Small business loans potentially overwhelm banks with demand
Small business owners, desperate to seek help amid the economic crisis caused by the coronavirus pandemic, are eagerly awaiting the start of a $ 349 billion government relief program.
But just a day before the program kicked off on Friday, banks and other lenders the government relies on to fund loans and veterinary candidates were still waiting for most of the information they needed to participate. They are also worried about how they themselves – and the government – will handle what is expected to be a huge demand crush.
“The response is overwhelming – it’s unlike anything I’ve seen in my career,” said Craig Street, director of loans for United Midwest Savings Bank, a community bank in Columbus, Ohio. “We’re talking about trying to make 10 times our normal monthly loan volume, and maybe more than that.”
The said paycheck protection program, part of the $ 2 trillion stimulus package enacted last week, offers businesses and nonprofits with up to 500 workers a low-interest loan to cover up to two months salaries and other expenses. Most – and in some cases all – of the loan will be forgiven if the borrower retains their employees and does not reduce their wages. (The government will reimburse the lenders for the canceled portions of the loans.)
It’s an attractive deal for many companies who would otherwise be reluctant to take on debt in the midst of a global crisis. Jason Dolmetsch, president of MSK Engineering & Design in Bennington, Vermont, said he was eager to apply. His engineering firm and affiliate architecture firm are trying to retain their 23 workers despite a series of canceled and postponed projects.
When he called his company’s banker on Monday, he was told to be patient and wait. The bank did not yet have information on how the program worked.
Late Tuesday, the Treasury Department and the Small Business Administration released an overview for borrowers and a sample loan request. The SBA, which backs loans, has waived most of its usual requirements – loans don’t require collateral or detailed financial records – and encourages lenders to digitally take applications and make quick decisions.
“It will be operational tomorrow,” Treasury Secretary Steven Mnuchin said Thursday during a White House briefing. He added that the loan checks could be disbursed “the same day” the borrowers applied.
But on Thursday night, lenders were still awaiting technical information on how to secure the loans – which will be breakeven at best for most lenders – and collect repayment from those who qualify for forgiveness. A trade group, the National Association of Government Guaranteed Lenders, had to postpone a training call for 1,500 lenders on Thursday because it did not have the necessary information from the SBA.
“I have requested information twice today, and I still have nothing,” Tony Wilkinson, group chief executive, said on Wednesday. “I am concerned that they are asking lenders to grant loans without the information they need to understand the rules of engagement.”
Bank lobbyist groups have warned the Treasury Department that the program as designed would not be feasible, expressing concern over their own legal liability as they attempt to funnel money to borrowers and to keep an eye out for potential fraud. The Independent Community Bankers of America sent a letter to Mnuchin on Wednesday complaining that the guidelines calling for low-interest loans could mean “unacceptable losses” for lenders.
SBA representatives did not respond to questions about when advice for lenders would be available.
Although the government has made efforts to quickly pull aid together, the slow roll-out of the program has frustrated business owners who face a daily struggle to save their businesses. Paul Caragiulo owns a restaurant group in Sarasota, Florida which employs approximately 150 people. He’s loath to fire anyone – even though his restaurant sales have plummeted – but he’s also reluctant to borrow what could amount to millions of dollars from a program whose details are being worked out on the fly.
The information sheets posted by the Treasury and the SBA did not reassure him. “These are bullets, not sheets of terms,” he said. “We’re not used to having debt and we don’t take it lightly. “
The Trump administration has said it wants paycheck protection loans easy to obtain; an example of application Posted on Tuesday is a four-page form that can be completed in under 10 minutes. But there is one line in the fine print that got Mr Caragiulo thinking: Borrowers should promise to only buy US-made equipment and products “where possible.”
Mr Caragiulo, who uses Italian pizza ovens, said the requirement seemed like an absurd bureaucratic trigger. Asked about this, a spokeswoman for the SBA pointed out a law of 1992 which requires the agency to “encourage” business owners receiving financial assistance to purchase American products. She did not answer questions about how – or if – this will be implemented.
Other federal efforts to help small businesses have been generous but chaotic. A program offer low interest disaster loans directly funded by the government has already had more than 100,000 applicants, according to a person familiar with its operations.
The SBA started receiving applications weeks ago, but last Friday’s stimulus bill added a new sweetener: applicants, including those turned down for loans, are eligible for up to 10 $ 000 in cash grants. (The funds are described on the SBA’s website as a “loan advance,” but a spokesperson for the agency confirmed that it does not have to be repaid.)
Abninder Mundra, who owns a UPS store franchise in Portola Valley, Calif., Applied for a disaster loan on March 20 and was approved four days later for $ 210,000. Then the stimulus bill introduced the subsidies. Mr Mundra said an SBA representative told him to complete a second loan application if he wanted the grant funds. He was still awaiting both his disaster loan check and a response to the grant application.
Mr Mundra said he could afford to wait a few weeks and was grateful for the help. He also plans to apply for a paycheck protection loan as soon as his bank starts receiving applications. He had to cut the hours of his three employees to make up for a drop in foot traffic and hopes the loan will help restore them.
“I think the government has really understood that small businesses are the backbone of the economy,” he said. “If we stop employing people, they won’t have the money to pay their bills.
But with job losses already records and some are getting worse, lenders fear the $ 349 billion Congress has allocated to the paycheck program will run out quickly. Senior Treasury and SBA officials told reporters on Tuesday they were prepared to ask Congress for more money if needed.
Jim Donnelly, chief commercial officer for Bangor Savings Bank in Maine, said his small staff were working around the clock to meet pent-up demand. In a typical year, his bank manages hundreds of commercial loans. He hopes to process thousands in the coming months.
And while her bank was still waiting for critical technical information, it planned to start processing loan applications on Friday.
“We have local businesses like restaurants that have closed and are looking at these loans as a way to reopen,” he said.
Many of the country’s largest banks have said they plan to offer the loans, although some will restrict the applicants they will work with.
JPMorgan Chase, for example, said this would make the loans available to customers with Chase commercial checking accounts as of February 15. Bank of America and Citi both said they were planning to participate but did not have details yet.
The Treasury has encouraged non-bank lenders to offer the loans as well, but some who want to do so say the process has been maddening. Kabbage, one of the largest online lenders, said the system for becoming an approved lender was opaque.
Mr. Street of the United Midwest Savings Bank was also desperate for more information, including details on how banks are supposed to carefully screen potential borrowers. Any choice comes with trade-offs: Fast approvals and disbursements increase the risk of borrower errors and fraud, but strong underwriting takes time that desperate business owners and overtaxed bankers don’t have to waste.
Mr Street hopes the SBA and banking regulators will give lenders some leeway to err on the side of speeding.
“We are trying to put things in place so that we can start them,” he said. “We received calls from Monday morning from people who wanted to borrow right away. It was hard to tell people they had to wait. No one can afford to wait.