The coronavirus has plunged the U.S. economy into its darkest period since the Great Depression, and community bankers say Congress’ decision to allow a major response program to run out of money will leave small businesses without essential funds.
The Small Business Administration’s Paycheck Protection Program ran through its $349 billion allocation Thursday, less than two weeks after it started. The PPP, part of the roughly $2 trillion relief package passed by Congress in March, offers forgivable, federally guaranteed loans through private lenders to small businesses capped at 2.5 times their monthly payroll. If the debt is used to cover payroll and other fixed costs for eight weeks, it will essentially convert to a grant and borrowers won’t have to pay it back.
With the PPP well at least temporarily dry, some banks have stopped taking applications, while others expect Congress to soon appropriate more funds. But for small businesses drowning in unpayable bills, community banks say the pause in the bailout has made an already challenging time worse.
“These are the people who so desperately need it,” said Cynthia Blankenship, president of Bank of the West in Grapevine, Texas.
Negotiations to refill the PPP purse are set to continue over the weekend. Republican have pushed for a clean bill to add $251 billion to the program, while Democrats have pushed to set aside a portion of the additional PPP funds for lenders that work with underserved communities, and also provide $150 billion for states, $100 billion for hospitals and an increase to food stamp allocations.
If a deal is reached, the Senate could pass it by unanimous consent Monday and the House could follow suit on Tuesday.
Blankenship said several of her regular customers dropped off applications overnight Wednesday that her staff couldn't get through the SBA’s approval platform before the funds ran dry Thursday morning. “They had to be told ‘Sorry, we can’t do anything for you,’” Blankenship said. “That’s a hard position to be in.”
After her staff readies the “couple of hundred [applications] that were very incomplete,” Blankenship says they’ll continue to take new applications, in the expectation that Congress will allocate more funds soon.
Blankenship’s bank processed 428 applications totaling almost $63 million. The lending “represents well over 7,000 jobs,” she said.
Randall Leach faced a similar scene in Portland, Ore., where his Beneficial State Bank received more than 2,000 inquiries from small businesses seeking PPP funds.
After processing more than 300, “we’re not even halfway through,” said Leach, the bank's CEO. “We’re maybe 15 percent of the way through the inquiry list that we have.”
Beneficial will still take new applications, but Tioga State Bank in Spencer, N.Y., won’t until Congress acts, said CEO Robert Fisher.
“We don’t know what the next round is going to look like,” Fisher said, adding that Tioga State would finish preparing the incomplete applications already received. “Once we get word that the next round is coming out and we know the details, we will reach out to customers that are trying to apply…. But we don’t want to have stale applications waiting around.”
Tioga State processed 263 loans totaling $25.4 million, Fisher said, supporting 3,400 jobs. That’s more than half of what the bank would lend in a normal year.
On Wednesday, Wells Fargo, one of the nation’s largest banks, announced it would also continue to prepare the applications already received and would submit them once more funds became available but would not take new applications until then.
Hiccups at SBA
Smaller banks reported having difficulty getting on the SBA’s loan authorization platform early on, meaning they filed most of their applications this week. “I think the big banks were getting in there and making it crash the first few days, but once we got up that following week, we were able to churn and burn,” said Blankenship.
Blankenship also lamented how the SBA launched the program just for small businesses at first, and then a few days later for independent contractors and sole proprietors. “They really didn’t get a fair shake,” she said. “They basically only had a few days to get access to this funding.”
The tiniest companies had more work to do preparing the paperwork than slightly larger businesses that have an accountant on staff or pay for automated payroll services. Those delays probably cost them, the bankers said.
The bankers said Congress cannot delay adding funds to the program again.
“Obviously, No. 1: fund another round of PPP,” said Fisher. “We’d also like to see 25 percent of those dollars earmarked for community banks, because community banks are the only physical banking presence in one in five of our counties throughout the United States.”
Fisher’s call echoed that of Independent Community Bankers of America, who urged Congress on Thursday for “an immediate $250 billion in new PPP funds,” plus a 25 percent earmark for banks with $50 billion or less in assets.
The rapid depletion of the PPP funds caused a run, said Leach. While many companies applied quickly because they desperately need the funds to stay solvent, others rushed to get in line just “because the money was going to run out.”
There’s still no real certainty when the shutdowns might end, and that uncertainty is making it almost impossible for owners to plan on a reopening. The PPP debt is forgivable for up to eight weeks-worth of payroll and other fixed costs, but companies getting money today can’t be sure they’ll be able to reopen by mid-June, said Fisher.
“So, many of these businesses that are getting funds are finding they’re not necessarily going to be able to bring back work staff to put them back on payroll,” he said, noting that New York Gov. Andrew M. Cuomo extended the state’s shutdown to May 15 on Thursday. “We had one customer withdraw his application because he knows he’s not going to be able to utilize the money.”
That’s the same issue Greg Schwegman is facing right now. Schwegman runs the business side of his wife’s small dental practice in Fort Thomas, Ky., which has been closed since March 18. Even though he was worried about the funds running out, Schwegman held off on applying for a PPP loan because he isn’t sure when they’ll be able to reopen. “It’s been a real juggle for us, seeing how long we can finance until we need to apply for the [PPP] loan,” he said.
“What we’re asking for, it’s not an exorbitant amount,” Schwegman said. But taking the PPP loans prematurely, then rehiring staff only to have to let them go again before reopening if the forgivable money runs out would be worse for everyone, he said.
Schwegman and his wife are an in fairly enviable position — they recently bought the practice from her father. “He’s been pretty understanding,” Schwegman said. “I told him we’d get him on the backend.”
A survey from the Job Creators Network, a trade group, released Friday showed that 65 percent of small businesses have applied for a PPP loan.
To provide businesses a bit more flexibility, Fisher said the SBA should relax the requirement that banks fund the loans within 10 days of approval.
Fisher and Leach also both want the SBA and Treasury Department to lengthen the loan’s amortization, which is now set at two years even though the statute allowed for up to 10 years. Stretching out a loan’s term reduces the size of each repayment. It can also mean the borrower pays more in interest, but there’s no penalty for early repayment of PPP debt, so companies would effectively have the option of paying it back faster if they wanted.
Given those debt concerns, Tioga State is advising clients to set aside any of the loan amount that can’t go to forgivable uses — like when employees refuse to get rehired because they get paid more on unemployment because of the $600-a-week bump Congress provided in the relief package — for repaying the debt. They would essentially just hand that money back rather than using it to reopen their businesses.
“We don’t want our customers and client and even non-customers to be in a worse position than they are currently,” Fisher said.