The lifeline for the small businesses that make up the backbone of the U.S. economy is now there for the taking.
But is the $350 billion enough – or too little?
It may certainly be too late, at least for some of the hardest-hit and smallest firms that started grappling with the coronavirus weeks ago.
Though the funds are ostensibly ready to be released to companies with fewer than 500 employees, through the Paycheck Protection Program (PPP) as part of the $2.2 trillion stimulus program that passed Congress last week, the mechanics of getting that money where it needs to go will prove to be a challenge.
Main Street in Trouble
To get a sense of the urgency of it all: As detailed this week in the PYMNTS report Main Street on Lockdown, which surveyed more than 200 SMBs on March 24, there was only enough cash on hand to get through the next 20 days before having to tap into additional means of funding, such as through personal credit lines or loans (such as the ones on offer through the SBA).
The fact that our survey took place 10 days ago indicates that the cash crunch has deepened, and that “cushion” has been cut in half.
The Wider Implications
The sample implies significant ripple effects throughout the U.S. economy at large. But how much of a ripple effect? As we estimated in our comprehensive Main Street Index two weeks (and a lifetime) ago, these smaller firms as a group populate 3.6 million storefronts across the U.S., spanning restaurants, professional and personal service firms, construction, remodeling and repair companies, fitness clubs and, of course, a wide range of retail verticals.
We estimate that Main Street represents 28.3 percent of total employment, 36 percent of total establishments and 23.2 percent of wages. As Main Street goes, so goes GDP.
As businesses shuttered and consumer demand disappeared, many of our respondents –roughly 28 percent of SMBs – are asking their staff to work fewer hours. Another 23 percent have started to lay people off, which of course feeds into the jobless claims reported on a nationwide basis.
That’s because 89 percent of the companies we surveyed expect to generate lower revenues this year than they saw in 2019, which points the way toward further belt-tightening among those that survive the coronavirus pandemic as viable businesses.
The Rescue Package
Against that backdrop of urgency and a finite set of tools SMBs can deploy before collapse, the Paycheck Protection Program seeks to help these companies continue paying employees, and to cover at least some basic expenses.
How Much is on Offer
In broad terms, companies can borrow as much as 2.5 times their average monthly payroll – to a maximum of $10 million. A look at the application itself offers the calculation: average monthly payroll, multiplied by 2.5, plus economic injury disaster loans. The application also asks that applicants spell out what the loan is being used for – such as payroll, lease or mortgage interest and/or utilities.
Some Fine Print
“However, not more than 25 percent of the loan forgiveness amount may be attributable to nonpayroll costs,” reads rules issued by the U.S. Small Business Administration (SBA). In other words, for the loan to be deemed forgivable, at least 75 percent has to be used for payroll.
The loan terms are for two years at 1 percent – not exactly cheap in a world where the yield on the two-year Treasury note is about 20 basis points.
(We note that 1 percent on a loan may sound relatively affordable, at least for firms making at least some cash flow that could use a boost to cover a backlog of bills – but would those be the ones applying for the funding in the first place?)
In terms of other fine print: “A lender may request that the SBA purchase the expected forgiveness amount of a PPP loan or pool of PPP loans at the end of week seven of the covered period. The expected forgiveness amount is the amount of loan principal the lender reasonably expects the borrower to expend on payroll costs, covered mortgage interest, covered rent and covered utility payments during the eight-week period after loan disbursement.”
The loan forgiveness period thus seems to cover a two-month period – it’s something, after all, but possibly (and likely) hardly enough.
In addition, banks can impose their own thresholds on loans – that $10 million is a cap, after all. But hypothetically, even with calculations in hand showing a request for, say, $2 million, a small business may run into a tight spot if the bank is willing to lend (through a self-imposed cap) $1 million. With the strategy of spreading the loans across as wide a pool as possible, some firms will have to come to the well several times, and the PPP will become less a relief package than a band-aid.
Where the Money Comes From
But yield is what gets lenders to lend, and the money will come from a variety of sources – spanning banks, SBA lenders and FinTechs.
As Shakespeare once wrote, “the readiness is all.”
And it may be the case that the gates have opened, at least insofar as the PPP has launched – but the devil is in the administrative details.
News came this morning (April 3) that Bank of America is now accepting online applications for the program. Per reports from CNBC, BoA is the first major bank to start taking those applications. JPMorgan, Wells Fargo and Citi had yet to open the proverbial doors for applications.
The program was slated to go live as of midnight today (April 3).
The situation is fluid, of course, but time is of the essence, where each day can determine, with finality, whether an SMB lives or fades away.
And with guidance issued by the Treasury at 7:00 pm on Thursday (April 2), the mad dash to get funding up and running – across banks as well as other lenders – will be massive.
“Having just received guidance outlining how to implement a $349 billion program literally hours before it starts, we would ask for everyone to be patient,” Richard Hunt, head of the Consumer Bankers Association, said late Thursday in a statement relayed by CNBC.
“They’re not ready at all; they’re desperately awaiting guidance on how to do this,” Ami Kassar, CEO of small business loan advisory firm MultiFunding, told CNBC earlier in the week. “I think it’s going to be a mess for weeks.”
And here’s another wrinkle: The banks are likely to accept funding requests from existing corporate customers, which may leave at least some SMBs scrambling for loans if they do not have such relationships in place.
In another example of the lack of readiness, and an illustration that this is all a work in progress: Fifth third Bank said in a statement on Thursday that they would not yet launch a platform tied to the PPP loans. That statement read in part, as noted by Forbes: “It’s critically important to us at Fifth Third Bank FITB, that we do not roll out a platform whereby the borrower completes the application only to either have to re-apply later and/or that application sits in a stagnant queue due to the lack of process guidance from the SBA for this particular program. We feel it would be inappropriate to launch without the necessary information that our customers need to provide in addition to what the bank needs to process these specific loan applications. Most, if not all, of our peer banks will join us in delaying their programs tomorrow due to the same reasons mentioned above.”
The community banks are starting to lend, in what seems to be at least a trickle. In a tweet Friday morning, Treasury Secretary Steve Mnuchin said community banks have processed 700 loans for a cumulative tally of $2.5 million – a drop in an ocean of need.
The clock is ticking for main street SMBs.