinancing new debt not incurred during the period of the proceeds, buying new capital assets such as new vehicles or new buildings, dividends or bonuses, owner disbursements, repayment of stockholder or principal loans, or paying a direct federal debt from the IRS (unless exempted from the September 8th update). 

So what?

Well, if you received EIDL funds or applied for more funds, expect a check in or an audit.  These occurrences are rare, but like our two clients who were not prepared, you should be prepared.  That is, if you used EIDL funds to expand your business you probably misused the funds.  On the surface, the Pandemic funds were there to provide a bridge.  In many cases the funds were totally used the right way.  However, if you were one of those who did not use the funds adequately, regardless of if you were confused or not you will likely be liable for consequences.  In each note from the SBA, the consequences are laid out and can include a host of different options.

https://www.sba.gov/article/2021/nov/24/fact-sheet-us-small-business-administration-delivering-support-americas-small-businesses-helping

Dr. Thomas Tramaglini is the Managing Director for BRP Onesta, a company that supports small businesses. By offering a host of important and affordable services that small business owners tend to not have time to do themselves, the team at BRP Onesta can help small businesses grow infinitely. Although located in on the famous Jersey shore, BRP Onesta serves clients in all 50 states, Puerto Rico, Mexico and Canada.

Are You on The Lending Blacklist? You might be surprised.

Lenders are getting smarter.  So we share a few tools that online and MCA lenders use to gauge fundability.

By Thomas W. Tramaglini, BRP Onesta
info@BRPOnesta.com
www.backofficedepot.com

Our company routinely works with small business owners to stabilize or grow their businesses.  One important step that small business owners require our assistance is with the attainment of capital for their businesses.  In a previous post, I discussed some of the statistics of how many small businesses are looking to borrow money for their business. Whether for consolidation of debt, expansion, real estate, or equipment, underwriting of any loan or advance, we generally are asked by small business owners what the lenders are looking for in order to get an approval.

Through professional conversations with brokers of merchant cash advance and online loans in the past, brokers seemed to have lenders who they suggested did not thoroughly vet client applications ultimately providing funding to small business owners who probably should not have been funded.  While this has not been our experience, clearly the shenanigans of the merchant cash advance and online loans have been in existence for some time.

So, we decided to explore some ways that lenders vet possible lenders in the online and alternative lending space.

Sign Up for Our Secret Sauce Newsletter which shares information on trends, lending and grants for Small Businesses and receive the link to 1 Tradeline Who Gives Business Credit for Free Click Here

In no way can one blog (or probably a book) do any justice to go through the art (and it is an art) of how banks or lenders go about their approval processes.  We did however, find three tools that online lenders (i.e., OnDeck, PayPal) and alternative lenders (MCA, equipment) favor in vetting their applications.

What are the lenders looking for?

Simply put, there are many different variables that go into an approval.  Yet, regardless of how strong a small business’ financials or bank statements look, one attribute that will kill any deal is whether a business has ever had issues paying back capital (defaults, slow pays, Judgements, fraud, etc.).

Three Tools that Lenders Use Which Unofficially Serve as A Blacklist

Clearinghouse Data

Online and alternative lenders use different clearinghouses who curate a multitude of data.  From publicly reported data to credit records, these datasets provide a robust amount of information about potential borrowers and businesses.  There are a few clearinghouses our there (others like Chex Systems) but here are a few that we know are commonly used.

LexisNexis

LexisNexis provides business research and risk management services to various industries. These include lenders, insurance companies, vendors and more. These companies use LexisNexis to verify personal and business credit history (PayNet does this too), public records (PACER), and application history. And they use LexisNexis to assess risk on applicants. Inaccurate information, data which doesn’t match your application, or negative items in your LexisNexis report can have a drastic negative impact on your business. This is especially true during the application process.

Business owners can request a copy of their LexisNexis report and decrease the probability of surprises during the application process.   Click Here to Request Your Report

DataMerch.com

Founded in 2015, DataMerch.com is a popular tool for online and alternative lenders.  Lenders who belong to DataMerch.com upload their lending experiences ultimately painting a picture of many small businesses who have taken loans and merchant cash advances with their companies.  Recently, DataMerch.com reported that they now have over 50,000 records on file.  

