Should I Apply to Become a PPP Lender?

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Question MarksOne question being posed in the small business finance community is whether or not you should apply to become a PPP lender. Unless you are a very large well-capitalized company with a deep legal and compliance bench, you probably shouldn’t.

Here’s why:

  • You must supply the capital. While a federal mechanism is being put in place to offload the PPP loans you fund, you need the balance sheet to fund the loans in the first place. Also, consider that community banks have historically expressed frustration with the guaranty process and that’s when times and loan volumes were operating at normal levels. You must be prepared for hiccups to take place that delay or even possibly prevent offloading of some or all of these loans.
  • You only earn a 5% processing fee on loans under $350,000. For larger loans, it’s a smaller percentage. You can’t even charge the applicant any fees at all so your compensation is entirely dependent on the SBA to pay you. Consider that your underwriting costs may offset some or all of that fee, leaving very little room for profit.
  • You must have 2019 audited financial statements available for inspection by the SBA.

And you must have either of the following:

1.

  • You must already have been applying Bank Secrecy Act-level compliance prior to this crisis.
  • You must have been originating at least $50 million in business loans or other commercial financial receivables per year for each of the last 3 years consistently.

OR

2.

  • You must already be a service provider to a bank.
  • You must already have a contract to support the bank’s lending activities.

It’s a tough bar to meet for a small and mid-sized small business financing provider, but the program isn’t really set up to become a major profit center for lending companies, it’s supposed to be a support center for SMBs to keep workers employed. Initially, many banks were hesitant to get involved because PPP participation was going to generate LOSSES for them. It still might.

So what’s the incentive to be a non-bank PPP lender? It’s a moral pursuit on the front-end rather than a financially-driven one. On the back-end, it’s a tool for lead generation, public relations, and elevating goodwill value. If such lenders are able to execute successfully, it could further develop trust for fintech with legislators, regulators, and the general public. On the other hand, however, if they perform poorly, it could reflect negatively on fintech as a whole.

So if you find yourself on the PPP lending bench, you’re not missing out financially. You can still become an agent/broker should an approved SBA lender accept you. Such a role presents limited upside financial potential, so if it’s riches you seek, the PPP doesn’t provide them.

Lastly, becoming a PPP lender certainly won’t save a dying lending company. Making loans at 1% interest to distressed and closed businesses isn’t going to somehow save a company with an already damaged loan portfolio. It’s just going to put it out of business faster.

Should you apply to become a PPP lender? That’s up to you. Good luck!

Last modified: April 29, 2020
Sean Murray


Category: Business Lending, PPP


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