The Complete Guide to Business Credit: What is Business Credit?

One of the questions we are asked frequently is what is business credit? This article explores the main concept of business credit and some of the benefits of establishing and building business credit. We also provide some of the barriers that small businesses encounter when establishing and building business credit and some things that small business owners should expect.

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

Business Credit: What is it?

Nearly every successful business has established business credit. When the business wants to grow or expand they do not need the personal funds of the business owner(s) to fund their projects.

When a business is able to use their established business credit, the business has demonstrated to creditors that they have an ability to perform on paying its financial obligations according to the terms of its contracts from their creditors. That is, business credit is how well the business takes on debt and pays its bills over time.

How is business credit different than personal credit?

Business credit is the establishment, building, and maintaining of a successful borrowing and payment of credit on goods and services. Business credit is established under the business’ Employee Identification Number (EIN) and is not associated with the business owner’s social security number.

Personal creditors like loan companies and credit card companies report your payments to the three consumer credit bureaus (Transunion, Experian, and Equifax). Business creditors do not report your borrowing and payment history to your personal credit. Instead, borrowing and payment history is reported to business credit bureaus (Dun & Bradstreet, Experian, Equifax, Creditsafe). The business credit bureaus score history and provide an estimate of the business’s risk, or ability to repay a loan or other financial obligations, similar to personal credit.

On average, small business owners have 50+ lower FICO scores.

The advisors at BRP Onesta work with a large cross-section of small business owners to provide a host of back-office solutions and offer an affordable, world-class commercial lending platform.

With the need for small business loans and other financial solutions, on average our clients’ personal credit scores (FICO) are 50+ points lower than the Equifax average score of 698 that was reported in 2021.

Therefore, it is in every small business owner’s best interest to establish and build their business credit as a major advantage is that they can separate their business finances from their personal wealth, ultimately protecting themselves.

Other advantages of business credit

  • Most ability to borrow is double for what it would be on your personal credit.
  • Perfect for startups.
  • Easy and fast to establish credit.
  • Building business credit makes.
  • You do not have to have outstanding personal credit to build and use business credit.
  • Most business credit financing does not require financials for approval.
  • Your business will become much more valuable.
  • No collateral required.
  • Usually, no financials or business bank statements needed for applying (No Cash Flow Requirements).

Does your business have any business credit?

Many times, business owners tell our advisors that they have a lot of business credit. For instance, we are told that the business owner has a business credit card, or they have their car in their business’s name.

Having a business credit card or a car in your name does not mean you have business credit. If you do not know, NAV has a great free tool to gauge what you have on Experian, Equifax and Dun and Bradstreet Business Credit Scores.

Business Credit Programs Work

One of the most valuable investments that a business owner can make is by establishing their business credit. Establishing business credit is not hard, however there is a lot that goes into building one’s business credit such as understanding the process and applying for the right tradeline at the right time.

There are several different business credit programs our there and business owners should examine those programs before they get into any process. For instance, the program we provide allows small business owners to take a test drive before they spend one cent on programming. Some companies will charge you up front thousands of dollars and have a time limit for their work with you. Many times, the time it takes to establish and build business credit surpasses the time the company gives you, unleashing hidden costs. Programs like BRP Onesta’s do not have time limits.

Do It Yourself Usually Not Successful

Many different companies will provide business credit programs that are mostly do it yourself. That is, the majority of the work for Business Credit tends to be placed on the business owner. When that happens, we estimate about 85% of our clients (who have done our DIY model) never actually can attain any business credit past the basic business credit where anyone can get what is offered (Uline, Grainger). Not that those tradelines that are basic are good, they will not provide your business cash and certainly when more advanced business credit needs are required, the small business owner will be declined.