Why is this important?  DataMerch.com provides lenders a robust database so they can better inform their approval process.  These records provide categorical data such as suspicious activity, slow payers, split payers, and COVID-19 Hardships.  Lenders can also find out if small businesses have taken on recent or defaulted funding that might not appear in a business’ bank statements.  Regardless, small business owners should know that lenders are not stupid and if you have had issues with your MCAs or loans, you will probably have some issues taking another loan or MCA.

NYS Court System

One place that online and alternative lenders check for issues with loans, MCAs or just other issues which might be a red flag for borrowers is the New York State Unified Court System (New York State Courts Electronic Filing).  This website yields a host of legal cases from New York State but importantly, most alternative lenders are in New York so anytime there is a default, and a lender files a Judgement, that Judgement is listed. 

If you are a small business owner and default on a loan or merchant cash advance and you are served with a Judgement, it will likely be listed here.  The good news is that you can satisfy your Judgement which will be listed on the site after doing so.  The bad news is that once you have a Judgement listed on this website it becomes very difficult to ever get funding for your business ever again.  In some ways, have a Judgement posted on this site can be worst than a bankruptcy. 

Would you like to see if you have anything listed?  https://iapps.courts.state.ny.us/ is the link that used to access the files.

So what?

I wrote this Blog because when our clients get declined for loans or merchant cash advances, they tend to ask us why?  Although lenders do not share much information with us, we do know that lenders are getting smarter about who they provide funds to.  That is, lenders want to (and should) know that someone requesting to borrow funds will pay back their debt.

Over the years, we have seen just about everything small business owners have done to get funded.  Specifically, we could write a book about some of the shenanigans some business owners who have negative payment histories have pulled to get funded.

When our clients or small business owners get declined for loans or merchant cash advances and ask why? Notwithstanding that many times the clients do not tell us they had issues with paying a loan or merchant cash advance, they should understand there are tools that lenders use, and it is very possible they are blacklisted. 

So, if you are a small business owner who has had issues with paying back a lender, lenders are getting more informed, and they should be aware of this.  Lenders are not stupid and if you had issues paying back a loan or merchant cash advance, rightfully so you will probably not be able to access more capital for your business.  In fact, you will probably not find an easy road finding capital for another business as well.

Read Other Blog Posts at www.backofficedepot.com/blog or www.tomtramaglini.com

Dr. Thomas W. Tramaglini is the Managing Director for BRP Onesta, a company that supports small businesses. By offering a host of important and affordable services that small business owners tend to not have time to do themselves, the team at BRP Onesta can help small businesses grow infinitely. Although located in on the famous Jersey shore, BRP Onesta serves clients in all 50 states, Puerto Rico, Mexico and Canada.

Small Business Grant Opportunities Updated.

By Thomas W. Tramaglini, Managing Director at BRP Onesta
info@BRPOnesta.com
www.backofficedepot.com

Are you a small business owner and looking for a grant to support your business?

Our team at BRP Onesta continually looks for and list grants that are available for small businesses on our website.  We also assist small business owners who are in pursuit of grants just need help. 

Check our list out.

Dr. Thomas W. Tramaglini is the Managing Director for BRP Onesta, a company that supports small businesses. By offering a host of important and affordable services that small business owners tend to not have time to do themselves, the team at BRP Onesta can help small businesses grow infinitely. Although located in on the famous Jersey shore, BRP Onesta serves clients in all 50 states, Puerto Rico, Mexico and Canada.

Fake 940/941s, More Lamborghinis, Rolexes and Real Estate Oh My. 

The Hits Keep on Coming – More Frontline Zeroes of the Pandemic.

Part II – An addition to the Small Business Owners (Real or Fake) Who Are Accused or Convicted of the Largest EIDL/PPP/CARES Act Fraud

By Thomas W. Tramaglini, Managing Director at BRP Onesta
info@BRPOnesta.com
www.backofficedepot.com

A few weeks ago, I wrote an article (see link below) that provided some context about one of our clients who was convicted of defrauding the United States of nearly $1.2 Million in Payroll Protection Program Funding because it was a real eye-opener for me and my journey in an industry that supports small businesses.  Every day, I work with professional, hard-working, small business owners who in many cases live paycheck or have had to shut their doors because of the Pandemic.  I love our clients because they are the crossroad of what makes our nation great.

Yet, I continue to read about the people who have defrauded our nation with EIDL or PPP fraud and I wanted to share more examples of what some people tried to get away with that in essence, shut out many of our clients and small business owners who deserved PPP or EIDL funds and were shut out.

