There has been a lot of recent news re. PPP audit risk and forgiveness rules. To catch up on these and other SMB lending issues, earlier today (June 4) I picked the brain of Gerri Detweiler, the education director at Nav, a fintech marketplace that connects small businesses with lenders and business credit cards. Detweiler has more than three decades of experience in consumer credit education. Please note that I myself am not a financial professional and am neither licensed nor equipped in this area; the information and opinions below are those of Ms. Detweiler.
Micah Solomon, Senior Contributor, Forbes: Tell me about audit risk for small and medium sized businesses. I’ve heard there’s good news for smaller borrowers–is that correct?
Gerri Detweiler, Education Director, Nav: Treasury and the SBA have indicated that for loans under $ 2 million the borrower will have been considered to have made the certification that the loan is necessary due to economic uncertainty in good faith.
However, an Interim Final Rule published in the Federal Register on June 1, 2020, they have made it clear that loans of any size may be reviewed by the SBA. Specifically it says:
For a PPP loan of any size, SBA may undertake a review at any time, at SBA’s discretion. For example, SBA may review a loan if the loan documentation submitted to SBA by the lender or any other information indicates that the borrower may be ineligible for a PPP loan, or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower.”
And it goes on to say:
If SBA determines that a borrower is ineligible for the PPP loan, SBA will direct the lender to deny the loan forgiveness application. Further, if SBA determines that the borrower is ineligible for the loan amount or loan forgiveness amount claimed by the borrower, SBA will direct the lender to deny the loan forgiveness application in whole or in part, as appropriate. SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.
Business owners tell us they are worried about the risk of their PPP loan being audited (or reviewed) and the loan not being forgiven. They are as scared of one of these audits as they are an IRS audit. Many already realize they may have made innocent mistakes when they applied because, for example, the rules weren’t clear on how payments to independent contractors or general partners should be handled.
We hope that the main purpose of these reviews is to identify cases of fraud and that borrowers who keep good records won’t encounter problems. But the fact that records must be kept — and may be examined — for six years adds to the anxiety; after all most IRS audits only focus on the most recent three years of tax returns.
Solomon: What’s the best way to find a lender who is open to your PPP application?
Detweiler: Business owners certainly can and should check with the bank where they have a small business bank account. But if their bank can’t help, or the business owner wants to cover their bases, they should consider applying through an online lender as well. Many online lenders are helping business owners who don’t fit the traditional bank mold in terms of loan size, time in business, etc., Nav continues to help match borrowers to PPP lenders for free.
Solomon: What’s the latest on PPP forgiveness?
Detweiler: The forgiveness application has been released and for many small businesses, it’s going to be confusing and overwhelming. It’s 11 pages long and includes some calculations that will be challenging to complete, especially for those businesses with multiple employees.
As it stands, some small businesses—including home-based business owners who are self-employed—will find it impossible to achieve full forgiveness and they will end up with at least some of the balance remaining as a loan. As far as loans go, the 1% interest rate is excellent, though the two-year repayment period will be difficult for some businesses with larger balances to pay back, especially given that it could take years for some communities and businesses to recover.
Nav has created a Self-employed PPP Forgiveness Calculator and a PPP Forgiveness Calculator for businesses with employees, along with detailed content to help them understand the process. Ultimately, lenders will provide a forgiveness application borrowers will use to request forgiveness from their lender. We’re encouraging business owners to get help from their accounting professional to make sure they are completing the application as accurately as possible.
The exciting news is that the House has passed the Paycheck Protection Program Flexibility Act of 2020 and it appears the Senate will take it up this week. That legislation that passed the House will offer a number of benefits, including:
· Allowing businesses to spend up to 40% of PPP funds on certain non-payroll expenses and still qualify for full forgiveness. (The business must still meet other requirements related to keeping workers on payroll.)
· Giving businesses up to 24 weeks (instead of 8 weeks) to spend PPP funds and still qualify for full forgiveness.
· Removing the restriction that businesses who get PPP can’t also get the Payroll Tax deferral.
· Extending the time to rehire employees and avoid a reduction in forgiveness from June 30, 2020 to December 31, 2020.
· Provide more flexibility for businesses by allowing them to potentially avoid a reduction in forgiveness if they can’t return to the same level of business due to “the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”
These changes will be welcomed by many small businesses and may spur at least some of those who haven’t yet applied to get a PPP loan. There are still funds available, so we’re encouraging business owners who may be on the fence to get their application in with the hope these changes become law.
Solomon: What are the newest developments in other types of business financing? Are lenders still lending to businesses outside of PPP loans?
Detweiler: Lenders have definitely pulled back on financing options but we’re seeing a little movement in terms of options for businesses in certain industries (such as healthcare) or for businesses with strong revenues and good credit. We’ve always emphasized the need for businesses to get lender ready and to explore financing options before they urgently need funding. Now that’s more important than ever.
Solomon: For business owners who didn’t qualify for PPP loans or EIDL (the other SBA program within the congressionally-mandated CARES Act), are there any other options they should consider in order to get funds?
Detweiler: Crowdfunding is still an option worth exploring for businesses that can’t get traditional financing but have a loyal following or a truly unique business model. Kiva, which offers 0% loans to small businesses has raised its minimum loan amount to $ 15,000 for those impacted by COVID-19, for example. Equity-based crowdfunding platforms continue to help businesses that may otherwise have trouble raising money get funding. And even donor-based crowdfunding (e.g., GoFundMe) which has traditionally been more consumer focused has become more popular with small businesses.