Biden plan to help smallest PPP applicants has downsides, banks warn

The Biden administration’s push to channel more Paycheck Protection Program funding to small businesses with 20 employees or fewer is winning qualified support from lenders.

The moves are well intended and will have some positive effects, but they’ll also come with downsides, bankers and industry representatives warned.

One of the key steps announced Monday, an exclusive 14-day application window for 20-employee-or-fewer firms, will delay loans, including many already in the works, to larger borrowers, some PPP lenders said.

Another major element of the proposal — a softening of the formula used to calculate the amount of credit that may be extended to sole proprietors, independent contractors and self-employed borrowers — will take time to implement. It also raises questions about whether borrowers in these categories who have already received PPP loans can seek to have their payouts recalculated under the new, more favorable formula.

“Are they eligible then for increases after the fact?” asked Alison Holt-Fuller, head of product and enterprise first-line risk management at the $20 billion-asset Atlantic Union Bankshares in Richmond, Va.

“With the current program expiration date of March 31st, there isn’t a lot of time to adjust processes that many, us included, tried to automate as much as possible,” Holt-Fuller said.

The changes, which take effect Wednesday, “are going to slow us down some,” said Sam Sidhu, vice chairman and chief operating officer at the $18.4 billion-asset Customers Bancorp in West Reading, Pa. “Two days is not enough time to get geared up. … We’ll be up all night the next two days getting ready.”

While the changes should make obtaining PPP loans “somewhat easier” for smaller firms, moving them to the front of the line without addressing persistent technical problems involving the Small Business Administration’s processing of applications may not help as much as business owners hope, Consumer Bankers Association President and CEO Richard Hunt said in a press release.

“It is like giving everyone a train ticket on an unfinished railroad,” Hunt said.

After the SBA announced a more stringent review process to combat fraud and loans to ineligible businesses earlier this year, bankers began to complain that the PPP loans they uploaded to the agency were hit with error codes that were resolved only after a great deal of time and effort.

“We remain hopeful that as this program enters its final weeks, SBA will work with lenders in addressing the many administrative issues that are still hindering some small businesses from fully utilizing the program,” American Bankers Association President and CEO Rob Nichols said in a press release.

Small-business advocates were more enthusiastic about the administration’s new course. Any modifications designed to ease their access to PPP is virtually certain to delight smaller borrowers, including minority-run businesses, many of whom complained about being left on the sidelines during the program’s first phase last year.

“There were a lot of businesses whose bankers were calling them to get them to apply for PPP,” Phil Andrews, president of the Long Island African American Chamber of Commerce, said last week in an interview. “On our end, we had people calling us saying they don’t have a bank to go to, they don’t have a banking relationship.”

Andrews’ group is one of a number of organizations working with Customers Bancorp to market PPP loans to smaller businesses.

The administration’s plan “has the potential to make a real difference for women-owned and minority-owned businesses,” said Kelsey Sheehy, a small-business expert at NerdWallet.

Still, echoing Hunt and Nichols, Sheehy said the administration needs to quickly follow up Monday’s announcement with more detailed guidance.

“We don’t know what the new formula will be. We don’t know if it will be retroactive. Those questions need to be answered sooner rather than later, especially for business owners trying to take advantage of the two-week window that starts on Wednesday,” Sheehy said.

Monday’s announcement came a day after SBA, which is administering PPP with the Treasury Department, released figures indicating that smaller businesses are capturing a bigger share of the program’s pie than they did during the first phase of lending, which ran from April to August.

Loans of $50,000 or less make up 17% of 2021 PPP lending, compared with 12% in 2020, according to the SBA.

PPP’s lending authority lapsed on Aug. 8. Lending resumed on Jan. 15 after Congress allocated $284 billion as part of the stimulus package it approved Dec. 27. Between Jan. 15 and Feb. 21, the SBA reported approving 1.9 million PPP loans for $140.3 billion; the average loan size was $73,000.

The average loan size during the first phase of PPP lending in 2020 was $101,000.

According to the administration’s own calculations, the share of funding going to businesses with 10 or fewer employees was up 60% before Monday’s announcement. With loans to small businesses in rural areas and funding distributed through community development financial institutions up sharply as well.

“We’re confident we’re already meeting the needs of businesses that [qualify] for this exclusive access,” Sidhu said. “We’re the second-lowest average loan size in the nation at $26,000.”

At the same time, the administration’s plan provides a way “to reframe the focus, which I think is welcome and makes a lot of sense,” Sidhu said.

Echoing Holt-Fuller at Atlantic Union, Sidhu said implementing the program changes will pose challenges for lenders, especially the new loan size formula for self-employed borrowers, sole proprietors and other small-dollar borrowers. The formula directs lenders to derive loan size from an applicants’ revenue rather than net profit.

“What happens to someone who got a loan last week that could have gotten a bigger loan this week?” Sidhu said. “Hopefully there will be some clarity on questions like that.”

“There are a lot of challenges the entire industry will face to implement this,” Sidhu added. “There’s going to have to be a lot of guidance, which I’m sure is coming.”

Atlantic Union began the new round of PPP lending with a pronounced tilt toward second-draw loans to 2020 clients whose businesses were still experiencing the negative effects of the coronavirus pandemic. In recent weeks, though, the company’s marketing efforts have led to an increase in the number of loans made to first-time PPP borrowers, especially smaller firms, Holt-Fuller said.

“Right now about 90% of our applications in process are for businesses with fewer than 20 employees,” Holt-Fuller said.

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