These Small Business Owners Lied About The Number of Employees They Had

If you read the dockets on sites like Arnold & Porter, many of the cases involve small business owners flat out lying on their PPP applications about the number of employees they had.  While I believe that this could have been a practice more prevalent than what is known, the cases also show falsified documents made to back up the claims for how many employees a company did employ.

I guess these people did not read much Mark Twain.  He said, “Honesty is the best policy – when there is money in it.”

Former Olympian Allison Baver

For instance, former Olympic speedskater Allison Baver is accused of falsely obtaining $10 Million in PPP funds.  According to Newsweek, Baver claimed that her company, Allison Baver Entertainment had over 400 employees on its monthly payroll.  She submitted several loan applications to banks back in April 2020, however according to the complaint, she did not have any employees on payroll.

For anyone who has any brain and owns a small business, it takes a big set to try and get $10 Million in PPP funding and have 0 employees.  We will see how this case is defended – Looks like the Alamo to me.

Lamborghinis, Trucks, Rolexes, Real Estate…

Similar to our client that I wrote about in the first article (The Zeroes of the Pandemic) Henry, Lee Price III from Houston defrauded the government of $1,600,000.  In fact, Price tried to get PPP funding for 3 different entities and even applied for a PPP loan under the name of a guy who had recently died.  According to the complaint, Two fraudulent applications received funding, according to the complaint. Price Enterprises Holdings allegedly received more than $900,000, while a loan application listing 713 Construction was approved for over $700,000. The loan applications allegedly asserted both entities each had numerous employees and significant payroll expenses. According to the charges, however, neither entity has employees nor pays wages consistent with the amounts claimed in the loan applications. Further, the individual listed as CEO on the 713 Construction loan application died in April 2020, a month before the application was submitted, according to the complaint.”

Price used his proceeds to purchase a Lamborghini Urus, a Rolex, and purchase real estate. 

In September, Price pled guilty to wire fraud and money laundering. (see https://www.justice.gov/usao-sdtx/pr/houston-entrepreneur-charged-spending-covid-relief-funds-improper-expenses-including)

A Common Practice of Those Convicted of PPP fraud – Submitting False 941 Forms

One of the requirements for companies that ran payroll was to submit Form 940 or 941 with their PPP application.  If you review the different cases and follow the news clearly the list of those who submitted Fraudulent 940s/941s is growing.  For instance, this month, a ring of those submitting fraudulent PPP applications was brought down in Georgia.

Ex University of Maryland Football Player Marc Mason

Earlier in January 2022, Marc Mason, the owner of Atlanta Business Capital is accused of submitting fraudulent PPP applications for more than one of his businesses.  He received nearly $600,000 in funding.  On top of that, Marc is separately accused of assisting others in getting PPP funds.  Allegedly, Marc helped business owners by creating IRS 941 forms for the business owners to submit to banks.  If the loans were awarded, he would receive a 2%-5% success fee from the borrower.

Celebrities Among Those Connected to Mason

The Atlanta Journal-Constitution highlighted Mason’s complaint and described 19 people connected with his scheme in Georgia.  Included in this list were Desperate Housewives Ion Overman, Dale Godboldo who was in The People v. O.J. Simpson, and music producer Carlos “Clos” Stephens.

Camus said, “Stupidity has a knack of getting in its way.”  The implications –

Well, when writing an article like this, one has to ask the question, So what?”

As I began this blog article, every day I work with small business owners and clients who put their lives and souls into their business.  The Pandemic hit hard.  They needed help.  I know many small business owners who were shut out of needed funding because the funds ran dry. 

It is clear that the government is beginning to find more and more cases where small business owners submitted fraudulent documents in their applications. 

In my first article, I ranked my top 15 Accused or Convicted of Fraud.  I am not sure were any of these “small business owners” would fall on that list.  Either way, it is horrible to see the means that people went to in order to defraud those who really needed the help.  I fully expect to continue to see more cases of small business owners who submitted fraudulent 941 forms or purchased things which were just dumb, like Lamborghinis and Jewelry.

For now, again in case you missed it, here is our “Top Fifteen Alleged or Convicted List for Pandemic Relief Fraud.”

