As this pandemic continues to spiral our economy further down the drain, I am beginning to worry about the pitfalls of hastily passed legislation. Visions of the 2018 Tax Cuts and Jobs Act are swirling before my eyes like ghosts of Christmases past revisiting us in the form of the Paycheck Protection Program loans. The more I hear about problems with these loans, the more I’m concerned for desperate small business borrowers who are grabbing at any opportunity to save their businesses.
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While I am not an agent who is assisting borrowers in applying for these loans and I am not inclined to give legal advice on this issue, I can see multiple potential problems with these loans as the SBA and the Department of the Treasury begin rolling out rules and guidance on administering this program. Let me be clear and say at the outset that these loans can be lifesavers for small businesses, independent contractors and sole proprietors who need help bridging the gap in income until they can get back on their feet, hopefully sooner rather than later. However, these loans could be a big nightmare for these same small businesses in a very short period of time if the borrowers aren’t careful with the process.
Here are some pitfalls to be aware of if you are a small business owner who has applied for a Paycheck Protection Loan:
- The lenders have no responsibility in verifying your information. You have to certify the information that you give on your application for the loan that demonstrates your eligibility for the loan and the lenders are authorized to rely on your certification. Needless to say, it’s important that you get your certifying information correct when submitting your PPP loan application. If you knowingly submit false certifying information you could face fines, criminal charges and imprisonment.
- The formulas for figuring out how much of a loan borrowers can take out are confusing. I’ve seen several different formulas designed to help you figure out how much loan funds a borrower can get access to. Here is the link to the SBA.gov website PPP loan calculator. https://www.sba.gov/document/support–how-calculate-ppp-loan-amounts I suggest you use it to figure out how much loan you should take out. Remember, the overall goal is to cover payroll for a short period of time.
- You, and you alone, are responsible for proving that 75% of the loan proceeds are used for payroll in order to qualify for loan forgiveness. The best way to satisfy this requirement is to open a bank account for the sole purpose of depositing these funds into and tracking them over time.
- If you don’t qualify for loan forgiveness after the six month deferment period is up, you will have two years to repay the loan. Even though the CARES Act says the maximum term of the loan is ten years, the Secretary of the Treasury and the SBA have decided that borrowers should be able to pay them back within two years. In all fairness, the interest rate is 1% so, that makes the two year term a little more bearable.
- Calculating payroll costs when applying for forgiveness can be a little tricky. Make sure you understand the rules for calculating payroll costs when you actually get your loan proceeds. You don’t want to get to the end of the six month deferment period and find out you missed out on forgiveness because you didn’t understand how to calculate payroll costs over the life of your loan.
While I am happy to see that small businesses are getting something of a lifeline in the form of payroll assistance, I am more and more concerned with the complexity of the program and the lack of oversight in administering it. I don’t feel comfortable with the fact that these rules and regulations are rolling out after some borrowers already have the money and the program is being administered by lenders with virtually no oversight or duty toward borrowers. Don’t forget, lenders are paid a percentage of the money they lend. The phrase “foxes guarding the henhouses comes to mind,” and no good will likely come from that.
The safest thing small business owners can do right now is get the advice of a qualified accountant or attorney who are agents and can assist them in applying for PPP loans. This might not be the best time to try to do it yourself because you could end up with a big bill to pay in two years if you don’t know what you are doing for the next six months.
Gird your loins will knowledge and avoid PPP loan pitfalls. You’ll thank me for it in a couple of years!
Sincerely,
The Dollar Lama
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