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Business & Economy

Small-Business Loan Program Catches Many Legitimate Businesses Seeking A Lifeline

A small store's open-for-business sign
iStockphoto.com
Small businesses struggle to get their PPP loan approved.

In an attempt to catch fraudulent applications to the Paycheck Protection Program, entrepreneurs say the Small Business Administration has put in too many checks in place that are catching legitimate applications.

Like many other small businesses during the pandemic, Shawnetta Faust's Dependable Movers balances on a razor's edge. The Charlotte-based moving and storage company has struggled to meet payroll, keep employees, and grow the business.

She thought she caught a lifeline in February through the Small Business Administration's Paycheck Protection Program, the federal loan program designed to help small businesses retain workers during the pandemic. Faust thought a forgivable loan would buoy her financially, at least for a while.

Her company did ultimately receive $54,000 in aid, but because red flags popped up around her application, it took eight weeks for the funds to receive final approval. The delay meant the company fell behind on rent and faced an eviction.

"It's just one thing after another," she said. "Finally the landlord was like, 'You know, I can't wait anymore. I'm going to have to get somebody else in that building.' So we ended up getting put out of the warehouse," Faust said.

Frustratingly, the error codes that flagged Faust's application didn't hold water. First, it wrongly flagged Dependable Movers as already receiving money in this round. Then it flagged Faust or her husband for owing money to a federal agency – neither of which were true.

Faust said her lender "kept getting a lot of different error codes that I couldn't understand."

It was a problem apparently happening to other applicants as well, so her bank told her to contact SBA directly.

"The SBA would tell you they can't tell the borrower anything, they can only speak directly to the lender," said Faust. "It was just a hot mess."

The Fausts weren't alone in this ordeal. In fact, Congress, in rare bi-partisan fashion, extended the deadline for this round of the PPP program from March 31 to May 31. While singing the bill, President Joe Biden noted that some 90,000 applications still languished in line.

"It's like they've turned the knob a little too far trying to prevent fraud up front."

Banking and accounting experts blame perhaps well-meaning oversight bodies for clamping down too hard on potential fraud, catching too many legitimate applications in a dragnet.

"It's like they've turned the knob a little too far trying to prevent fraud up front," said Lisa Simpson, vice president of firm services with the Association of International Certified Professional Accountants. "We certainly want them to be trying to stop as much fraud as they can. But they've overcorrected."

Representatives in the SBA media relations office did not return multiple emails seeking comment or further information.

Simpson said SBA would run applications against outside databases which would "trigger false positives" and flag applications with error codes. But there was little communication from SBA back to the lenders working with small businesses.

"So it's a very manual process for the lender to actually have to go find the error code, look at some guidance from the SBA on how to fix it, contact the borrower, try to get it resolved," said Simpson. "It's a volume game right now. There are so many thousands of applications stuck in this loop. That's why we (kept) saying there's got to be more time. That we just need more time."

Simpson and others praised Congress for passing the extension.

Despite the consequences of catching small businesses like Dependable Movers, the SBA's intention of catching fraud early isn't without merit. An October report from the House Select Subcommittee on the Coronavirus Crisis "identified more than 22,500 loans worth $4 billion that may have been subject to fraud." On March 26, the Justice Department publicly charged 474 defendants in connection to Covid-19 related fraud, including at least 120 defendants charged with PPP fraud.

Small Businesses Struggle, Big Companies Get Loans

In North Carolina, an analysis of PPP loan data from previous rounds shows more than 50% of the money doled out in the state went to just 4% of the addresses companies provided to SBA. Dozens of these locations, scattered from Wilmington to Asheville, list 20 loans or more.

President Donald J. Trump displays his signature on the Paycheck Protection Program.
Official White House Photo by Shealah Craighead
President Donald J. Trump displays his signature on H.R. 266, the Paycheck Protection Program and Health Care Enhancement Act Friday, April 24, 2020.

Generally, the PPP loans are available to companies only with fewer than 500 employees. Typically, affiliated businesses must tally all employees from the various entities together. If the combined employee count tops 500, it makes the business ineligible. For PPP loans, however, SBA exempted affiliated businesses from that rule.

Daly Seven, a hotelier based in Greensboro, operates 40 properties. Before the pandemic, it employed 1,800 workers in Virginia and the Carolinas, but laid off 750 workers as occupancy rates fell to as low as 13% last April. The company received at least $9.5 million in loans, according to records compiled by WUNC cross referenced with a PPP database maintained by ProPublica. SBA rules permitted companies receiving loans to make some layoffs, as long as the salaries of workers who stayed employed didn't drop by more than 20%.

While the combined employee count of the Daly Seven properties would make it ineligible for normal SBA help, the affiliated entity carve-out in the Paycheck Protection Program means each hotel qualifies separately.

"They do operate as different entities. They file separate tax returns," said Daly Seven in-house counsel Noel Anderson. "Really, it just lets us put more money in the hands of employees."

Anderson acknowledged that being a bigger company does offer benefits in a downturn.

"I think our size has helped us be able to maintain through this probably a little bit better than maybe your smaller hotelier that's only got, you know, two or three, or just a handful of properties," he said, though argued that just because Daly Seven accessed funding, doesn't mean that smaller companies couldn't do the same.

"I don't see how us having access to it would negatively impact any mom-and-pop hotelier from being able to access PPP funds," he said.

Other Problems Irritate Small Business Owners

Although Biden extended the deadline, a move praised by critics, the smallest companies who applied for help early on say there's another problem. On March 3, SBA allowed self-employed individuals to calculate their maximum loan amount using gross – instead of net – income. However, the change didn't apply retroactively, so that those who applied early, weren't able to see an additional benefit.

H.R. 266 – the Paycheck Protection Program and Health Care Enhancement Act
Official White House Photo by Shealah Craighead
H.R. 266 – the Paycheck Protection Program and Health Care Enhancement Act was signed Friday, April 24, 2020, in the Oval Office of the White House.

For Steven Gianquinto, the owner, operator and sole employee of The Window Shade and Shutter in Huntersville, it means he received a loan of just $10,328, or about half of what he would qualify for if he could use gross income.

"$10,000 goes a long way," he said. "I'm a small business, and that's why it matters to me, and I need it."

Gianquinto doesn't blame the Biden Administration. In fact, he supports the change. He just wishes he could get ahold of someone in the White House to simply make the switch retroactive.

"I'm sure President Biden wanted all small businesses to benefit from this new rule, otherwise why bother?" he said.

Of course, not all PPP applicants face issues. SBA has approved thousands of loans worth billions of dollars, money that's currently circulating in the economy. The current deadline to apply is May 31, leaving weeks to iron out kinks and consider applications.

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