  1. ($14M) Apocalypse Bella (https://www.justice.gov/usao-sdny/pr/two-texas-men-and-one-oregon-man-charged-fraud-scheme-obtain-over-14-million-covid)
  2. ($11.1M) Amanda Christian (https://www.justice.gov/opa/pr/twenty-two-charged-connection-more-11-million-paycheck-protection-program-fraud-scheme)
  3. Charles Petty ($11.1M) (https://www.justice.gov/opa/pr/twenty-two-charged-connection-more-11-million-paycheck-protection-program-fraud-scheme)
  4. ($11.1) Charmine Redding (https://www.justice.gov/opa/pr/twenty-two-charged-connection-more-11-million-paycheck-protection-program-fraud-scheme)
  5. ($7.6M) Jacob Carter, Quadri Salahuddin, Anwar Salahuddin, Christal Ransom (https://www.justice.gov/usao-sdny/pr/four-defendants-charged-76-million-covid-19-fraud-scheme)
  6. ($7.2M) Don Cisternino (https://www.justice.gov/usao-mdfl/pr/seminole-county-man-charged-covid-relief-fraud)
  7. ($6M) Christopher Lick (https://www.justice.gov/usao-ndms/pr/starkville-man-charged-more-6-million-covid-relief-fraud-false-statements-and-money)
  8. ($5.8M) Julio Enrique Lugo (https://www.justice.gov/usao-mdfl/pr/davenport-couple-charged-58-million-covid-relief-fraud)
  9. (4.5M) Christina Burden (https://www.justice.gov/usao-ndca/pr/oakland-woman-charged-million-dollar-scheme-defraud-pandemic-relief-programs-struggling)
  10. ($3.8M) Gregory Blotnick (https://www.justice.gov/usao-nj/pr/new-york-and-florida-resident-charged-38-million-paycheck-protection-program-fraud-scheme)
  11. ($3M) Anuli Okeke (https://www.justice.gov/usao-edny/pr/two-former-employees-new-york-branch-major-bank-and-accountant-charged-cares-act-loan)
  12. ($2.2M) Abdreq Aaron Lloyd, Russell Schort (https://www.justice.gov/usao-or/pr/two-oregon-men-face-federal-charges-pocketing-millions-covid-relief-fraud-scheme)
  13. ($1.9M ) John Jhong (https://www.justice.gov/usao-nj/pr/sussex-county-man-charged-19-million-paycheck-protection-program-fraud-scheme)
  14. ($1.6M) Alicia Ayers, Andrea Ayers, Traci Proctor (https://www.justice.gov/usao-sdny/pr/three-defendants-charged-16-million-covid-19-fraud-scheme)
  15. ($1.6M) James Kyle Bell (https://www.justice.gov/usao-dc/pr/nevada-man-pleads-guilty-election-fundraising-scam-and-cheating-taxpayers-out-paycheck)

Source: Arnold & Porter, 2021 https://www.arnoldporter.com/en/general/cares-act-fraud-tracker

There are other people or groups of people who have been accused or convicted (some for more greedy amounts than below and can be found here: https://tinyurl.com/2d5rm823.

*Disclaimer to reader – We believe that every person is entitled to due process and until convicted of any crime, anyone accused should be innocent until proven guilty.  All contents in this article, including names and claims were confirmed in by research through the United States Department of Justice or the State the person is accused from.

Dr. Thomas W. Tramaglini is the Managing Director for BRP Onesta, a company that supports small businesses. By offering a host of important and affordable services that small business owners tend to not have time to do themselves, the team at BRP Onesta can help small businesses grow infinitely. Although located in on the famous Jersey shore, BRP Onesta serves clients in all 50 states, Puerto Rico, Mexico and Canada.

The Merchant Cash Advance – Accounting (A Bit) Demystified.

By Thomas W. Tramaglini, Managing Director at BRP Onesta
info@BRPOnesta.com
www.backofficedepot.com

It is tax time and once again we have seen the IRS go after several of our loan origination clients because they reported their MCAs as liabilities (Merchant Cash Advances), not correctly accounting for the MCA as income.  In some cases, the back taxes and penalties have been significant (over $100,000).  Small business owners should take the accounting of Merchant Cash Advances into consideration before they file their taxes, especially bringing in their accountant for their opinion as it may make a rather huge difference.

Background

There is certainly some misunderstanding of what Merchant Cash Advances are and how they differ from loans so my attempt with this article I am writing aims to clarify a bit what MCAs are versus what loans are and more importantly, generating an accurate accounting of Merchant Cash Advances in a small business’ books. 