Biggest Barriers for Building Business Credit

We have been working with small business owners to build business credit for many years. We know that small business owners struggle with the following aspects of building business credit before they try to establish their tradelines:

  • Unsure of what goes into business credit approvals.
  • When business owners assume that they already have plenty of business credit.
  • Lack of understanding of what business credit is.
  • Fail to have established what creditors suggest are indicators of business creditworthiness (some examples below).
  • No business address.
  • No phone number for the business.
  • No website.
  • No domain.
  • No business email with a business domain.
  • No web presence on social media.
  • Not found on Google.
  • Just do not have the time.
  • Failure to know who gives business credit and who does not.

Coaching Models Works

Models that coach small business owners seem to be the best way for small businesses to establish and build their business credit. These coaching models are deliberate, support the business owner, and have a human being who is experienced advising the client.

For more on a coaching model, click here.

TONS of misinformation out there

Like anything online, there is a lot of information out there which is not true or just wrong. Many of our clients go to and spend lots of time on YouTube or reading stuff that is just not accurate. In some cases, clients do things which hurt their business credit such as apply for business credit cards before they have the preliminary business credit that is needed.

Companies like ours provide a team which will not only provide you accurate information but teach you about what you want to do. In fact, our advisors will walk you through every step of the way so you do not make mistakes in the work that you are doing towards your business credit goals.

Three things to watch out for when choosing a business credit program

1. Do it yourself plans.

Most do it yourself business credit models are on the surface great ideas. However, they are counterproductive because they amount of time and lack of information you have will never outweigh the efficiency and effectiveness of working with trained experts. The best programs are those which have live support, even if those plans are temporary and limited in scope.

2. SCAMS by those who do not know what they are doing.

Experience matters. Business credit development can be an art because it is different than building personal credit and many people who claim they are going to build business credit and use a canned program will never build anyone’s business credit.

When you are going to work with someone on business credit the people working with you should answer simple questions such as, What is business credit? How is business credit different than personal credit? How long does it take to build your business credit? Or What are creditors that will give you business credit when you have none or only a little business credit and which creditors require preliminary business credit for an approval?

3. Business credit is more than just business credit

Business credit is not just business credit – its way beyond business credit. So, anyone who tries to tell you different you should consider working with someone else. Business credit requires business credibility, without one cannot get approved for business credit (beyond basic). Furthermore, important pieces of business credit go way beyond having your Dun and Bradstreet address match that on the EIN letter and articles of organization or incorporation. Business credit includes web presence, knowledge of how lenders interact with borrowers, as well as when and who to apply for tradelines.

Before considering building your business credit one should know what business credit is and what value building business credit will have for the business. Business credit makes businesses more valuable and allows owners to separate their personal finances from their business, something that most small business owners fail to do.

For more information and a free assessment of your business credit, click here (no obligation).

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.

Maseratis, Jaguars, Mercedes, Investments, Swimming Pools…. Getting Caught for PPP/EIDL Fraud.

The List Grows…. More Frontline Zeroes of the Pandemic.

In recent weeks, I have been writing about how some small business owners took advantage of the generous funding to help small businesses during the height of the pandemic (The Zeroes of the Pandemic). Each day, more and more light is being shed about those who have defrauded our nation with EIDL or PPP fraud and again, 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. In most cases, their actions made it easy for the government to catch.

Part III – 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

www.thomastramaglini.com

About Thomas Tramaglini Introduction

Many small business owners benefitted from COVID Relief programs in 2020 and 2021. Specifically, over a $1.2 Trillion dollars were provided to small businesses through programs like the Payroll Production Program and the Economic Injury Disaster Loan. Yet, since the onset of these programs, the government has been going after small business owners who abused these programs. Either by submitting inaccurate and in some cases fraudulent documents or by misusing the funds small business owners, one by one the government is going after small businesses.

NBC Calls PPP Fraud the Biggest Fraud in a Generation

Recently, Ken Dilanian and Laura Strikler of NBC recounted much of the fraud which had occurred with PPP and suggested that prosecutors called PPP the largest fraud in U.S.

History.

