Increased PPP/EIDL Oversight: Three Things Small Business Owners Should Do Now.

In the State of the Union Speech this past week, President Biden called for increased oversight into COVID-19 Relief fraud. This article provides some details of what the government is doing to find EIDL and PPP fraud. We include several easy steps that every business owner should take to be ready for if and when they are investigated or audited.

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

Joe Biden wants to be the new ‘Sheriff” in town when it comes to Pandemic Program Fraud

In last week’s State of the Union Address, President Joe Biden announced increased investigation of fraud in the Pandemic’s Relief Programs. Both borrowers and lenders need to be aware that the federal government will continue to work with the Department of Justice to find those who abused the system.

However, it should be expected that there will be more and more investigations coming.

Politically, with the government doling over $1.2 Trillion in EIDL and PPP funding it would make sense that the Biden Administration might try to score some easy points against greedy small business owners by showing that the Administration is tough and protects the American people from fraud.

Practically, as demonstrated by the Department of Justice and other organizations such as the Federal Trade Commission, some small business owners committed fraud. However, it is my guess is that there is plenty of fraud to be found as the government does not usually go after small business owners unless they know that they can find the fraud.

How bad was the Fraud?

The purpose of this article not to describe how inherent the fraud was but from what some watchdogs are showing, it was pretty bad. However, Yahoo Finance writer Dani Romero’s post on March 4 was pretty telling:

“Data from Accountable.US, a watchdog group, found that individuals with no employees, and making over six-figures annually – but received $20,833 in PPP funding, which was the maximum by the legislation.

Separately, a new paper published by the National Bureau of Economic Research reveals that was used accordingly. Of the $510 billion of PPP loans distributed in 2020, $115 billion to $175 billion went toward supporting jobs that would have otherwise have been lost, while about $335 billion to $395 billion ended up with business owners and corporate stakeholders, the paper found.”

The Department of Justice Coming Down Hard on Pandemic Relief Abusers

The government is promising to find those who cheated the government during the pandemic. I have written other articles on the schemes that some heroes of the pandemic have utilized. For instance, some business owners used fraudulent 940/941 forms which they submitted to banks and received funds. Other small business owners changed their business’ documents and were able to get funding (Several Examples Here).

Last week, the Department of Justice charged the CEO of an alternative lender MBE Capital with both fraudulent loan and lender applications. According to the docket, “Martinez [the CEO] used false representations and documents to fraudulently obtain the approval of the SBA for his company, MBE Capital Partners, LLC (“MBE”), to be a non-bank lender through the PPP. Martinez then used that approval to obtain approximately $932 million in capital to issue PPP loans and earn over approximately $71 million in lender fees. In addition, Martinez engaged in a scheme to obtain a PPP loan for MBE in the amount of approximately $283,764 through false statements regarding the number of employees of MBE and the wages paid to MBE employees and using the forged signature of MBE’s tax preparer. Martinez was arrested yesterday and will be presented today in Manhattan federal court before U.S. Magistrate Judge Katharine H. Parker.”

BEWARE! The DOJ is Showing Their Cards – They Are Using Data Analytics and Collaborative Tools Across Agencies to Find Those Worthy of Investigation

In several of the dockets and press releases that are available, the Department of Justice has indicated that it is using data analytics using collaboration between government agencies to find those who might have committed fraud.

I think that this is likely easy considering all they need to do is match data across databases. For instance, it cannot be very hard for the DOJ to match application data or funding data from the SBA to the information in the IRS. In fact, one of the reasons why so many EIDL expansion loans have been declined after approved for the original funding is because many of the applications could verify what the business owners reported on their original application to their taxes.

Could you be next?

Most small business owners who received their PPP or EIDL funds submitted correct and accurate data. Some did not.

It is surely plausible that small business owners did not try to defraud the federal government of Pandemic Relief Funds but made a mistake.

However, those who know that they used fraudulent documents or hired someone to submit the documents should understand that if the DOJ finds discrepancies that are blaring, expect an audit at a minimum.

“They are only going after the big fish” – NOT!

While the President in his State of the Union speech said he would be going after the most egregious cases, the database of fraud by Arnold & Porter suggests that there have been convictions with small business owners receiving as little as $10,000 in funding.

What does this mean for most business owners?

Most small business owners have nothing to worry about. However, with the announcement of more oversight and investigation, as well as the commissioning of a COVID-19 Fraud Enforcement Task Force and appointment of a Chief Prosecutor for Pandemic Fraud small business owners can expect that the government will be looking at two possible probes in their review:

  1. Were Pandemic Relief Program funds received legally?
  2. How were Pandemic Relief funds used?

Three things that small business owners can do to ensure they are ready for an audit or investigation.

  • Small business owners should review their loan application and forgiveness application to make sure that the proper loan amounts were applied for, received, and forgiven.
  • Some small business owners used a service or someone to apply on their behalf for their funding. Those who did this should know who did the application, what documents they provided, as well as have contact information for an auditor to contact.
  • Maintain a list with back-up of all expenditures which were made using the Pandemic Relief Funds.

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.

What is a Merchant Cash Advance (MCA)?

Working capital loans are important to small business owners as funds allow small businesses to expand or at a minimum become nimbler than it currently is. However, small business loans, especially SBA and bank loans are not easy to get so many small businesses resort to easier options like merchant cash advances. In this article, we describe in some depth merchant cash advances. We also provide some implications and offer lower cost avenues to borrowing money for small businesses.