Further, most states require businesses to ensure that they have their liabilities and assets balanced in one way or another and we have seen many a business owner exposed with not accounting for Merchant Cash Advances in their books accurately. As demonstrated above and from numerous interactions with our clients and small business owners, it is important to grasp the concept of an MCA and the implications of an MCA with regards to the IRS.

Sign Up for Our Secret Sauce Newsletter for Small Businesses and receive the link to 1 Tradeline Who Gives Business Credit for Free Click Here

Most Small Business Owners We Pooled Think an MCA is a Loan

The majority of the small business owners we pooled in a survey last year thought MCAs were loans.  In our survey, 742 (58.6%) respondents who were small business owners (of 1266 total respondents) said that MCAs were loans given to small businesses with high interest and short payback periods.  Although another pool might show a different result, our statistically generalizable result and our interactions with our client suggest at a minimum, clarification is needed.

What is a Loan?

Simply, a loan is when a lender agrees to provide money or resources to a borrower (small business in this case) and the borrower agrees to pay back the loan over a period of time, usually with interest.  Loans can be personally guaranteed, and lenders can require collateral on some loans.  Loans also are usually paid back monthly, however there are other iterations which loans can be paid back depending on the lender.  For a detailed description of different loan products, you can review them on our website.

Loans are listed on a company’s balance sheet as a liability and most loans (unless forgiven or specifically codified by Statute as non-taxable, e.g., PPP) are not counted as taxable income for a business because it is money that you are paying back.

Lenders like banks who provide loans are also subject to regulation from various organizations and follow strict rules and underwriting guidelines. 

What is a Merchant Cash Advance?

A Merchant Cash Advance is not a loan in any way.  A Merchant Cash Advance is an advance of a business’ future receivables.  Lenders gauge how much to advance a small business owner in several ways, including previous credit card sales and revenue going into their business bank account.  Variables such as industry, number of deposits, daily balances among others are used by the lender to hedge risk.  Regardless, MCA lenders offer to advance a portion of a small business’ future sales as well as an agreement with the business owner on the percentage of future sales which are being sold to the lender.

Interest

MCAs do not carry interest. Advances carry factor rates, which are also called buy rates that are simply an agreement of how much of a small business’ future sales will be paid to the lender.  In most instances, points sold for MCA brokers are added to the buy rate and in turn the sell rate is 10-20% higher than the buy rate.  

Merchant Cash Advances are much easier than a loan to get (see This Blog Post for Data), not usually secured, not personally guaranteed, and come at a high cost, short payback periods, as well as daily or weekly payback terms.  Some advances may also collect repayment terms by taking a portion of business’ credit card receipts each day as well until their agreed sale of future receivables is completed.  Finally, most advances carry origination fees for the work by the lender, which can be as high as 10% of the loan.

Because Merchant Cash Advances are not loans the industry is not heavily regulated, however in recent years the SEC and FTC have become more involved in holding some lenders such as Quarterspot, Yellowstone Capital, and RAM Capital.  For more information on the regulation of the industry, read this blog post.

What is the best way to account for a Merchant Cash Advance?

The short answer is that different people have different ways of accounting for a Merchant Cash Advance.  What is clear is NOT to record the Merchant Cash Advance as a loan and account as a long-term liability, which is where our clients have been hit on their audits. 

Because advances are advances of future receivables or the sale future receivables one should take note that receivables should be taxed accordingly.  According to Robert Jacovetti, an attorney at Jacovetti Law, P.C. in New York, “Merchant cash advances are not loans and, therefore, are not reported as income. At the time the advance is made, the money received from the cash advance is not subject to tax. However, income that is used to repay the cash advance provider is considered income and therefore taxable.”1

So, MCAs are not tax-deductible in any way.  The fees however are fees and can be recorded as deductible.  Therefore, regardless of the payback method of the Merchant Cash Advance, the fees deducted each day, week or month can be recorded as fees and ultimately listed on the Profit and Loss Statement. 

While there are several ways that a business can account for an MCA, some accountants still suggest setting up the funding received as a liability so balances can be accounted for.  Whether the balance sheet has a liability for an MCA, clearly because they are an advance of future sales there need to be an accounting of that.  An easy way to do so is to set up an income account (minus the fees) and record the MCA as such.  Then, have a line for fees in the P&L for the MCA.  As each payment is made, that payment can be applied to the MCA Income account.  Eventually there will be a negative balance in that income line.  Because another line has accounted for the income the MCA company hedged against, the percentage of future receivables which would be paid back are deducted from the overall income.  Thus, the deductibility of the agreed payback of future sales (not interest) is not tax deductible. 