“Even if the highest estimates are inflated, the total fraud in all Covid relief funds amounts to a mind-boggling sum of taxpayer money that could rival the $579 billion in federal funds included in President Joe Biden’s massive 10-year infrastructure spending plan, according to prosecutors, government watchdogs and private experts who are trying to plug the leaks.

“Nothing like this has ever happened before,” said Matthew Schneider, a former U.S. attorney from Michigan who is now with Honigman LLP. “It is the biggest fraud in a generation.”

Most of the losses are considered unrecoverable, but there is still a chance to stanch the bleeding, because federal officials say $600 billion is still waiting to go out the door. The Biden administration imposed new verification rules last year that administration officials say appear to have made a difference in curbing fraud. But they acknowledge that programs in 2020 sacrificed security for speed, needlessly.”1

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. Twain once said, “Honesty is the best policy – when there is money in it.”

Liliana Gonzalez Used PPP funds for a Swimming Pool

Liliana Gonzalez lied about the number of employees she had and used some of her funds to put in a new swimming pool. When audited about how Gonzalez used her funds, the US Department of Treasury found that clearly, she misused the funds.

In a plea agreement description, Attorney Goldberg said:

“You’re seeing picking and choosing to do audits, or they’re getting information through the affidavits in the paperwork asking for the forgiveness that doesn’t add up. So, that’s when you’re going to see prosecutions like this come out of the woodwork on a loan for $170,000,” said Goldberg.

The public loan information for the PPP loan Gonzalez received indicates she claimed to have ten employees at her home business. Each making more than $81,000.

The loan was supposed to help Gonzalez retain employees during the pandemic, but prosecutors say the information was made up.

“There’s a lot of paperwork and affidavits and things that have to be filed in the forgiveness portion. And that’s opening up people to more liability and, of course, scrutiny in looking at these loans closer to make sure that they’re being used for what was asked for and what the government allows,” said Goldberg.

The PPP loan was then used to build a swimming pool, according to prosecutors. Goldberg says prosecutors are pursuing more significant penalties and more time behind bars as a deterrent.”2

Robert Williams Sentenced to More than 10 Years for PPP Fraud

“According to court documents, Williams obtained federal loans provided through the CARES Act that resulted in a loss of up to approximately $2.7 million. Williams applied for these loans at Midwest Regional Bank, PNC Bank and submitted false information to receive funding.

The investigation included a review of numerous PPP loan applications and financial accounts during the summer of 2020. Williams completed and submitted approximately thirty different PPP loan applications that contained materially false statements and false supporting documents related to the ownership of a business and the business’ payroll including the number of employees and monthly payroll expenses.

Investigators also determined that Williams did not use the PPP loan funds for any appropriate business expenses but used funds for his own personal benefit including the purchase of vehicles such as a Maserati Levante and a Jaguar, F-Pace. Williams also assisted several other businesses in brokering and submitting fraudulent PPP loan applications. During the investigation the FBI seized approximately $466,000 and vehicles. Williams has also agreed to an order of restitution for $1,231,491.” 2

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 two articles, 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.

References

1 – https://www.nbcnews.com/politics/justice-department/biggest-fraud-generation-looting-covid-relief-program-known-ppp-n1279664

2 – https://www.winknews.com/2022/04/14/cape-coral-woman-pleads-guilty-to-ppp-loan-fraud-accused-of-using-money-for-a-pool/

3 – https://www.justice.gov/usao-edmo/pr/judge-sentences-st-louis-man-more-10-years-federal-prison-bank-fraud-conjunction

*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 shor

Damaging Mistakes That Small Business Owners Make When Financing Their Businesses.

Business owners tend to rely on borrowing money to grow their businesses.  However, it is not without pain that many small business owners and entrepreneurs experience when borrowing money.  In this article, we explore a bunch of damaging outcomes that occur when small business owners borrow money for their businesses.  By sharing what we see every day from small business owners we hope to share some foresight for small business owners who wish to access financing for their businesses.

