In the wake of public outrage at the news that public companies have received millions of dollars from the Paycheck Protection Program, Treasury Secretary Steven Mnuchin today spoke out against such businesses. His comments come after the SBA and Treasury further clarified which businesses actually qualify for PPP, noting that only companies with no access to other forms of capital, such as selling shares or debt, would qualify.
Speaking on Fox Business, the Treasury Secretary explained that “anybody who took the money that shouldn’t have taken the money, one, it won’t be forgiven and two, they may be subject to criminal liability, which is a big deal … I encourage everybody to look at this and pay back these loans now so we can recycle the money if you made a mistake.” Mnuchin made clear that any company that receives a loan of over $2 million will be audited by the SBA.
A number of cases have made headlines, with Shake Shack and Ruth’s Chris Steak House returning $10 and $20 million, respectively, following calls from the public to refund it. Other publicly funded companies that have returned PPP money include AutoNation ($77 million); Penske Automotive Group Group ($66 million); and the Los Angeles Lakers basketball franchise, which received $4.6 million.
“I’m a big fan of the team but I’m not a big fan of the fact that they took a $4.6 million loan,” Mnuchin said of the Lakers. “I think that’s outrageous and I’m glad they returned it or they would have had liability.”
With the launch of the second round of PPP funding yesterday, the SBA reported that it had processed more than 100,000 loans by 4,000 lenders by 3:30pm that day. Senator Marco Rubio explained on Twitter that a new pacing mechanism had been integrated into the SBA’s E-Tran portal system, lowering the minimum amount of PPP loan applications required for lenders to send a bulk submission from 15,000 to 5,000. The hope for this is that it will enable smaller businesses to reach the funds through more regional lenders and “allow more banks to submit,” explained Rubio.
Susan Lyon, managing director at an independent commercial film company in Solana Beach, California, can’t say enough good things about the quick action her bank took to help her secure emergency government funding during the current pandemic. “They sent out all the forms right away” enabling her to file an application on Friday, April 3 — “the earliest day possible” — she says of the Bank of Southern California. “Then they kept in touch after we sent all the pdf’s back, and they started uploading the loan applications when the Small Business Administration’s website went live the following Thursday.
“The very next day, which was Good Friday,” she adds of the San Diego-based bank, “they e-mailed me at 7 p.m. to say the funds are coming — and two hours later they e-mailed me to say that ‘the funds are in your account.’ It was a high-touch experience.”
Lyon says she will use the bulk of the $130,000, which she received under the government’s Paycheck Protection Program, to pay the salaries of the eight fulltime employees at Lyon & Associates, of which she and husband Mark own 90%.
Lyon’s friend Jennifer Biddle was not so fortunate. Biddle, who operates a flower-growing and distribution business with her husband Frank, has been emotionally devastated, she says, since Torrey Pines Bank dropped the ball on her application for $285,000 to pay employees during the crisis.
“They created an administrative nightmare,” Biddle says of her San Diego-based bank, which failed to forward her paperwork to the SBA. “Being disappointed doesn’t begin to describe my feelings,” she adds.
Based in Vista, California, FBI Flowers has roughly $6 million in annual sales, 40 employees, and a monthly payroll of $114,000. Like her friend Susan Lyon, Biddle also applied for PPP funding on April 3. But she didn’t hear back from her bank for several days “and we thought (the application) was processing,” she reports. When the bank did get back to her a week later, it was to say, “‘We need this other form,’” she says, quoting the bank. “And then they wanted our addendum revised.”
By the time the SBA made the announcement on April 16 that the agency had exhausted the $349 billion allocated by Congress, Torrey Pines was still sitting on her application. “To me it’s negligence,” Biddle says.
“We’re in the middle of our growing season and money is hardly coming in,” she adds. “Our employees are part of a vulnerable population, We were really counting on our bank to do their part and get the application to the SBA. This was what my kids would call ‘an epic fail.’”
Neither Torrey Pines Bank nor its Phoenix-based parent company would comment. “Unfortunately,” Robyn Young, chief marketing officer at Western Alliance Bancorporation, told deBanked, “our bankers are not able to share any information about our clients or client transactions.” (According to a tagline in the e-mail, Forbes magazine has named Western Alliance to its list of the “Ten Best Banks in America” for the past five years in a row.)