It is good practice to go over how the accounting is going to be recorded with your tax professional as their opinion certainly matters and they may prefer one method over another.

1 https://www.jacovettilaw.com/blog/2018/april/tax-implications-of-merchant-cash-advances/#:~:text=Merchant%20cash%20advances%20are%20not%20loans%20and%2C%20therefore%2C%20are%20not,considered%20income%20and%20therefore%20taxable.

BRP Onesta is not an accountancy and we do not offer tax advice, as CPAs and Attorneys are more appropriate to do so.  However, our commentary is specifically our own opinion, and albeit accurate, readers should continue to always seek advice from professionals like accountants when making decisions for their own businesses.

Dr. Thomas W. Tramaglini is the Managing Director for BRP Onesta, a company that supports small businesses. By offering a host of important and affordable services that small business owners tend to not have time to do themselves, the team at BRP Onesta can help small businesses grow infinitely. Although located in on the famous Jersey shore, BRP Onesta serves clients in all 50 states, Puerto Rico, Mexico and Canada.

Need a Bank Loan for Your Small Business? Don’t Bank On It!

The Landscape of Small Business Lending Suggests Banks are Less Interested in Lending to Small Business Owners

By Thomas W. Tramaglini, BRP Onesta
info@BRPOnesta.com
www.backofficedepot.com

Since the Great Recession of 2008, banks have continually made it harder for small businesses to borrow money.  If you are a small business owner and have applied for an SBA, USDA or bank loan, you will agree that the banks will ask you for everything including your 3rd grade report card.  Most small business owners do not have the time and in many cases the expertise to have adequate P&Ls or an accurate up to date Balance Sheet.

Sign Up for Our Secret Sauce Newsletter for Small Businesses and receive the link to 1 Tradeline Who Gives Business Credit for Free Click Here

However, regardless of the business entity or industry, many businesses need to borrow money.  In fact, according to NerdWallet, 29% of all small businesses fail because they run out of capital.1 Inherent in the same dataset, 57% of small businesses sought loans for their businesses of denominations of less than $100,000. “Most small businesses that apply for financing aren’t asking for much…20% [of small businesses] sought less than $25,000 and only 8% sought more than a million.”1

So What?

At the core of small business lending are banks and alternative lenders.  However, according to Anna Serio2 of Finder.com the combination or PPP and EIDL funding and small business loans have more than doubled since 2019 to cover all types of business needs, including operating costs, payroll, investments, or to pay down other debt.

The Small Business Credit Survey (2021) 3 found the following regarding small business owners:

42% applied to large banks for loans

43% applied to small banks for loans

20% applied to online lenders for loans

27% applied at other alternative lenders, credit unions or CDFIs. 

However, while banks were more popular for loans, they were the hardest to get before March 1, 2020 and are harder to get approved for after March 1, 2020. 

Merchant Cash Advances and Equipment Lending

The Federal Reserve Small Business Credit Survey (2021) also suggests that 87% of small business owners were able to get auto or equipment approvals and 84% of small businesses were credit worthy.  However, only 65% of applicants who applied for SBA loans were approved for some credit, followed by Bank loans (57%).

What this still means is that Merchant Cash Advances and Equipment Loans are simply much easier to get than bank loans.

Some Pros of Merchant Cash Advances and Equipment Lending (Learn more Here)

  • Fast
  • Lower Credit is Okay
  • Most Loans and MCAs do not require financials or taxes
  • There are many different products to choose from
  • Most MCAs and Equipment Loans are Unsecured
  • Driven by Revenue and Not Credit

Some Pros of Merchant Cash Advances and Equipment Lending (Learn more Here)

  • Expensive
    • MCA Factor Rates are usually 20% or more and in most cases above 40%
    • Equipment loan rates tend to be better but still usually carry a higher cost than bank loans
  • Payback is usually daily or weekly (not monthly which most small business owners want)
  • Shorter terms (usually 6 months and under for MCAs)
  • No regulation of MCAs (See my review here of MCA nightmares)
  • Some brokers shop your application with 10-20 companies each time, leading to hard pulls on credit ultimately lowering your credit score

1 https://www.fundera.com/resources/small-business-lending-statistics

2 https://www.finder.com/business-loan-statistics

3  https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/2021-sbcs-employer-firms-report

Read Other Blog Posts at www.backofficedepot.com/blog or www.tomtramaglini.com or www.thomaswtramaglini.com


Dr. Thomas W. Tramaglini is the Managing Director for BRP Onesta, a company that supports small businesses. By offering a host of important and affordable services that small business owners tend to not have time to do themselves, the team at BRP Onesta can help small businesses grow infinitely. Although located in on the famous Jersey shore, BRP Onesta serves clients in all 50 states, Puerto Rico, Mexico and Canada.