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

Small Businesses Need Financing

The typical small business regularly seeks and utilizes working capital of some type to address various needs including growth.  A recent dataset from Anna Serio suggested that in 2021, 57% of small businesses sought financing in amounts less than $100,000.  In another recent article published by Fundera, nearly 3 in 10 small businesses fail because they do not have access the capital they need. 

So, small businesses need working capital to fulfil their short and long term needs and they seek funds in all sorts of avenues, from SBA loans to Merchant Cash Advances.  In 2021, we surveyed over 1,000 small business owners about their experiences with seeking funds for their small businesses. 

Our data showed several commonalities which were interesting:

  • 68.8% of small business owners said that they sought working capital without restrictions
  • 43.1% of the small business owners said that speed in receiving funds mattered over most other factors, including rate
  • 92.5% of small business owners we surveyed said they wanted an SBA loan but only 1.3% said they had received an SBA loan.
  • The most popular loan product sought in 2021 was a Line of Credit

What are the unintended consequences of borrowing money to finance your small business?

Clearly, small business owners look for financing for their small businesses.  The data supports our work with small business owners as they seek financing that is fast and easy.  However, many times small business owners face the unintended consequences of borrowing money.  From our data and experiences, we have put together a list of some different consequences that we see small business owners encounter when borrowing money. 

Using Personal Credit to Finance a Business

This is one of the biggest areas we encounter small business owners taking a hit.  Small business owners take personal loans and use personal credit to finance their businesses.  When small business owners finance their businesses using personal credit or personal loans they generate lower credit scores, reduce the amount of credit they can use for their personal lives and jeopardize losing everything.

Risking Personal Assets

This occurs when small business owners pledge their personal assets to back what they are doing for their businesses.  For instance, some small business owners personally guarantee loans they take or even worst, they collateralize their homes and savings.  When businesses cannot pay their bills, the lenders will come looking for you to satisfy your commitment.

Co-Mingling Company Credit with Joint Credit

Small business owners who have joint credit with other family members (such as spouse or children) run the risk of having people who are not associated with the business hurt the company’s credit or business owner’s personal credit.

Not Paying Your Bills on Time

Not making payments on loans or credit cards on time each time they are due can hurt your ability to borrow money for your business or attain vendor accounts. 

Using Your Family’s Money

Routinely, we see small business owners using their family’s savings or personal credit for their business.  Once this becomes a regular practice, business owners cannot carry enough cushion to get them through hard times if they come up.  The idea is that eating up your personal credit for business expenses weakens your safety net.

Failing to Build Corporate Credit Correctly

From time to time we find small business owners either confused or misinformed about how to develop corporate credit.  Incorporating your business allows your business to be separate from your personal wealth.  If one understands that there is a process for building appropriate corporate credit and follows that process correctly, it is easy to separate personal and business wealth.  However, often we see someone trying to build their corporate credit by getting a Uline account or a Grainger account and failing to harness how to build progressive corporate credit.

Trying to Accelerate Corporate Credit Too Quickly

Having adequate business credit takes time and many business owners try to build their credit too quickly.  It takes time to build corporate credit to levels where small business owners can access financing without a personal guarantee or strictly on their business credit.  Some business owners turn to just applying for corporate cards and getting declined, or those cards go on their personal credit.

Poor Follow Up on Building Corporate Credit

It takes effort to consistently build your corporate credit.  In many cases, small business owners fail to keep track of their progress and waste their business credit.  They tend to miss key benchmarks or elements that can increase their credit. 

Overextending Borrowing Capacity

There are many times we see small business owners take on debt and do not truly understand what that means to their profit margins, etc.  For instance, we see small business owners regularly take Merchant Cash Advances.  Those advances can carry 50-55% interest so if you do not have profit margins that would yield enough to make these MCAs work, then it is probably not a good idea.  We see small business owners utilizing these risky practices regularly. 

So what?

Small business owners want access to business financing but at what cost?  In this article we provided real things that happen when small business owners take on financing.  In many cases, small business owners never see what is coming until it is too late. 

