Apps for new businesses have a double WTF moment

People have massively chased their dreams and started new businesses, and that’s wonderful. Then there is the problem of large-scale PPP loan fraud.

Through Wolf Richter for LOUP STREET.

The historic explosion of overnight layoffs last spring, the tsunami of free government money for individuals and businesses whether they need it or not, whether they are fraudulent or not, and the reactions of people with this free money have upset all kinds of economic dynamics. And the double spike in applications to start new businesses is one of them.

The 440,165 requests filed in March with the IRS for an “employer identification number” (EIN) were up 47% from February 2020, the last month before the pandemic. In the first quarter, claims jumped 62% from a year ago. By July of last year, business apps had nearly doubled year-over-year, producing an all-time high that faded through December, then resumed in January for a moment WTF doubles – and we will discuss the potential reasons in a moment.

These data from Census office is not based on surveys, but on actual new business requests for a federal EIN, with which the IRS tracks businesses for tax purposes.

Excluded are EIN applications that are not related to typical business training, such as EIN applications “for tax liens, estates, trusts or certain financial deposits, applications without state-county geocodes, applications of certain entities agricultural and public sector and applications in certain industries (eg private households, civic and social organizations).

Machines that create jobs.

From the information contained in the EIN application, the Census Bureau estimates which companies have a “high propensity” to have a large payroll (“High-Propensity Business Applications” or HBA) and could therefore become machines for creating jobs. .

In March, there were 153,186 requests that the Census Bureau considered HBAs, up 35% from February last year. In the first quarter, HBA applications jumped 47% from last year. That massive peak last July faded until December, but then demands resumed in January. Note that it took this peak to reach and exceed the number of applications before the financial crisis:

The real machines that create jobs.

Within the HBAs are “Business Applications with Planned Wages” (WBAs). These are companies that already have a scheduled date for the payment of wages. They have hired people and have the funding in place and are ready to pay salaries, increase their payroll, and become major employers.

In March, 53,213 such trade applications were filed, up 37% from February last year. The first quarter total is up 50% from the first quarter of last year. But note that even the huge spike in July did not bring applications from these job-creating machines down to levels that prevailed before the financial crisis:

Most applications come from companies with a low propensity to create jobs.

The graph below of total business applications (red), high propensity business applications (purple), and business applications with planned salaries (green), all on the same scale, shows the reality that most business applications are intended for companies that do not have a large payroll. They can employ the owner and possibly a few other people, and quite often they remain stores for one man or one woman throughout their existence. This is a great way to go, but they basically only create one job:

Retail dominates.

Brick-and-mortar retailing was badly battered during the closures, as the big retailers that sold food and everything, such as Walmart and Costco, were allowed to stay open, while retailers that didn’t sell. no food had to close. These retailers which had to close had already been beaten before the Pandemic by competition from e-commerce. Many big box stores have filed for bankruptcy. The small stores went quietly, relinquishing their lease, possibly making a deal with the owner, and then closing the store.

But online sales have exploded, and business applications in retail – likely by people planning to profit from the boom in online sales – have seen an all-time high. At its peak in July, there were 120,000 claims from retail businesses, or 22% of all claims in that month, and triple the number of claims before the pandemic.

In March, business applications in retail, at 81,469, were still roughly double 2019 levels (red line in chart below). Nothing else came close. This is interesting because in previous years retail apps performed at roughly the same level as professional services apps (hotline), but during the pandemic they simply exceeded the cap. Also note that all categories have this double peak:

The chart above shows the top seven industries, by number of business applications in March, as well as the increase from 2019:

  • Retail trade (red): 81,469, almost double compared to 2019
  • Professional services (green): 54,385, + 38% compared to 2019
  • Build (black): 38,312, + 16%
  • Transportation and warehousing (light blue): 37,092, + 83% Many are trying to capitalize on the fiery e-commerce boom with its last mile delivery demands and the boom in food and meal deliveries.
  • Administration and support (yellow): 30,480, + 50%
  • Accommodation and food services (gray): 25,540, + 66%
  • Health care and social assistance (brown): 24,674, + 33%

Entrepreneurs try to get by.

There are many legitimate and exciting reasons for an increase in business applications during the unemployment crisis, including the fact that people had the time and a little extra money from the government to finally pursue their dream and get started. alone and start a business. I know several people who have done just that, and it’s exciting and wonderful to watch.

Anything internet-related – whether retailing or delivering or posting YouTube videos and making money from ads – would naturally be a primary target during blocks. And a lot of people have. This kind of fiery entrepreneurial energy is one of the best things to come out of this crisis.

But there is another side.

I can’t remember anything that has ever attracted so much fraud, like an industrial magnet attracting scrap metal, than the federal government’s programs to support jobless and struggling businesses.

When it comes to this double peak in business applications, Payroll Protection Program (PPP) repayable loans and economic disaster loans immediately come to mind – especially since the July peak and then the new one. peak this year, are synchronized with the two generations PPP.

Companies that applied for PPP loans were required to submit documents on wages paid over specified periods. The first generation PPP program ended on August 8, 2020. The second generation PPP program started this year and remains open.

The dates were structured in such a way that it would be impossible for honest people to set up a business entity after the announcement, pay salaries long enough to qualify for a PPP loan, and then apply for a PPP loan. Applicants were required to submit historical salary documentation to lenders whose job it was to verify all of this.

What we now know is that these PPP loan applications were riddled with inaccuracies and fraud. Fintech companies have invested in PPP loans with reckless abandonment. A Bloomberg Analysis in October discovered that fintech companies were linked to 75% of the PPP fraud cases alleged by the US Department of Justice at the time, although they only arranged 15% of the total number of loans.

Once borrower fraud is involved, the initial requirements no longer matter, as they are first bypassed by the fraudster.

the Government Oversight Project (POGO) reported today: “The Justice Department has laid criminal charges against at least 209 people in 119 cases related to Paycheck Protection Program (PPP) fraud since banks and other lenders began processing loan applications on behalf of the Small Business Administration on April 3. , 2020. And these cases are just the beginning.

POGO’s analysis of the first batch of PPP fraud cases revealed that in at least:

  • In 107 of the cases, accused persons allegedly falsified payroll documents to justify either obtaining a loan or obtaining a loan larger than the one to which they were entitled;
  • 93 of the cases, accused persons allegedly created false tax documents used to verify details of loan applications;
  • 41 of the cases, accused individuals allegedly set up bogus companies to obtain loans;
  • 28 of the cases accused persons allegedly used missing companies to obtain loans;
  • In 20 cases, accused persons used stolen identities or pseudonyms when applying for a loan;
  • In 12 of the cases, accused persons allegedly tampered with the ownership of existing legitimate businesses;
  • 28 of the cases, the accused persons also obtained economic disaster loans (some of these persons were accused of fraudulently obtaining these loans as well as).

So, on the one hand, this spike of EIN apps is the result of an exciting increase in entrepreneurial energy from a large number of people going on their own and going in a row to start a new business, this which is wonderful to see. On the flip side, that spike appears to include large-scale and systematic fraud efforts, the extent of which – beyond a few exciting nuggets emerging from investigations – we may never be able to fully understand.

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