Getting the $350 billion in loans for small businesses in the record U.S. stimulus package into business owners’ hands before a wave of closures will strain the nation’s network of lenders and regulators as never before.
The magnitude of the plan is unprecedented for the Small Business Administration, an agency that distributed $28 billion in fiscal year 2019 and is in charge of the program. Some small-businesses groups that had advocated for immediate help in the form of cash grants are concerned that the money won’t be available quickly enough for firms that have urgent needs.
“We’re all on the same telephone calls determining how we can stand this up as quickly as possible,” said said Julie Huston, chairwoman of The National Association of Government Guaranteed Lenders, a trade association of banks and finance companies that make SBA loans. Without estimating how quickly money will flow to businesses, she said: “They’re designing it to be very quick.”
Providing fast relief to small-business owners and helping them keep their workers on payroll is central to shore up the economy. It’s a crucial sector that employs almost half of the private workforce and has been among the hardest hit by lockdowns across the country as part of efforts to slow the coronavirus pandemic. Treasury Secretary Steven Mnuchin on Wednesday said banks should be able to issue small business loans by the end of next week.
The loans, which are guaranteed by federal government, will function as grants under certain conditions. The debt will be forgiven if the funds are used for payroll costs, mortgage interest, rent and utility payments and if businesses retain employees. And companies could get an advance on disaster loans within days.
“We were happy to see that,” said Kevin Kuhlman, senior director of federal government relations at the National Federation of Independent Business, the the largest small-business association in the country. “Folks have to keep the lights on.”
But, the Small Business Majority, a group of 58,000 owners, said the program is not designed for a large scale economic emergency.
“There is little in the stimulus compromise that will help small businesses in the immediate future,” said John Arensmeyer, president and chief executive officer of Small Business Majority. “When a crisis strikes there are multiple phases, and we are still in the emergency phase. Right now, small businesses need cash fast to stay afloat.”
Huston, the NAGGL chairwoman, was more optimistic of its ability to offer immediate relief. A network of more than 800 lenders already approved to make SBA loans will extend the money to small business, with some choosing to hold the loans and others selling them on the secondary market.
Eventually, if and when the loans are forgiven and converted to grants, the bank or investor who holds the note will be made whole, Huston said. Banks and financial technology are having conference calls daily to work out the details, including how any secondary market for loans would work and how banks will service them, she said.
The loans will be available to companies with fewer than 500 employees, including independent contractors. Here are some of details of the Paycheck Protection Program:
– The U.S. will forgive the debt used for payroll costs, mortgage interest, rent and utility payments, as long as businesses maintain the same number of employees it had before the coronavirus crisis and all employees receive at least 75% of their prior pay. For businesses that reduce their headcount or reduce wages more than 25%, the amount of the loan forgiven will be reduced in proportion to payroll cuts, but the companies can rehire employees in coming weeks without penalty.
– The small business loans will be 2.5 times monthly payroll costs, although some groups in the travel and restaurant industries had sought four times operating costs. The loans come with a rate of 4% or below, and the maximum loan amount is $10 million.
– The bill also allows franchise-like businesses in accommodations and food service to benefit from the loans even if they have multiple locations, so long as each location has fewer than 500 employees. It also provides for businesses that have applied for a disaster loan because of the virus to receive an advance grant of up to $10,000.
– A separate program will provide $17 billion to pay the principal, interest, and fees on outstanding SBA loans temporarily. While far smaller than the $350 billion program, this relief could be more immediate, Huston said, because the government already has the names of small business owners with such loans and it can cut a check quickly. There are roughly $100 billion of such loans outstanding, she said.
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This really does nothing to help most small businesses. “You can apply for a loan and maybe we will forgive some it later down the road” isn’t a very exciting prospect for companies that have worked hard to eliminate debt, or those that have a lot of debt to begin with. When you do reopen you will be saddled with higher costs. Most businesses don’t have the margins to just add to their bottom line costs. I would expect massive small business failures if this is all they are planning-even if the process is quick and easy, which it wont be, its a government program, which by definition is rarely quick and easy.