The best financing programs for small businesses at those that utilize corporate credit, which carry low interest and that do not carry a personal guarantee.  To build adequate corporate credit, small business owners need to build their portfolio of tradelines which have a record of successful payments and depth.

To learn more about our programs that help build corporate credit, please click here.

References:

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

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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.

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.

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.

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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.

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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.

FTC Goes After MCA Lenders Who Resort To Machiavellian Tactics To Recover Funds.

This past week the Federal Trade Commission (FTC) Banned Former Merchant Cash Advance defendants accused of what many who have worked in the industry know too well – among other things… weaponizing Confessions of Judgement and using “deceptive and illegal means to seize assets from small businesses, non-profits, and religious organizations.” – Implications and thoughts.


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


Over the past several years, a relatively unregulated lending industry is becoming more and more regulated. Since the industry exponentially grew after the recession of 2008, Merchant Cash Advance companies have used a host of different tactics to recover funds if a borrower failed to pay back what they borrowed.


What sets apart MCAs from traditional loans is that MCAs are not loans. They are advances of future receivables based on a company’s previous receivables. Because MCAs are not loans, over time MCA lenders have skirted laws and protections that banks and loan providers are required to adhere to, including how lenders to about recovering funds from borrowers. Therefore, without many limits on how many MCA lenders recover funds, MCA lenders have instituted a bunch of different tactics to recover funds from borrowers.


Confessions of Judgement


One of the most significant tools that MCA lenders have used for years has been the utilization of a Confession of Judgement (or COJs).


The Cornell Law School defines a Confession of Judgement as, “a legal device – usually a clause within a contract – in which a debtor agrees to allow a creditor, upon the nonoccurrence of a payment, to obtain a judgement against the debtor, often without advanced notice or a hearing. These clauses may also require the debtor to waive their right to assert any defense against the entry of judgement or be represented by an attorney appointed by the creditor.


To the layperson, a COJ is predetermined guilt for when a small business stops making payments on advances (or in many cases misses a few payments). The borrower waives the right to defend themselves and gives the lender permission to seize personal assets, business assets, or other means to recover what they can. This can include liquidation of assets such as cars, homes, and other things that the borrower has as an asset.
Some States have certainly fought back against this concept. For instance, Indiana prohibits COJ clauses and in 2019 NY State stopped allowing companies to use COJs for out-of-state debtors.


More oversight and regulation are coming to the MCA industry.


For those companies who have brokered or directly provided Merchant Cash Advances, most involved have heard of PAR Funding, RAM Capital Funding and Yellowstone Capital.
For those unfamiliar with these companies, I have added some links to some background on each of the lenders that I mentioned below.


These companies have seen millions in profit and hosts of small business owners who have used these companies can tell you from experience that their experiences have not always been so great. For instance, I have spoken to clients who have suggested that they had been threatened by lenders if they did not pay back their advances, as well as heard countless stories of how the lenders just seized all of the funds in a client’s bank account.


Regardless of the lender, borrowers do agree to pay back their advances but when something goes wrong lenders seem to use any tactics they can to recover their funds.

COJs are just one tactic which has been Machiavellian to say the least.


MCA Lenders Be Aware – The FTC and Others Are Taking Aim


In the three examples that I have shared below, (PAR, Yellowstone, and RAM) clearly officials are making a statement that nonsense will not be tolerated.


For instance, in the complaint against RAM it was noted:


“The agency also alleged that the defendants made unauthorized withdrawals from consumers’ accounts and used unfair collection practices, including sometimes threatening physical violence. In addition, the FTC alleged that the defendants illegally weaponized “confessions of judgment,” contractual terms that allowed defendants to pursue customers’ personal assets in court and obtain uncontested judgments against them.”


From what has been done in these cases, officials are beginning to govern the tactics that MCA lenders use to recover funds. And while it should be noted that borrowers should repay MCAs and if not be held accountable, what tactics lenders should use are ambiguous because the industry is fairly unregulated.
What is clear is MCA borrowers are on notice from officials.


