Banks stand to collect billions of dollars in fees on the $350bn in loans that are being offered to US small businesses as part of the federal response to the coronavirus pandemic.
Under the $2tn relief package signed into law by Donald Trump on Friday, the Small Business Administration will offer the loans through banks and credit unions to cash-strapped businesses employing under 500 people.
The full amount of the loan will be forgiven if it is used for payroll, mortgage interest, rent or utilities in the two months after the money is received. Less will be forgiven if the employees are sacked or salaries cut.
Any amount that is not forgiven will accrue interest at a 0.5 per cent rate and the principal will come due in two years, the SBA said on Tuesday as it shared details of its “pay cheque protection” programme.
Banks will receive processing fees, paid by the federal government, for making the loans. The fees will vary with loan size: 5 per cent for loans under $350,000, 3 per cent for loans under $2m, and 1 per cent for loans greater than $2m. The loans will not incur a capital charge.
Borrowers will need to fill out a two-page form and document that they were in business as of mid-February. Lenders will not need to wait for SBA confirmation before providing cash in hand, as soon as Friday. Businesses will be eligible to borrow the equivalent of 2.5 times their average monthly payroll with a cap of $10m.
“Speed is the operative word,” said Jovita Carranza, the SBA’s administrator. “Applications for the emergency capital can begin as early as this week, with lenders using their own systems and processes to make these loans.”
According to the SBA, there are 30m businesses with fewer than 500 employees in the US, employing 60m people, almost half of the private workforce. The National Federation of Independent Business, an advocacy group, says about three-quarters of its members have been affected by the crisis.
Since the president signed a rescue package, the SBA has been under pressure to release details of the programme. As customers disappear from all but a short list of essential businesses, business owners have been uncertain about a crucial question: whether to keep their staff on payroll, or release them to collect beefed-up unemployment insurance cheques.
Karen Ginther, who works for the Seattle chapter of Score, an organisation that works with the SBA to mentor small businesses, said one typical email from a business owner came to her at 3am on Tuesday. It asked: “Can you help me make some decisions? I don’t understand how all of this works. I have been learning and taking webinars, reading. I am so confused what the right thing is to do. I don’t want to lose my employees.”
Claudia Sahm, a former research section chief at the Federal Reserve, said offering banks fee-based incentives to administer and distribute loans — which function like grants — is a way to make up for the limited capability of the SBA to administer a programme that senior administration officials say could pull in millions of application requests.
Small businesses “are used to going to their local bank to get loans”, said Ms Sahm, now at the Washington Center for Equitable Growth. This will make it easier for banks to act quickly on existing relationships. It also means the SBA will rely on banks to contact their own clients, giving large banks and favoured clients an advantage.
“It’s great that the government has done this so quickly,” said Wendy Cai-Lee, chief executive of Piermont Bank, a digital start-up bank that specialises in lending to small and midsized businesses. “The challenge is in the execution. Banks are still waiting for guidance from the SBA . . . My concern is how quickly we can get the money into the hands of small businesses”, given that they may struggle with the required paperwork.
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The SBA has also laid out a role for agents, such as attorneys or accountants, who can help prepare documents, and can claim some of the lenders’ processing fee.
Sam Taussig, head of policy at Kabbage, a fintech that makes small business loans, said: “It is essentially a grant programme that, if the borrower doesn’t use the money to pay their employees, turns into a super-low interest loan.”
Initially, only federally insured banks and credit unions will be eligible to make the loans. Mr Taussig said Kabbage was eager to participate, but that it remained unclear whether online lenders and fintechs would be allowed to do so. The Treasury’s statement on Tuesday said that “additional lenders” were encouraged to apply to the SBA for approval.
Online lenders are an increasingly important source of capital for small businesses, particularly the very smallest. The Fed’s 2019 Small Business Credit Survey found that a third of small businesses seeking loans applied to online lenders, and that speed of decision making was the key reason for choosing the online lenders.
“We can do what most banks do and do it in a faster way,” Bernardo Martinez, US managing director of Funding Circle, the UK-based online lender, told the Financial Times last week. “We can reach customers that don’t have access otherwise.”