The program, part of the $2 trillion financial rescue legislation that President Trump signed on Friday, offers small businesses 100 percent government-guaranteed loans, which will be forgiven if the company retains the workforce it had before the pandemic.
Treasury Secretary Steven Mnuchin has promised a “very, very easy” process with banks starting to make loans on Friday, the first day applications can be submitted. But for the rapid-fire effort to succeed, the government must distribute in a matter of weeks more than 15 times as much money as the SBA issued through its main loan program in all of last year.
“I can’t imagine, given the size of the program, that banks are going to be able to get this out as quickly as Treasury wants. But it’s the best option they have,” said Brian Gardner, managing director at the investment banking firm Keefe Bruyette & Woods.
With large swaths of the economy essentially closed by government edict, countless small companies are growing desperate for funds, even as many bankers say they lack the detailed guidance needed to administer the loans. Some lenders that are new to working with the SBA could struggle with staffing and software problems once they are approved to join the program in early April.
Paycheck protection is the cornerstone of the administration’s effort to avoid repeating the mistakes Washington made in responding to the 2008 financial crisis. Generous bank bailouts and only scattered aid for homeowners incited bipartisan populist anger for appearing to favor Wall Street over Main Street. This time, Trump officials want to make sure that the policy response is seen to benefit average Americans more than corporate elites — and that is focusing attention on the nation’s banks.
“It’s really up to the banks to step up and get that cash to Main Street,” said Tom Sullivan, vice president of small-business policy for the U.S. Chamber of Commerce.
Business owners across the country are besieging bankers for loan information. On Monday, the National Federation of Independent Business, an industry group, had 13,000 members join an online meeting about the program. If borrower demand exhausts the $349 billion, the administration will ask Congress for more, Mnuchin has said.
“We’re inundated with everything from hairdressers to hardware stores to multimillion-dollar businesses,” said Cynthia Blankenship, corporate president of Bank of the West. “We expect to be flooded with requests, and we’re seeing that already.”
The Grapevine, Tex.-based lender has fielded calls from about 50 of its small-business clients asking to delay loan payments during the shutdown.
“There’s a real desire to get it done, but the problem is, it isn’t as easy as it looks,” Blankenship said of the paycheck program, adding that verifying even the stripped-down paperwork could take time. Some banks may be turned off by the 0.5 percent interest rate that the standardized loans will carry, she said.
To arrest the economy’s slide, the paycheck aid must move faster than typical government programs, officials said. One-quarter of the nation’s small businesses can survive just 13 days before exhausting their cash reserves, according to a 2016 JPMorgan Chase Institute study.
“These programs don’t do any good for Americans three or four months from now,” Mnuchin told Fox Business on Monday.
Administration officials said they had streamlined the loan application process by abandoning the SBA’s customary requirement for borrowers to post collateral or offer a personal guarantee. Companies with fewer than 500 workers are eligible to participate and can apply by completing a two-page form, which is available at sba.gov.
The banks will not be expected to assess a borrower’s ability to repay the loan, only to establish that the business was operational on Feb. 15, said the officials, who briefed reporters on the condition that they not be identified by name.
The SBA’s only role will be to verify that the borrower has not already received a paycheck loan, leaving the approval, disbursement and servicing of the transaction to the financial institutions.
One senior administration official said the banks are bracing for “millions of applications” on Friday.
“It’s going to depend on the banks,” said a second official, who added that loans could be approved “almost in real time.”
The administration is trying to move quickly as parts of the economy crumble. On Tuesday, Goldman Sachs cut its forecast, saying the economy will shrink in the second quarter at an annualized 34 percent rate before rebounding. Unemployment will spike to 15 percent by midyear, the bank’s economists wrote in a client note, up from 3.5 percent in February. In comparison, the jobless rate reached 10 percent during the depths of the Great Recession in October 2009.
In Cookeville, Tenn., Gillen Young, president of Custom Tool, wants to avoid adding his 17 employees to the jobless ranks.
The manufacturer of precision components enjoyed its best year ever last year and was booking new business at a steady clip into 2020. But as the pandemic spread, Young’s revenue in March plunged about 40 percent from the same period last year.
For now, he’s got a sufficient order backlog from his auto industry customers to keep everyone working. But he worries that the sudden stop that is hitting his customers will inevitably ripple onto his shop floor.
“It’s important that we keep our team in place. I can’t just bring somebody in who’s inexperienced and sit him on a five-axis lathe to do the work,” he said. “We want to keep providing a paycheck to our employees.”
Under the new program, Custom Tool and other small businesses are eligible for loans equal to 2.5 times their average monthly payroll cost up to a maximum of $10 million. Independent contractors, sole proprietors and the self-employed can participate along with employers of up to 500.
The loans carry an ultralow 0.5 percent interest rate, and payments can be deferred for six months.
The government ultimately will forgive the loan if the company maintains its original payroll. Officials hope some companies will rehire workers they have laid off in recent weeks.
For the banks, the paycheck program could represent lucrative, risk-free business. The government will guarantee 100 percent of the loan’s value, meaning the bank will get repaid by the taxpayer if the business fails.
Participating banks also will earn a processing fee for making and servicing the loan, which a senior administration official described as “pretty generous.” The government will pay them 5 percent on loans up to $350,000; 3 percent on loans between $350,000 and $2 million; and 1 percent on loans above $2 million.
Community banks that already participate in the SBA’s flagship loan program will probably make up the core of the lending. But officials want the broadest possible participation from any federally insured institution.
“It remains unclear to what extent the large banks will participate,” said Brendan Browne, senior director of S&P Global Ratings. “Banks like JPMorgan, Bank of America and Wells Fargo already make SBA loans, but small-business lending overall makes up a small piece of their loan portfolios.”
Commercial and real estate loans of less than $1 million — a category that includes most small-business loans — account for about 4 percent of those banks’ loan portfolios, Browne said.
In Eugene, Ore., Travis Snapp, president of Benchmark International, a product certification and laboratory testing firm, has slashed expenses, including executive salaries, while trying to retain his 100 workers.
Snapp’s teams need to be out in the field, performing compliance audits and deploying technicians to conduct laboratory tests at client facilities. The virus has put an end to that.
“Revenues are definitely plummeting. We can’t get out to do the work,” he said.
Snapp said he has been able to get some information about the new loan program from his local JPMorgan Chase banker, but he has unanswered questions. Although Benchmark has sufficient cash reserves to ride out all but the worst downturn, he said, the company is “getting close” to layoffs.
His more immediate concern is the fog of uncertainty that surrounds his 10-year-old operation.
“With something that’s moving this quickly, we need them to provide clarity to us,” said Snapp, referring to the banks. “How long do I have to hang on until it’s safe for us to travel around the world again?”