PAR Funding: https://finance.yahoo.com/news/why-par-funding-merchant-advance-114314171.html
Yellowstone Capital Complaint: https://www.ftc.gov/enforcement/cases-proceedings/182-3202/yellowstone-capital-llc-ftc-v RAM Funding Complaint: https://www.ftc.gov/news-events/press-releases/2022/01/merchant-cash-advance-providers-banned-industry-ordered-redress
https://www.consumerfinancemonitor.com/2022/01/07/ftc-enters-into-settlement-with-two-defendants-in-lawsuit-alleging-merchant-cash-advance-providers-engaged-in-unfair-and-deceptive-practices/


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.

EIDL Series Post 1: The Only Certain Thing About Economic Injury Disaster Loans is Uncertainty

Part 1: The Only Certain Thing About Economic Injury Disaster Loans is Uncertainty

EIDL – Did we use the funds correctly?  Can and will I be audited?  Many say, no but the experts suggest you better be ready for what is ahead.

This is the first post in a multi-post blog regarding some of the ambiguous areas of the EIDL program which as to date funded nearly 4 million small businesses.

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

One of the biggest questions that our clients ask our advisors was and is how Economic Injury Disaster Loans (EIDL) funds can be used.  We always advise our clients to consult with their accountants but from our communications with small business owners we know that many do not consult their accountants until it is too late.

Remember, EIDL funds are not forgivable – Unlike the Payroll Protection Program (PPP) the EIDL program is a loan that is NOT forgiven by the Federal Government.  That is… yes, you must pay it back.

On the surface the EIDL loans were exactly what was needed for many businesses in 2020 (beginning approximately in March).  In fact, to date, according to the SBA1 has provided over $316 Billion Dollars in Pandemic Relief funding to small businesses.  (For more on these statistics and how much the Feds will get in return for lending the EIDL funds go to https://tinyurl.com/yckcm2hj). That comes to over 3,865,600 different approvals throughout the United States and eligible territories.  In comparison to PPP funds ($790,921,572,3582), EIDL funding provided approximately 60% less funding to small business owners to sustain their businesses during the pandemic. 

However, did EIDL funds really help small businesses “survive” during the pandemic?

First and foremost, according to the EIDL Regulations:

“Economic injury loan proceeds can only be used for working capital necessary to carry the concern until resumption of normal operations and for expenditures necessary to alleviate the specific economic injury.”

In December of 2021, we surveyed over 2,400 of our clients regarding a host of different issues including their business financing.  Of the over 2,400 clients, we received over 900 responses (41.2% response rate).  Inherent in the responses some of our feedback was interesting to say the least. 

Top 5 Uses of EIDL From Our Business Owners 2021 Survey

Operational expenses (payroll, costs for expenses such as supplies)

Pay off existing debt (credit cards and merchant cash advances)

Purchase new equipment and vehicles

Hire new employees

Pay off back taxes incurred before the pandemic

Overall, the use of EIDL seems to be mixed with regards to what SBA has provided and updated as allowable uses for the EIDL funds. 

The SBA has posted their FAQs on what the allowable uses are at https://www.sba.gov/sites/default/files/2020-09/COVID%20EIDL%20FAQ%20FINAL%20APPROVED-508.pdf.

For instance, when EIDL was launched in 2020 for Pandemic Relief one could not use the funds to pay off long term debt however, in September 2021 SBA updated its guidance (13 CFR 123.3033) to include the payments being made to long term debt as included in allowable uses.  SBA guidance is ambiguous to what is long term debt and what is not long-term debt.  That is, what the SBA sees as long-term debt and what our clients see as long-term debt may be different.  Clearly, from what our clients told us in their surveys the used their funds to pay for things like their Merchant Cash Advances which are not loans and are recognized as advances of future receivables and not long-term debt.  Further, many of our clients expressed using their EIDL loans to pay for credit card debt.  It is also clear from their responses that while the revision of the guidance seems to include credit card debt for the business, small business owners who have LLCs or partnerships, many of the credit cards may not be in the name of the business or separated from personal uses. 

