CARES Act Loans: What If I Have a Criminal Record?

New rules and regulations are being announced on SBA disaster relief loans, including restrictions on applicants with criminal records.

By , Attorney

In response to the COVID-19 outbreak, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Part of this legislation provides financial assistance to small businesses through the Paycheck Protection Program (PPP), Emergency Injury Disaster Loans (EIDLs), and Express Bridge Loans (EBLs). As businesses start applying for these programs, additional rules and regulations are being announced, including restrictions on applicants with criminal records.

Eligibility Under the Paycheck Protection Program

The Paycheck Protection Program provides forgivable loans to small businesses to help with employee and other operational expenses. Recently, the Small Business Administration (SBA) announced additional rules concerning eligibility for the PPP. Any business that is engaged in illegal activity is ineligible for a loan. In addition, your business may be ineligible if an owner with more than 20% equity in the company:

  • is incarcerated, on probation, or on parole
  • is currently subject to an indictment, arraignment, or any other formal criminal charges, or
  • has been convicted of a felony within the last five years.

The application for a PPP loan was updated to include additional questions about owners' criminal backgrounds, including all felony charges from the last five years. By submitting the application, you must agree to a criminal background check to verify your answers.

Advance Economic Injury Disaster Loans (EIDL)

The CARES Act also expanded the availability of the Economic Injury Disaster Loan program to include an advance up to $10,000 for businesses experiencing a temporary loss of revenue. However, the SBA has not provided guidance on whether applicants with criminal records will be ineligible for EIDLs.

The application asks if the applicant is facing pending criminal charges, has been arrested in the past six months, or has any history of a criminal offense other than a minor vehicle violation. As of now, there is no indication as to whether a criminal background will disqualify a company for a loan. Because the rules are not clear, and there is no fee or penalty involved in submitting an application, consider applying even if you or a co-owner has a criminal record.

Good Character Requirement for Emergency Bridge Loans

Businesses that have a relationship with an SBA Express Lender may qualify for a loan up to $25,000 through Express Bridge Loan program, which may be used to bridge the gap while waiting for an EIDL. The SBA will only guarantee EBLs if the principal owners of the business are found to be of "good character." Principals of a business include:

  • sole proprietors
  • all general partners
  • limited partners who own more than 20% of the business
  • any partner involved in management
  • all officers and directors of a corporation
  • any person owning 20% or more of a corporation or LLC
  • all officers, directors, and managing members of an LLC
  • key employees, which include persons who manage day-to-day operations, and
  • trustors if the business is owned by a trust.

The business will not be eligible for a loan if any of the principal owners are incarcerated, on probation, on parole, or are presently subject to an indictment, arraignment, or any other formal criminal charges.

In addition, the application process involves a more thorough check into every principals' background. The application asks whether any principal has been arrested in the last 6 months, or if they have ever been convicted, pleaded guilty, pleaded no contest, been placed on parole, or been placed on pretrial diversion for any criminal offense other than a minor vehicle violation at any time in their life. This includes misdemeanors as well as felonies. If anyone has such a background, they must submit an additional "Statement of Personal History."

Many older criminal offenses, such as a DUI from 20 years ago, may not deem a business ineligible for a loan. However, if an individual's record includes crimes that indicate issues with business integrity, such as charges involving fraud or breach of trust, they may be denied an EBL. This may be the case even if the individual was never convicted, but was placed on pretrial diversion.

Penalties for Failing to Disclose a Criminal Background

Even if you are concerned about a potential issue on your record, it is important to provide the information. Do not remain willfully ignorant of the backgrounds of all your principals and co-owners, and be sure to take the time to answer the application completely. If you are unclear about whether or not you have to provide information, err on the side of listing the offense. Failing to disclose information that is pertinent to your application can be grounds for denial if later discovered.

In serious situations, failing to disclose information could be considered Borrower Fraud, which may be reported to the SBA Office of the Inspector General for investigation. If charged with fraud, not only will you have to forfeit any money received, you could also face a federal prosecution which could result in significant fines and jail time. You would likely be prohibited from receiving any loans from the SBA in the future.

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