This article is a sequel to our extremely popular COVID-19 Crash Course for Small Biz Payroll Protection Plan Applicants
EDITED BY GEORGE W. HIGHTOWER
The mad dash for Paycheck Protection Program loans under the CARES Act intensified early Friday morning, as the Treasury released a purported final loan application during the witching hours. This came after several revisions, apparently driven by discussions between Chase Bank and Bank of America and the top brass at the Treasury Department.
At this point, the number one rule for the CARES Act and Paycheck Protection Program is to only trust information listed on a dot-gov website. Nevertheless, there is still a lot of confusion. Breathe. It will clear up. It will be a bumpy ride, but here we go …
Crushing loan request activity
The Small Business Administration (SBA) fiscal year runs through September 30. In 2019, total SBA loan volume exceeded $28 billion with more than 63,000 approved loans. Over 52 weeks, that equates to an average weekly loan volume of approximately $538.46 million, with an average loan size of $444,400.
President Donald Trump and Congress have agreed to allocate $349 billion for Paycheck Protection Program loans (despite news articles that round it to $350 billion). Last week, a well-intentioned CPA firm held a seminar on these loans and compared the $23 billion of annual volume (their figure was off) to $349 billion, reasoning it was a sturdy 15-fold volume increase. They forgot to factor in timing. The PPP loan period is about 12.7 weeks (89 days between April 3 and June 30), equivalent to $27.45 billion per week. Without even considering ongoing normal SBA loans, that represents a 51x increase in program volume, and it’s unlikely that anyone can process that much in a week.
My calculations suggest that the average loan size under this program will be smaller than $444,000. Loan sizes are two-and-a-half times your average monthly payroll, pre-COVID, and for this program, a $444,000 loan equates to a business with an average monthly payroll of $177,780. If you pay your employees, on average, $25 per hour, that equates to about a 40-person size company. Many of the small businesses most severely impacted by COVID have fewer staff and lower wage rates. More small firms will lead to a lower average loan size, which means more loans and applications.
Lenders will be swamped. Imagine a year’s worth of activity over seven days. Have some compassion for your banker. More PPP loan applications could lead to worse bottlenecks. And don’t forget to consider that demand will be front loaded. On Friday, several financial computer systems crashed, while big banks have been slow to jump into the lending scrum for this program. Community banks seem to be leading the way.
If you’re in banking, KYC means Know Your Customer, which is integral to AML (anti-money laundering). AML procedures help root out criminal or terrorist activities from the regulated financial systems. Banks need to know who they are dealing with; but faced by an onslaught of new customers rushing the vaults, they naturally experience AML stranger-danger vibes. If you are not currently a bank’s customer, they will need to verify who you are. This doesn’t mean fingerprints and invasive background checks, but it does take some human face time, and that commodity is in scarce supply during coronavirus chaos.
Be patient. And please note: as we finished editing this article, Bank of America announced its program. It is limited to: “small business clients with a business lending and a business deposit relationship at Bank of America.” Noting, “a client’s pre-existing lending relationship with us may be a Bank of America Business Credit Card, small business line of credit or business loan.” (Sen. Marco Rubio, chairman of the Senate’s Committee on Small Business & Entrepreneurship, scolded BoA on Twitter, spurring the bank to loosen its application policy.)
Confusion is expected
First, a word about interest rates. The law provides—verbatim—that a “covered loan shall bear an interest rate not to exceed 4 percent.” On Friday, March 27, two high-up government officials explained the program would have interest rates of 2.75% for nonprofits and 3.75% for small businesses. A few days ago, it dropped to .5%, but this led to backlash from lenders, who balked at the low rate. Thursday brought another announcement from the US Treasury, increasing the rate to 1%. It appears that is the final rate for these loans, but remember, everything in this program appears to be a moving target.
Second, the tem of these loans … The law states—verbatim—that “the covered loan shall have a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness under that section.” Actual loan terms are now set at two years.
There are no fees
Really, there are no fees charged to borrowers. Don’t pay intermediaries. No money to slick telemarketers. Not even your cousin’s best friend from high school who’s offering you half his commission if you help him transfer $50 million from Nigeria, since you’re the only trusted one who can do it! Lenders may not collect any fees from the applicant, which begs the question—how will lenders be motivated if there’s no direct compensation?
As you may recall, the SBA is 100% guaranteeing these loans to lenders, as long as the borrower qualifies. That means lenders can probably skip credit checks and financial statement reviews, to focus on whether the applicant qualifies and for how large a loan. From there, the lenders are paid a fee from the government as follows: for loans $350,000 and under, the lender receives a fee equal to 5% of the amount borrowed. For loans between $350,000 and $2 million, lenders receive a fee equal to 3% of the amount borrowed. And for loans greater than $2 million, the lender receives a fee equal to 1% of the amount borrowed, which could easily equate to local and national banks earning about $12 billion for administering these loans.
Who are these agents?
An agent is an authorized representative and can include: an attorney; an accountant; a consultant; someone who prepares applications for financial assistance and is employed and compensated by the applicant; someone who assists a lender with originating, disbursing, servicing, liquidating, or litigating SBA loans; a loan broker; or any other individual or entity representing an applicant by conducting business with the SBA.
How will agents be compensated? Agent fees will be paid out of lender fees, and the lender will pay the agent. Importantly, agents may not collect any fees from the applicant.
Where to apply
In Massachusetts, if your bank is not an SBA lender—or has decided not to participate in this program— follow this link to the state’s top SBA lenders for 2019. Just expect banks to prioritize the customers they know first—KYC procedures—as a smart business typically takes care of its own customers first.