The Tangled Webs People Created for Themselves Around The CARES Act

When Covid-19 took the country by storm back in March of 2020, the U.S. Government had just one mechanism even remotely capable of handling millions of small businesses that needed to borrow at once.

The same one they used to handle actual big storms. 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, an offshoot of The Small Business Administration’s long-standing Economic Injury Disaster Loan Program (EIDL), saved a lot of honest and well-designed businesses from failing via low-interest, long-term loans.

But it also invited abuses, especially as its limits ballooned from $200,000 to $2 million. Rather than using it to operate, expand and stabilize their companies, unscrupulous entrepreneurs used the low-interest (3.75%), 30-year loans to pay off mortgages, buy second homes, boats, even, in one case, put a down payment on a jet.

It was easy to see the temptation. EIDL was designed to address crisis in a small microcosmic space, not stave off an economic collapse due to a worldwide pandemic that forced people into restricted movement and isolation. To do this in the quick manner needed though, it required alarmingly little documentation to substantiate needing such a loan, even as the limits for such loans increased several times up to its $2 million ceiling.

And so what happened? I met some people who literally took the $2 million and bought $2 million of crypto cards. I met that someone who used the $2 million on a jet with their $2 million, and all iterations from that. And I met people who legitimately needed the money.

The bet by the unsavory ones was that they would not be audited. It was a safe one given the trillions that were loaned out via this program over the pandemic. And with just 12 SBA offices servicing the entire country, with rare exception, they were not. The government is just not equipped to do all that auditing.But here’s where it gets interesting, at least for some of those borrowers who used the loans for something other than their businesses, and now need to borrow to grow or stabilize those businesses. They borrowed the maximum $2 million EIDL loan, not because they needed it, but because it was so cheap. But what if their business is booming, and there is a need to expand the line of credit issued from the bank from say $4 million to $8 million for cash flow purposes.

The first thing the banker will want to know is, “What did you do with that EIDL money? Where did it go?  Show me how you used it. Did you use it for approved purposes within the framework of the program?”

Without solid answers, their relationship with that bank will likely be strained, if not severed. There’s a character issue there. Even if the bank is somehow appeased, you then have to go negotiate a subordination of your lien with the SBA. At that point, the SBA is likely to take a harder look at what was done with that money, and why more is needed. Also, what incentive does the SBA have to subordinate its position and not make it as strong?

What a mess, right? They’re faced with a King Solomon choice. Keep the cheap money and hog-tie growth without the increased line of credit. Or pay back the EIDL loan way sooner than expected, or wanted.