FinTechs Must Be Involved In The Paycheck Protection Program Lending For Small Business

During the coronavirus crisis, small businesses have shouldered an enormous burden. Many of them have had to shut by government orders to help halt the spread of COVID-19. Others, such as restaurants that are allowed to offer curbside service, have seen their revenues fall to a fraction of what they would normally be. While they can stay open, American consumers are largely staying home because of the pandemic.

Small businesses drive the economy and create the lion’s share of jobs in the private sector economy. However, right now they are struggling mightily. Although it is recommended that companies have at least six months’ worth of revenue in the bank to weather economic disruptions such as the coronavirus, the reality is that most small companies don’t have enough cash to operate more than a couple of weeks.

For the service industry: restaurants, nail salons, haircutters, landscapers, athletic trainers, and others, the loss of weekly revenue is devastating for the owners and staff of small businesses. Most service workers live paycheck to paycheck and cannot go very long without being paid. We have already seen an enormous spike in unemployment claims, ending an era when the economy has basically been at full employment. 

Government responded with a massive $2.2 trillion economic stimulus package, the Coronavirus Aid, Relief, and Economic Security (CARES) Act on Friday, March 27. It is designed to help consumers (by giving them checks for $1,200) and businesses, which can now apply for $350 billion in loans available now through the new Paycheck Protection Program that will be administered by the Treasury Department and the SBA.

Related: $2.2 Trillion CARES Act Provides A Lifeline To Small Businesses

The Trump administration plans to get the new loan program rolling immediately and get cash into the hands of small businesses this week to prevent them from having to lay off workers or, worse yet, shutter their doors permanently. Karen Mills, the former SBA Administrator under President Barack Obama, warns that 20% of small businesses – or even more – could fail because of the coronavirus.

In an interview with Yahoo Finance, Mills expressed concern over the logistics of getting that money to businesses before the cash runs out and says execution “depends on what happens between the banks, FinTechs, the Treasury and the SBA in the next week.”

The $2 trillion bipartisan financial-rescue package signed by President Trump includes $350 billion in desperately needed relief for small-company operators whose sales have plunged or whose businesses have been ordered closed. Many could fail if the widespread disruptions to the economy persist for more than a month.

The lending program provides 100% federally guaranteed loans to small businesses. The loans can be later forgiven if borrowers maintain restore their payrolls to pre-crisis levels. The following organizations are eligible:

• Small businesses with fewer than 500 employees and meets the SBA’s financial size standards

• 501(c)(3) non-profit organizations with fewer than 500 employees

• Sole proprietors, independent contractors, and other self-employed individuals

• Tribal businesses and 501(c)(19) Veterans Organizations that meet the SBA size standard.

Government, by nature, is simply not as efficient as the private sector, and we can likely expect that the SBA’s infrastructure won’t be able to handle the anticipated avalanche of loan applications from business owners who need a financial lifeline. If the SBA’s Economic Injury Disaster Loan program is a good measuring stick, it could take 3-4 weeks for the agency to process the funding request and get money into the hands of borrowers. The problem is small business owners cannot wait that long for a cash infusion. They simply won’t be able to survive.

Some banks may not see enough upside in the loans at 0.5% APR on a 2-year term to make it worth it for them to lend to businesses that are not already their clients. They are also worried about being victims of fraud. Indeed, some business owners may double-dip and to apply for PPP at many different places. There is concern that banks may only lend to their existing clients. This means that there is a huge swath of small business owners who will not be getting fast enough to save their companies.

FinTech firms can help speed up the process dramatically. They have developed cutting edge technology that has used primary data submitted by prospective borrowers to assess risk and, in many cases, reduce default rates to single percentages. FinTechs have the ability to accept online applications and lending decisions in just minutes and then wire money to the borrowers in less than 48 hours.

By allowing non-bank lenders to become SBA lending partners, the federal agency would be better able to meet the needs of small business owners who are drowning in a sea of debt because of the current economic crisis.

Lenders will also ask borrowers for a good faith certification that:

1) current economic conditions make the loan request necessary to support ongoing operations;

2) the borrower will use the funding to retain workers and/or make rent/mortgage and utility payments; and

3) the borrower does not have an application pending for an SBA Economic Injury Disaster Loan (EIDL) that will be used for the same purpose.

Loan amounts can be up to 2.5 times the borrower’s average monthly payroll costs but must not exceed $10 million.

President Trump and the country face an economic crisis unlike any other we have seen before. It may take years to undue the crippling damage caused by the coronavirus crisis. Already companies are going out of business, and their employees are out of work. In order to breathe life back into the ailing service-driven economy of the 21^st century, we must quickly save small businesses and bolster the spirit of entrepreneurship that has long made this country great.