Other uses which seem to not jive with the SBA guidance were noted in responses:

What I used the funds for:

Equipment Purchases

Starting a New Business

Hiring More Staff

Real Estate Purchase

Purchase of Vehicles

Purchases for split personal/business uses

From what we believe our interpretation to be from the guidance, many of these uses are not going to be acceptable when Audits are included.

“Economic injury loan proceeds can only be used for working capital necessary to carry the concern until resumption of normal operations and for expenditures necessary to alleviate the specific economic injury.”

Obviously, clients expressed the need for more funds during this time to sustain their businesses, yet it is also clear to us that many business owners (some our clients) do not have a grasp on how to appropriately use their funds.  Overall, from our analyses using several surveys some small business owners replaced their use of short-term funding solutions with both PPP and EIDL funding.  This is clear from the MCA industry where Gunes Kugaligil of Methodical Management underscored the effects of the Pandemic on the industry in deBanked (Brendan Garrett 6.8.20204).  MCA companies clearly took a hit, but their lending was also significantly cut and in most cases MCA companies from OnDeck to PayPal and brokers helped originate billions in EIDL and PPP funding.

EIDL Audits?

So, the question lingers: What oversight will come from the EIDL Loans?  WHO GETS AUDITED AND WHO DOES NOT?

There is guidance from SBA on who is required to get an independent (CPA via OMB guidance) audit (Currently, the threshold is anyone who received over $750,000), for borrowers who accepted less than $750,000 there is little indication of who and who will not be audited.  For those receiving over $750,000 audits were supposed to be done and reported by the 3rd Quarter of 2021.  Yet, for those who have been receiving more funds or were under the $750,000 it is not clear how SBA will or will not do audits.

It has been widely reported that5 the SBA via the Department of the Treasury hurried to release funds during the first few months of SBA causing many loans to be provided which should not have.  In fact, one of our hottest services requested for months has been EIDL Reconsideration for an extension of the original EIDL funding and clearly the SBA has denied a ton of businesses for more funds because they were either funded incorrectly or should not have received EIDL funds originally. 

Regardless, those who received any EIDL funds should cautiously prepare their books for submitting back up data for audits that do occur.  After consultation with our accountants, we at BRP Onesta believe the EIDL Audits from SBA will be like how the IRS audits taxpayers.  Some desk audits and some in person – subsequently, we believe that the SBA will 1) highlight those who they find massively cheated on their applications and did not get caught and 2) will seek the repayment of more funds than currently expecting to be repaid with interest (see Thomas W Tramaglini Blog Post on 12.23.2021).

Therefore, if you are a small business owner, you need to be ready:

What were funds not to be used for?  A succinct overview of the allowable uses was done by NAV.  According to NAV:

“EIDL proceeds may not be used for:

Payment of any dividends or bonuses;

Disbursements to owners, partners, officers, directors, or stockholders, except when directly related to performance of services for the benefit of the applicant;

Repayment of stockholder/principal loans, except when the funds were injected on an interim basis as a result of the disaster and non-repayment would cause undue hardship to the stockholder/principal; 

Expansion of facilities or acquisition of fixed assets; 

Repair or replacement of physical damages; 

Refinancing long term debt (see change described below) 

Paying down (including regular installment payments) or paying off loans provided, or owned by another Federal agency (including SBA) or a Small Business Investment Company licensed under the Small Business Investment Act. Federal Deposit Insurance Corporation (FDIC) is not considered a Federal agency for this purpose; 

Payment of any part of a direct Federal debt, (including SBA loans) except IRS obligations. (Note: There is an entire section that goes into more detail on paying federal debts. If you want to use EIDL proceeds that way, refer to page 75 of the SOP.) 

Pay any penalty resulting from noncompliance with a law, regulation or order of a Federal, state, regional, or local agency. 

