Ready for PPP 2.0?

The first traunch of the $349 billion in Paycheck Protection Program (PPP) and Economic Injury Disaster Loan Program (EIDL) loans earmarked for small businesses by the CARES Act was exhausted in less than six days.  Another $310 billion in PPP and $60 billion in EIDL funding is now waiting in the wings.

The rush by small businesses to apply for these loans clearly points to a huge vulnerability for those lending to small and medium-sized businesses (SMBs). Community banks and credit unions unable to make these loans, essentially a grant, to small business customers will not be able to shore up their distressed customers, nor even know they are in distress. Few small financial institutions are approved by the Small Business Administration (SBA) to originate these loans; almost none are capable of doing so completely online at scale without a branch visit.

The vulnerability is magnified for credit unions serving sole proprietors and micro-businesses that are dependent on core processors and Credit Union Service Organizations (CUSOs) lacking the online capability.

More so than in the first round, PPP 2.0 will require digital reach, scale and speed to protect as many qualifying SMB borrowers as possible before the government money runs out again.

This all matters because financial institutions already pre-authorized by the SBA to issue PPP and EIDL loans have a distinct advantage, aiding their existing business borrowers first with federally-guaranteed low interest loans that will be forgiven if certain requirements are met. A byproduct of being able to accept the PPP application, regardless of funding the loans or not, is the forward view to what’s to come as the COVID-19 crisis continues.

Surprisingly, a major credit union service organization (CUSO) specializing in SBA loans is quoted in CU Management Magazine saying they don’t consider the PPP/EIDL an opportunity for the credit union movement, suggesting to “…refer members who want those loans to another lender, typically a larger bank or credit union that is already an approved SBA lender.”  Why would a financial institution refer an existing borrower to a competitor rather than strengthening their own stressed portfolio with the government-guaranteed PPP/EIDL loans?

Referring their own business customers to a competitive financial institution puts both their balance sheet and their client relationships at risk.

The SBA creates its own set of bottlenecks.  Unfortunately, the SBA’s own web site presumes an in-person applicant, directing SMBs searching for an approved lender to a list of physical branches by zip code, many of which by our test were closed until further notice. No website links to online lenders are provided.

A significant challenge is looming for smaller credit unions, not because of making bad loans but because they can’t scale digitally to support their own customers that need help now.  Time is of the essence because of the estimated 31 million SMBs qualifying for PPP/EIDLs, many hold less than 10 days’ revenue to cover the payrolls of more than 60 million employees.

Woe is the small business that doesn’t have an existing relationship with a digitally-equipped SBA-approved lender.  This is demonstrated by the misguided lawsuit brought against Bank of America for prioritizing their existing small business borrowers.  Bank of America is actually a shining example for other heritage banks to follow; making the application, origination and funding process totally online without the need to visit a branch and violate social distancing guidelines.  Rather than punishing those who were able to stand up the PPP program quickly, attention should be focused on enabling every other lender to do this, including fintechs. The underlying problem is not favoring one’s own customers, it is the fact that only about 1,700 banks and credit unions out of a pool of over 10,000 in the USA are certified to originate the SBA loans.  PayPal finally gained SBA approval last week to join them.  If Apple can provision an Apple Card in under 3 minutes with Goldman Sachs or Google can open a bank account instantly for any participating financial institution online, then for the greater good maybe fintech innovators should be conscripted now to facilitate online PPP/EIDL loan production, as GM is for ventilators, because this too will save lives & livelihoods.  And shouldn’t a financial institution lending to small businesses already meet the standards & requirements for SBA certification?  A role for the Defense Production Act?

Absent any help from the Defense Production Act, community banks and credit unions must act decisively if they and their SMBs are to benefit from the PPP/EIDL programs, starting by working concurrently on the following steps:

• Help all your SMBs apply for PPP and EIDL loans, whether or not your institution is an approved SBA lender. Take your cue from accountants that serve SMBs, some of which completed the applications for their clients using the documentation they already produce for payroll, taxes, financial statements, etc.
• If not an approved SBA lender, then establish immediately a processing relationship with an entity that is, as a referral partner or broker. Ideally you can rely on your current core processor, but if not turn rapidly to those that can turn on the capability quickly on a stand-alone basis.
• Don’t limit your consideration to old-line legacy processors, you owe it to yourself to also evaluate fintech partnerships, especially for the front-end mobile interface and back-end access to artificial intelligence for straight-through processing with the SBA.
• Initiate the formal request to be a direct SBA lender so you can eventually supplement referral, broker, fintech and other third-party partnerships pursued above.

As any or all of these options are made available, prioritize serving your existing business customers first.  Doing so makes it easier to meet the SBA loan requirements and perform due diligence, with the added benefit of foreseeing and forestalling possible challenges in your own lending portfolio, with government loan guarantees.