OPINION:
The economic stimulus provided to small businesses under the recently passed CARES Act could be a very big help. But there’s a very good chance that one component of it — the most important — could fail.
The legislation has set aside a fund of $377 billion with most of it going toward an expansion of certain loan programs offered by the Small Business Administration, specifically for Emergency Economic Injury and Small Business Debt Relief. The bill also added a new twist to the agency’s already existing Section 7(A) loans, called the Payroll Protection Program.
Under the Payroll Protection Program, small businesses with less than 500 employees can apply for funds of up to $10 million and pay back the loan over 10 years at interest rates around 4 percent. More enticing, amounts under these loans that are used for payroll, benefits, insurance, mortgage, rent and other operating costs over an eight-week period between Feb. 15 and June 30 would be forgiven.
Yes, forgiven. In essence, it’s free money from the U.S. government to help small businesses. But there’s just one thing in the way — the bankers. “We’re struggling to figure things out right now,” one person at a large regional bank told me. “There’s a lot of confusion.”
But aren’t these Payroll Protection forgivable loans coming from the SBA? No, they’re not. They’re being issued through the SBA’s member banks (and others will be allowed to also do, according to Treasury Secretary Mnuchin). That, in itself, is creating problems.
The first is what lenders can participate and how to find them. Even if Mr. Mnuchin is right and more lenders can issue these loans, there will be a steep learning curve because many of them don’t have experience issuing Section 7(A) loans. So why not just use an SBA “member” bank? Good luck. My experience finding one on the SBA’s website has been frustrating and circular. Sure, you can Google but that doesn’t bring up all your choices. Some of these lenders are also very small and ill-equipped to handle the surge of applications from desperate business owners. The ones I’ve been talking to are frustrated. Things are not going fast enough for them.
Because fast is what’s needed. The SBA bankers I spoke to about the legislation are still in the dark and awaiting guidelines from the SBA that are not expected for at least a week. And these are the experienced ones. Imagine the lenders that are not used to issuing Section 7(A) loans. They’ll be starting to learn the process, the paperwork and the rules from scratch.
Unfortunately, even after those guidelines are issued by the SBA those businesses will need to go through an application and loan approval process with their customers which, depending on the size of the loans, could take more days or even weeks to work through the system. Meanwhile, the clock is ticking. Small business owners operating on razor margins that have seen their businesses either shut down or suffered revenue falls of more than 80 percent need cash now.
Finally, I’m concerned about whether or not banks will rise to the occasion. Why? Because let’s not sugarcoat things: This is not profitable work. Sure, fees have been waived by the SBA. But interest rates are too low to really make money at this. Most small businesses applying for these loans have been drawn in for the forgiveness benefits. Barring some undisclosed arrangement with the government, lenders will be issuing money, then forgiving it after only a few months, which means they’re not earning much from it.
Judging by who is most in need these same banks will be inundated with very small mom-and-pops, independent contractors and merchants who are not experienced in high finance and will not only have hundreds of questions but only be asking for $25,000 or $50,000. They will also be after a rapidly diminishing pot of available funds as more apply. “It’ll be a lot of work processing a lot of little loans,” one banker told me in confidence. “I’m not sure how much of this we can be bothered to take.”
All of this is very concerning. Small businesses desperately need these funds. But unfortunately the way things have been setup, there will be many hurdles to jump through by both them and the people who are authorized to dole out the money. If the money doesn’t get into the right hands soon, it will be a colossal failure. The clock is ticking and I’m concerned that it will run out too fast.
• Gene Marks is a CPA and owner of The Marks Group, a technology and financial management consulting firm that specializes in small- and medium-sized companies.
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