Contractor malfeasance; and 

Relocation”

SBA guidance can be found: https://www.sba.gov/article/2021/nov/19/sba-announces-updated-guidance-regarding-applicant-deadlines-covid-economic-injury-disaster-loan

So What?

As small business owners continue to operate in 2022, be prepared for your EIDL Audit, as it could come anytime.  Perhaps one of the best things a small business owner can do is to have their books done and organized by a Certified Bookkeeper.  If audited, this can allow your business to easily provide supporting documentation, so you do not have to repay additional EIDL funds or face criminal prosecution.

Also, Small Businesses should identify and store important records for audits as per Federal Guidelines on data retention.  States also have individual laws that govern this area as well.

Regardless, small business owners should expect these audits to occur and prepare accordingly.  Furthermore, if a small business misappropriated funding they should understand that the Department of Treasury has a host of tools to in place from requiring the return of funds to criminal action.

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.

References:

1https://www.sba.gov/sites/default/files/2021-12/COVID-19%20EIDL%20TA%20STA_12232021_Public-508.pdf  

2https://www.sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-program/ppp-data

3https://public-inspection.federalregister.gov/2021-19232.pdf

4https://debanked.com/2020/06/impact-of-covid-19-on-the-merchant-cash-advance-market/

5https://www.nytimes.com/2021/11/30/business/sba-eidl-pandemic-relief.html

The Frontline Zeroes of the Pandemic

Small Business Owners (Real or Fake) Who Are Accused or Convicted of the Largest EIDL/PPP/CARES Act Fraud

Our Top 15 Zeroes of the Pandemic

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

As stated in an earlier post we published, “We recently polled over 1,400 BRP Onesta clients who own one or more small businesses.  Of the responses we received, most (84.2%) were thankful of the PPP and EIDL programs, and many (68.3%) said it was not enough.”

However, some folks got greedy and got caught.

  • Henry

Our first interaction with someone who had committed PPP fraud was our client, Henry (Named Changed Because of NDA). 

Henry ran a small trucking company with several trucks that had sustained some moderate growth in the time we worked with the company.

We had executed several truck loans for Henry’s LLC over a period of about 4 years.  In July 2020, Henry asked us to work on financing for two more trucks which we happily agreed to help him and his company with. As usual, we asked for our credit application updated and several months of business bank statements. That is when things changed, and we realized things were a bit different…

The business was now in his sister’s name, and they were working with a new bank. Revenue was down over 80%.  When we asked him about the change in owner and business bank account, he said that he changed banks because of fraud against his business and that his sister volunteered to steer the ship while he transitioned to a more active operations role.  He said he was not sure about the decrease in revenue because his business is busier than ever.

So, customary in this situation, we Googled his business and BOOM – There it was…. Accused of PPP fraud at the tune of $1.01 Million. 

So, what happened?  Henry (or someone he hired) used his/their Adobe skills and generated false bank statements, tax returns and payroll statements. He was funded $1.1 Million for the first draw of PPP in May of 2020 –

How did he get caught?   When Henry got funded, he started buying lavish items (Rolls Royce, new house via cash, jewelry) and paying off all his bills including lifetime alimony and child support.  Someone who knew him then reported him to the police, and the rest is history – When the FBI raided his business, they recovered about $150K of his $1.01 Million he borrowed and would hopefully have forgiven.  In September, Henry was sentenced to 17 years in Federal prison for a host of crimes, including PPP fraud.

The Greedy Get Greedier

However bad I thought Henry’s case was, there were others who were way greedier – and while some of these cases are still in litigation, some of what these people allegedly tried to get away blows my mind.  

From the literature (Arnold & Porter have a nice data set) I compiled who were accused of the top 10 highest dollar Stimulus funds fraud.  Some have been convicted, some still waiting but regardless, those who are convicted of doing so are the Real Frontline-Zeroes of the Pandemic.

Our Top Fifteen Alleged or Convicted List for Pandemic Relief Fraud

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.

  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

*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.