Bankers are preparing for a deluge of applications as the COVID-19 stimulus package’s Paycheck Protection Program loans for small businesses rolls out starting Friday.
Don’t expect all bankers to be ready, however. Lenders have been sounding the alarm that they haven’t had time to properly prepare for the deluge and that they have many outstanding questions about how the program will work.
The $349 billion Paycheck Protection Program, signed into law last Friday, is designed to provide forgivable loans to cover eight weeks of payroll and operating costs for companies, nonprofit organizations and other employers with fewer than 500 workers. It is aimed at preserving jobs, an urgency underscored when the Labor Department reported Thursday that unemployment claims soared to 6.6 million last week, more than double the previous week.
The SBA and the U.S. Treasury announced Tuesday afternoon that small businesses can begin applying for the loans, carrying a 100% government guarantee, through an existing SBA lender as soon as Friday. Independent contractors and self-employed individuals can apply starting April 10. The SBA is also working on on-boarding additional lenders.
Bankers say they haven’t received enough guidance and have many questions about the way the loans will work. Some experts worried the 0.5% interest rate will be a disincentive for lenders. Many of them are worried about demand and have said their current loan customers will get priority.
How fast are things changing? The SBA released new guidance (a 31-page document) on Thursday evening, hours before the program was to launch, which included raising that interest rate on the loans to 1% from half a percent previously. The information was titled “Interim Final Rules” indicating more changes could be coming so stay tuned. Treasury and banks are moving “heaven and earth to get a system in place and running to help America’s small businesses and the millions of men and women who work at them,” Richard Hunt, head of the Consumer Bankers Association, told CNBC.
One of the nation’s biggest banks, JPMorgan Chase, reportedly warned it would “most likely” be unable to launch the loans as scheduled on Friday. (Friday update: Chase launched by 1 pm Friday, but Wells Fargo reportedly did not start Friday. Bank of America caught flak for trying to limit the program to its loan or credit card customers). Small businesses, meanwhile, said they were having trouble getting through to their banks to even find out if they were offering it.
In a virtual town hall in Miami-Dade on Wednesday, US Senator Marco Rubio, who chairs the Senate’s small business committee and helped write the CARES Act, expressed a fear that the program could quickly run out of money because there would be so much demand. The needs are so great.
Advice from him and other officials at the town hall: Even though the program is open until June 30, 2020, don’t delay — apply early. It’s “first come-first served,” the SBA said in its latest guidance.
Check with your own lender first, because banks are giving priority to their own customers. And be patient – your lender may not be ready on Friday.
Advice from a banker
Daniel Pische, Senior VP with First American Bank in Coral Gables, said his bank plans to roll out the PPP on Friday, and in his LinkedIn post he shared some advice for those businesses seeking loans:
- Your current bank is the best starting point for your application and to help with questions regarding the program.
- There will be delays as applications are made. The scale of the program is immense and it will take time for all institutions to work through the initial surge of requests. In the CARES Act legislation, the Senate stated that they consider all small businesses to be affected by the COVID-19 pandemic.
- Guidance on the program and instructions on how to handle unique payroll situations will continue to come out even after applications begin to be accepted. Work with your accountants and attorneys to make determinations on any intricate situations that pertain to your business.
- Banks across the country are mobilizing massive resources to meet the needs of small businesses. “We will get through this,” he said.
Here are some of the questions raised by businesses during the week:
How much can I borrow?
The maximum loan amount is 2.5 times the business’s average monthly payroll for the 12 months preceding the date the loan is made, up to a maximum of $10 million. There are other formulas for seasonal and newer businesses.
How are the loans forgiven?
The loan can be fully forgiven if borrowers demonstrate that they kept on their employees or quickly rehired them while maintaining salary levels during the first 8 weeks. Forgiveness will be reduced if headcount declines or if salary or wages decrease. Any portion of the loan that is not forgiven will roll into a 2-year loan at an interest rate of 1% (UPDATED). (Earlier guidance indicated the rate would be 4% for 10 years and then 0.5% for 2 years.) Loan repayments can be deferred for six months.
How do I apply?
Business can apply through any existing SBA 7(a) lender, including banks and credit unions. The SBA released a sample form so potential borrowers can see what will be required. As part of the application, borrowers must certify they are taking out the loan due to coronavirus-related economic uncertainty.
How fast can I get a loan?
That’s the million dollar question, isn’t it? Traditionally, SBA’s signature 7(a) loans can take anywhere from a few weeks to a couple of months. This legislation was specifically designed for very fast approval — “days not weeks,” said Sen. Rubio. However, the expected volume of the applications will likely far exceed anything we have ever seen for SBA loans. At this time it’s impossible to guarantee how fast these loans will be processed and funded.
Florida SBDC at FIU and other Small Business Development Centers stand ready to help small businesses navigate the process.
Latest Q&A about the program from the SBA is here
More information about the loans: SBA.gov/Coronavirus
Find a list of approved lenders in your area here.