The Two Things Keeping PPP Funds From Flowing Into SMB Bank Accounts

For the last week, a veritable tidal wave of small- to medium-sized business (SMB) owners have been lining up to apply for Paycheck Protection Program (PPP) funds — a $350 billion segment of the $2 trillion in government stimulus passed as part of the CARES Act a little less than two weeks ago. Small business owners pushed rapidly and unexpectedly to the brink of survival are clamoring for funds; money that various federal officials promise daily will be swiftly delivered.

But will they? That is a far more complicated question that most people realize, Ingo Money CEO Drew Edwards and Planters First Bancorp CEO Dan Speight told Karen Webster when they rejoined her for a second week of On The Agenda digital discussion on the PPP and how it will be disbursed. So far, Speight told Webster, it has been an incredibly long, “tough week” full of confusion, half-answered questions and still more clarity needed. Reducing the problem to its simplest terms, he noted: one week in, and there are just too many things that all bankers don’t know.

“What we need to be told is that we have this document, we have authorization and we’re good to go,” Speight explained. “Just simple stuff like that because bankers are still on eggshells.”

It’s not that PPP is a bad program, Speight noted, quite to the contrary from where he sits, it’s a very well done program: it’s simple, it’s direct and it will put the money in the hands of the SMBs who genuinely need it in the right way — if it is carried out correctly. The trouble, Edwards noted, is that bankers at the moment are both slightly unsure of what correctly is and what the consequences to their balance sheets could be if they get that wrong. And what bankers don’t know, he said, can hurt small businesses who needed funds two weeks ago.

“I think they’re missing a step there in Washington,” Edwards said. “And meanwhile across America are a bunch of bankers going, ‘well I’m not hitting the send button yet cause I don’t understand this.’”

So how to fix the log jam. Two major things have to happen, and fast, both Edwards and Speight agreed.

Fix Number One: Close The Communications Loop

The problem for bankers right now, Speight explained, isn’t just that there isn’t enough information, but that there is a lot of disorganization in how information is provided. It’s coming from many sources, at unexpected and odd times and is just incredibly unpredictable.

The simple solution here, he noted, is to stop the sprinkler effect and channel all the data resources into a single, accessible point that updates at scheduled times. That could be a website, a FAQ page — any number of things will work, and it will lower the anxiety among bankers that there is information out there they need but haven’t seen yet.

That anxiety, he noted, is creating a lag in the payouts. His bank has gotten nearly through the application process with a few of their SMB customers, he noted, but they’ve not released any funds yet.  And while he’s heard anecdotal accounts, thus far he has yet to directly encounter a bank that has done the paying or an SMB that has received funds.

Second: Eliminate The Capital Crunch

By most official descriptions of the program, the bank is but a processor and funds distributor and why the requirements for qualifying for this loan are so radically different from the standard SMB loan that requires credit checks, proof of revenue and a whole host of other underwriting and risk management considerations before a bank will willingly lend money to an SMB.

But while Speight agreed that sounds like a terrific way to manage the program — the reality is a bit different — at least right now since the guidance on this topic for bankers has been vague. But the operating assumption of Speight and most bankers are working under is that the banks are both processing and distributing funds directly out of their capital reserves and carrying them on their balance sheet until the government either forgives them in 8 weeks or the balance of the proceeds is paid off two years hence.

That then limits how many PPP loans any bank can process for their SMB customers who are interested in the program. For Speight and Planters First Bancorp, they’ve hit capacity already and are now referring  SMBs to others. The SBA PPP loans aren’t the only loans that his bank or any bank has or will carry on their balance sheets and the more PPP loan applications he accepts, the fewer other SMB loans he can extend, at least until this uncertainty has been clarified.

“We’ve got farmers planning in the fields right now. So we have to take that into consideration of the amount of money we know we’ve got to lend out just keep our normal lending business going,” Speight said.

And that is a story, Edwards noted, that he’s heard from his banker in applying for PPP funds for Ingo — and a tale that a lot of community banks with limited assets under management are going to be telling. The government, he noted, can promise it will keep re-upping the fund all it wants, but banks won’t keep accepting applications until this really important point is clarified. A decade of regulation in the financial services industry has worked very hard to condition them never to do anything like what’s been asked of them under the terms of the PPP program, as much as they all want, desperately, to help SMBs in need.

“The log jam is in the banks because they don’t have clarity as to exactly what is the process they’re supposed to follow to distribute the money is and what exactly are the calculations as it relates to their capital, their balance sheet, how long are they going to be keeping these loans?” Edwards said.

Bankers want to lend this money out; small businesses desperately need it. Which means, the solution that has to be coming, both Speight and Edwards agreed, is information and promises that banks doing their part to funnel funds to SMBs, won’t end up holding the bag when it comes time to truing up the till.

“I’m not a banker,” Edwards said “But I’ve made my living working with bankers. Until they have clarity over what the rules and processes are, and how that impacts their balance sheet? They’re not letting the money go.”