Be Careful – It’s Not a Loan!

Several times a year we survey small business owners regarding their practices and needs and from what we learn we shape areas of our company. One thing we learned has implications for small business owners.


By Thomas W. Tramaglini, Managing Director at BRP Onesta
info@BRPOnesta.com
www.backofficedepot.com
thomaswtramaglini.com


BRP Onesta is a company that supports small businesses in a host of areas. One of the areas we help our clients with is commercial loan origination. Our platform has over 50 different types of products that small businesses can take advantage of to support their operations and growth.


However, in our latest survey we learned that the majority of small business owners who have taken a Merchant Cash Advance (MCA) believe that they secured a loan. In our 2021 survey, we found the majority of small business owners (68.1%) believing that that MCAs were loans.


The majority of small business owners believe that Merchant Cash Advances are loans but they are not.


Merchant Cash Advances are not loans – Merchant Cash Advances (MCAs) are advances of future receivables which are paid back over a short amount of time. MCAs are not classified as loans so these advances skirt most of the regulation which the banking and lending industry require.


NAV defines MCAs as: “A merchant cash advance is not a business loan but should be considered a cash advance based on the volume of your credit card receipts. The funding provider gets paid back by taking a portion of your future credit card sales each day. You can usually get approved in a day or two—with very little paperwork. But you’ll likely pay for this convenience in higher interest rates.”


Why MCA?


Loans take time and are in many cases not east to get – One of our best loan products are business loans that are guaranteed by the Small Business Administration (SBA) and on average fund in 90 days from start to finish. Sometimes, they take much longer but rarely do they take fewer than 90 days to get done.


Some of our equipment loans, small business loans (not SBA) can take a few days to fund but generally speaking, Merchant Cash Advances can be funded in as little as 2 hours with minimal underwriting. The following can also be true with regards to MCAs:

  • Fast funding
  • Minimal underwriting
  • No Personal Guarantee
  • Unsecured funds
  • Poor credit okay

However, some negatives also include high cost of money (up to 150% interest/fees), daily or weekly payments required, as well as dealing with companies who are similar to loan sharks (see https://www.backofficedepot.com/post/ftc-goes-after-mca-lenders-who-resort-to-machiavellian-tactics-to-recover-funds).


Taxes and MCA – Be Careful


Considering that an MCA is not a loan, small business owners need to be cognizant – BRP Onesta also handles bookkeeping for many small businesses. What is significant is that we consistently see small business owners counting their MCAs as long-term liabilities. Rarely do we not see MCAs listed on a balance sheet as a long-term liability.


Because a Merchant Cash Advance is not a loan and is an advance of future receivables, it should be counted as that – revenue. Therefore, if one receives a $10K MCA, that is an advance of $10K in revenue.


MCAs also do not include interest. They include a pre-determined agreed-upon percentage of business sales to be returned to the lender each day (or week). Payments should be made against the revenue. In theory, the income line should be negative once a MCA is exhausted because the business owner has forfeited a portion of their future receivables to the lender.


What are the implications?


BRP Onesta has clients who have been audited by the IRS and have been penalized for not counting Merchant Cash Advances as revenue. Remember, MCAs are not loans, nor should they be coded on a balance sheet as a loan. Loans are not counted as income and business owners need to understand the implications of using MCAs versus loans so they are not liable for misreporting taxable revenue.

*BRP Onesta is not an accountancy and Thomas Tramaglini is not a CPA. We encourage anyone and everyone to always consult their accountants regarding MCAs.


Dr. Thomas W. Tramaglini is the Managing Director for BRP Onesta, a company that supports small businesses. By offering a host of important and affordable services that small business owners tend to not have time to do themselves, the team at BRP Onesta can help small businesses grow infinitely. Although located in on the famous Jersey shore, BRP Onesta serves clients in all 50 states, Puerto Rico, Mexico and Canada.