Coronavirus emergency small business loans are here, but lenders remain in the dark

Lenders express serious concerns over the payroll protection program, which was due to launch on Friday, citing a lack of information from the government on how and if the emergency loan program will even work.

The payroll protection program is the centerpiece of the three small business loan programs outlined in the CARES law, which passed last Friday and pledges $ 350 billion in funding small business relief affected by the coronavirus pandemic. On Tuesday, the U.S. Treasury said it expects to be able to fund the loans by today, but lenders worry they won’t have enough capital to fund demand and are wondering how they’ll be able to replenish capital – and to How fast .

“We need this wastegate in place where lenders of all types can sell the paper to recycle funds. It’s such a vital piece,” said Chris Hurn, CEO of non-bank lender SBA Fountainhead, Thursday. “We hardly heard anything – no indication of what’s going to happen there.”

Under normal circumstances, for example, a community bank might have $ 100 million on its balance sheet that allows them to make loans to small businesses; a bigger bank, $ 20 billion. But in today’s emergency environment, they could deploy so much in a single day. And if or when the demand for a PPP loan becomes available, bankers are sure to stand still and wait for the Treasury and the SBA to clarify how to handle these capacity constraints.

“Small lenders, community banks, regional lenders, non-bank lenders like me, and even the biggest banks will not have the capacity to make these loans and keep them on their balance sheets for a period of time,” Hurn said.

“Do you think it’s chaotic now? It’s about to be absolute madness.”

Brock Blake, CEO of Lendio Small Business Lending Market, said about 70% of his lending partners will participate in the program. Some institutions, like Chase and First Republic Bank, are unable to accept applications immediately, although both made the program available on Friday afternoon.

“They don’t have the process in place, they don’t have the capital, they don’t have the right way to help their clients, but they are looking to direct their clients to other financial institutions that will participate,” Blake said.

Lenders are also concerned about the low amount of interest they will be able to earn on PPP loans: 1% with a two-year maturity. The Treasury raised that rate Thursday night by 0.5%, which the SBA had been announcing all week.

However, lenders typically charge between 4% and 8% on small business loans, and the CARES Act caps interest at 4%. It’s not about profitability – small business loans tend to be a very small amount of bank balance sheets – but they are concerned that this will not allow them to run the economy to service the loans. .

“Small business loans, in general, aren’t really a lucrative business. It’s more of a retention game,” said Ian Benton, senior analyst at Javelin Strategy & Research, specializing in small business banking. “It’s about attracting and retaining customers, keeping them happy and selling them on other services.”

The SBA is going to compensate lenders, but according to estimates by industry experts, based on lender pay rates, it could amount to some $ 10 billion – for the $ 350 billion deployment. It will pay lenders 5% for loans less than $ 350,000; 3% for loans over $ 350,000; and 1% for loans over $ 2 million.

“You have to remember: the cost of origination for a bank is so high,” said Ryan Metcalf, head of US regulatory affairs and social impact at online lender Funding Circle. “A loan of $ 100,000 and a loan of $ 1 million can cost a bank the same amount of money to generate.”

PPP loans are based on 2.5 times the company’s monthly average salary cost in 2019. The maximum possible loan amount is $ 10 million.

They also operate on a first come, first served basis and, combined with the need for lenders to manage capital constraints and the high cost of origination of loans, they are likely to prioritize existing clients who have established a long term value for them.

“I suspect the banks have already developed customer lists that they know will be interested in this and they’ve probably started preparing applications,” Benton said.

This could make it difficult for banks to meet the demand for PPP loans.

Borrowers can always turn to non-bank direct lenders, such as Fountainhead, which is an SBA lender; as well as fintech companies like Funding Circle and Kabbage, which specialize in small business loans but are not SBA approved lenders. A provision of the CARES Act allows them – as well as other lenders who wish to participate in capital allocation – to seek approval, but the SBA hasn’t provided clear direction on how to do it, Blake said. On Thursday, he announced that he would publish an application form for non-SBA lenders.

“Every lender I know – and we have 2,000 lenders on our platform – have contacted if they weren’t already an SBA lender at the email address [provided by the SBA] saying they wanted to be approved. Now the day before [the launch], they say, actually that’s not how you get approval, we’re going to release a new document that allows non-SBA lenders to speed up the approval process. “

The situation has been similar for borrower applications, whose requirements, forms and application processes are caught in a power struggle between the Treasury and the SBA, according to Blake.

Earlier this week, the Treasury released a handy app for borrowers to download so they can “start preparing” and “see what information will be requested.” Borrowers have been using it all week, and some lenders have posted digital apps on their websites based on it and created automated experiences for their clients.

“The day before it goes live, we receive indications that this is not the real app; that there are additional documents and data that need to be collected from the business owner, and if you don’t collect it, it’s not going to be a secured loan.

Updated April 4 to reflect the fact that Friday afternoon, First Republic and Chase both made the program available.