PPP Loans Should Not Be Automatically Forgiven

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The Paycheck Protection Program has been a vital lifeline for businesses during the pandemic, providing close to $520 billion in aid to more than 5 million businesses. The premise of the program is to provide recipients with cash infusions to help pay their employees and qualified expenses such as rent, with the promise that in many cases, the loans will be forgiven.

But should such loans be automatically forgiven—allowing businesses to skip the paperwork required to prove the government funds were used for the intended purpose? According to two bank lobbying organizations and Treasury Secretary Steve Mnuchin, borrowers with loans under $150,000 should not have to go through the forgiveness process. This would mean that more than 86% of all PPP loans would be automatically forgiven, according to data provided by the SBA.

Relief Funding Needs To Be Accounted For

The U.S. economic fabric is woven from the industrious efforts of millions of hard-working entrepreneurs, farmers, medical providers, service providers and others. The PPP was specifically designed to keep this fabric from unraveling in the midst of an unprecedented crisis.

If the PPP were intended to function like the economic impact payments to citizens, the government would have simply issued checks to U.S. business owners—just like it did with its stimulus payments to eligible citizens. PPP funds are taxpayer dollars specifically intended to maintain employment and support the economy during this tumultuous time; as such, some accountability must be required for the use of these funds.

Business owners should be expected to take the time to show how they used the money, in order to encourage accountability and reduce fraud. If a small business owner used the PPP loan for the intended expense items of payroll and utilities, the loan should be 100% forgiven. If not, it is not the responsibility of taxpayers to cover the cost of misused funds.

Yes, it will be an effort for both business owners and lenders to go through the forgiveness process; but the process of documenting the use of funds will help to maximize the effectiveness of this $520 billion in aid.

Automatically Forgive Loans To Sole Props And The Self-Employed 

While I don’t believe in auto-forgiveness for all loans less than $150,000, I do advocate that loans to sole proprietors, 1099 contractors and self-employed individuals should be automatically forgiven. It is already challenging for those very small businesses to document how they pay themselves, they aren’t supporting other employees and they usually don’t have a separate office space with utility expenses. This is a segment of small business owners that should benefit from an auto-forgiveness mandate.

However, for every business that has employees, I strongly recommend maintaining the original guideline in the PPP that requires basic accountability for how the loan is used. If used appropriately, forgiveness should be granted. If not, the SBA should require the payback of the loan.

My hope is that the forgiveness process is as streamlined and easy as possible. Although I have empathy toward lenders who would rather focus their efforts elsewhere right now, I believe this process is necessary to protect against fraud.

The Unintended Consequence Of Speed Is Fraud

In April, when unemployment numbers were soaring by the day, the need to quickly deploy capital into the hands of small businesses was paramount. Business owners were desperate and the collective industry was trying to do everything possible to process loans in the most efficient manner possible. Unfortunately, one of the unintended consequences of speed is increased fraud.

“The limited safeguards and lack of timely and complete guidance and oversight planning have increased the likelihood that borrowers may misuse or improperly receive loan proceeds,” the Government Accountability Office wrote.

Due to how quickly the program rolled out, there were also questions around who got a share of the funds. Some public companies received millions of dollars in aid, to the outrage of many people. Worse yet, the program has been at risk to fraudsters.

In a more egregious case of PPP fraud, a Florida man has been arrested after he allegedly received nearly $4 million in federal loans and spent it on lavish purchases including a Lamborghini Huracán. The man claimed to have operated four businesses that employed 70 people with $4 million in monthly expenses. Authorities took notice after he applied for additional money that totaled more than $13 million.

While the above example is an extreme case, the insertion of basic accountability through documenting the use of PPP funds will help to collectively decrease fraud and ensure proper use of taxpayer dollars.

Will There Be Another Round Of PPP?

Unfortunately, the COVID-19 pandemic continues on, and most small businesses are still feeling the pain. The initial PPP loan has certainly helped many to survive, but those that have been hit the hardest are in need of another lifeline. Senate Republicans have put forward a plan that will set aside funds to businesses of under 300 employees that were hit hard by the pandemic. Part of the initiative will also stipulate that applications show at least a 50 percent revenue loss compared to the previous quarter.

A portion of this new round of PPP loans will be set aside for businesses with 10 employees or fewer, a segment that has been historically disadvantaged when it comes to receiving loans from large banks. It is these business owners, along with sole proprietors, that would likely receive loans of up to $20,000.

Throughout the PPP, my company, Lendio, has helped many of the smallest businesses in the country to connect with one of our 300 PPP lenders. To date we have facilitated 100,000 PPP loan approvals totaling $8 billion. More is needed to keep these businesses afloat. Congress should act quickly to pass another aid bill, with the proper accountability measures in place, in order to keep the small business engine of our country chugging along.



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