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

Lack of Lower-Cost Options for Small Businesses

In recent articles I have provided an overview of the lower-cost options available for small businesses. Loans such as SBA loans are rare. For instance, in 2021 there were over 32 million small businesses in the United States and only a little over 12,000 SBA loans funded in the same year. That means, that the funding rate to small business is 0.00038%. That comes down to about 1 in 37,000 chance a small business would get an SBA loan.

These are not good odds for the typical small business owner, unless you are comparing to getting struck by lightning (1/114,195) or dying in an airplane crash (1/205,552).

Barriers in Place Make Sure Small Businesses

Overall, small businesses asking to borrow money present high risk to banks. Most banks do not want to lend to small businesses because about 1 in 6 small business owners (Voigt & Campbell, 2017). So, for banks to get to the place where they feel comfortable, they ask for and analyze every piece of paperwork they can. Banks also use terms such as Global Cash Flow (which most business owners cannot determine) and require full financials (which most small business owners do not have).

In short, it is my perspective that unless a small business has millions in accounts receivable or years of showing profits of 6-figures, the likelihood of getting a small business loan is grim.

The Devil is in the Details

According to the SBA data from the 7a lending report, in 2021 SBA loans totaled around $6.3 Billion. In comparison, the MCA industry alone (Rumore, 2021) totals around $19 Billion per year. Therefore, MCA dollars are about 3 times more prevalent in lending than SBA 7a loans.

Alternative Loans or Online Loans

Because it is so difficult for small business owners to get a small business loan at a bank (see This Blog Post for Data), there are options that present a much easier route. One such option are alternative loans or online loans from lenders who offer much shorter terms (6 months to 5 years). There are many advantages to these loans (time, less paperwork, fast approvals) and you can learn more about or apply with the options listed here. It is important that if you want to apply for a term loan or line of credit with one of these lenders you speak with someone who has knowledge of these products. Although the approval process is relatively fast, these lenders will still ask for financials, taxes, and other documents. Further, you can assume you will receive a hard pull on your credit and in some instances, they will ask to secure your loan. Our team of advisors has the knowledge of the different programs out there, can explain your options, and will prevent your application from getting shopped around the internet which will hit your credit negatively.

The Merchant Cash Advance

A Merchant Cash Advance (MCA) is one of the easiest funding options for small business owners because MCAs are unsecured, do not require strong credit, usually do not require collateral, and also require little documentation (if any). The average MCA file can be funded within a day and usually requires several months of business bank statements.

An MCA is not a loan but 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 and Terms

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. 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. MCA payback frequency varies depending on the risk and bank account statistics. For instance, if a borrower wants to have a monthly or weekly payment the lender gauges that opportunity off the average daily balance of the business in the business bank account. When daily balances are variable or lower MCA lenders may require a daily payment.

Probably the most negative part of an MCA is cost of money. MCAs can be expensive. That is, MCAs can be as high as +50% in payback. Also, most advances carry origination fees for the work by the lender, which can be as high as 10% of the loan. MCA cost of money is like how credit card cash advances operate and, in some cases, better.

Advantages of MCAs

Merchant cash advances have several advantages for small business owners, and some can include:

  • Fast funding – Some MCA companies can fund small businesses in 90 minutes.
  • Most MCAs do not have UCC liens
  • MCAs are not usually reported on personal credit
  • Funds are unsecured
  • Payment frequency can be flexible at times
  • Most MCAs do not carry a personal guarantee
  • Easily refinance options which can cut costs
  • No early payback penalties
  • Small business owners can build a relationship with the lender ultimately securing better programing
  • Few required documents (including taxes) for funding

IMPORTANT – Speak to Someone with Expertise and Who Cares (without obligation or cost)

It is imperative to speak with someone who is impartial when it comes to your borrowing options. MCA brokers make money off of your MCA (Points added for MCA brokers to the buy rate and in turn the sell rate is 10-20% higher than the buy rate). Many of the rip-off and illegal collection activities of lenders have been exposed and prosecuted in recent years as well (SEC and FTC have become more involved in holding some lenders such as Quarterspot, Yellowstone Capital, and RAM Capital.

That said, you should speak to someone that knows about the different options and importantly, tells you what they believe you can be approved for and WHY! This includes should include SBA and USDA to MCA options.

Up front, I believe that phone sales can be very valuable, if the person calling you is ethical and follows the rules of calling.

However, if you are called and asked the following it is probably an MCA broker and you should think twice before engaging in their questions.

Common MCA Broker Script:

  • What industry are you in?
  • What is your average revenue?
  • How many deposits do you make a month?
  • How many years have you been in business?
  • How many positions do you currently have?
  • What is your credit score?
  • Do you have any bankruptcies or judgments?

Our Team Cares – We Offer Lower Cost Options

Are you curious about what you would qualify for or want a specific product? Call us at (888) 315-2822 or simply request a no-obligation call. One of our team members will go over what we believe you can qualify for. In many cases, you do not compensate us in any way as we participate in volume profit sharing with lenders and never pass those costs on to you. What that means is that if the buy rate is 25% (cost of money from the lender) we will not increase your cost 10-20% to arrive at a 45-50% sell rate. Most of the time we can even cut your current payments without paying interest on interest.

Importantly, we care and will never push you in the wrong direction. So, if you currently have an MCA or MCAs and you want to consolidate those MCAs, give us a call. If you want to save money on a new MCA, we can get you there.

References

(Rumore, 2021) https://businessdebtlawgroup.com/state-of-merchant-cash-advance-during-coronavirus-pandemic/

(Voigt & Campbell, 2017) https://www.nerdwallet.com/article/small-business/study-1-in-6-sba-small-business-administration-loans-fail

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.