Lyon’s and Biddle’s accounts are just two stories – one a rousing success, the other an abject failure – emerging from the Paycheck Protection Program, which was created as part of the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Since the bipartisan bill was signed into law by President Trump on March 27, the SBA has approved 1.66 million small business applications.
Under the PPP, small businesses and self-employed individuals must apply for emergency funding through banks and designated non-bank lenders. Congress authorized the SBA to make emergency, low-interest loans of up to 2½ times a business’s monthly payroll to pay their employees’ wages for eight weeks.
If, after eight weeks, businesses can show they’d spent 75% of the government money keeping furloughed employees on the payroll and covering their health insurance, the loan will be forgiven. The remaining 25% of PPP funding will convert to a grant if it’s spent on rent and utilities.
Now, as the program is being rebooted with new Congressional action for a second round of funding totaling more than $300 billion, many applicants fear that they will again be left out in the cold. “We’ve been hearing that many banks have not been able to handle the torrent of applications,” says Gerri Detweiler, education director at Nav, Inc., a Utah-based online company that aggregates data and acts as a financial matchmaker for small businesses.
Detweiler reports that she and her team at Nav have been working 14-hour days since the CARES Act was signed into law fielding calls and responding to e-mails from the company’s 1.5 million members looking for assistance in navigating the PPP rules. One common experience for small business applicants has been that “many of the banks have been prioritizing customers with deeper and more longstanding relationships,” she says.
One small business owner in Texas, Edward L. Scherer, filed a federal lawsuit in Houston on Easter Sunday charging that Frost Bank, which is headquartered in San Antonio, violated the CARES Act and SBA rules by refusing to accept PPP applications from non-customers. Class action suits alleging illegal favoritism have also been filed against Bank of America, Wells Fargo, J.P. Morgan Chase, and US Bancorp.
For customers and non-customers calling on Bank of America, this would come as no surprise. The Charlotte (N.C.) based giant makes clear that it will only process applications for regular customers. A notice on the bank’s website, declares that only “small business clients who have a lending and checking relationship with Bank of America as of February 15, 2020, and do not have a business credit or borrowing relationship with another bank, are eligible to apply for the Paycheck Protection Program through our bank.”
Although the PPP has been heralded as a way to rescue mom-and-pop businesses, national chain restaurants like Ruth’s Chris Steak House and hotels operating franchises have benefited handsomely. Ruth’s Chris alone received $20 million in crisis funding, according to The Wall Street Journal, which first reported the story.
For the bulk of the country’s small businesses “the money has been trickling in very slowly,” says Sarah Crozier, senior communications manager at the Main Street Alliance, a Washington, D.C.-based advocacy organization that counts 300,000 members. Even for many businesses that have received funding, there remains widespread uncertainty that the loan will be converted to a grant. “There’s not a lot of trust that the PPP loan will be forgiven,” Crozier says. “There’s a lot of confusion.”
That’s a major concern for Randy George, owner of Red Hen Bakery in Middlesex, Vermont – a speck of a place off I-89 near Montpelier, the state capital – who does not want to take on extra debt. Until a month ago, George had been running a $4 million (sales) operation which employed 48 employees. He’s closed down the café, he says, which accounts for about 60% of annual receipts, while keeping on 20 workers to run the bakery.
That operation – which turns out baguettes, croissants, sticky buns and other baked goods for wholesale distribution – has actually ramped up. With most restaurants temporarily shuttered, more New Englanders are eating at home, resulting in the bakery’s nearly doubling its sales to regional grocery stores and supermarkets.
Meanwhile, George has received $411,000 in PPP funding, which he applied for through Community National Bank, located in Barre, Vt., and he’s paying many of his 28 furloughed employees to remain idle. Because of the way the CARES Act program is structured, he says, it’s in his interest to convince laid-off employees not to collect unemployment compensation which includes an extra $600-a-week federal benefit and lasts longer than the eight-week PPP.
“I just called one of my fulltime employees and told him he’ll get to keep his health care if he stays on the payroll,” George explains. “But for part-time people it’s awkward. I’m incentivized to get people back to work and they’re incentivized to go on unemployment.”
At the Portland Hunt & Alpine Club, a bar and restaurant in Maine with the reputation for having the tastiest cocktails in town, if not the entire Pine Tree State, the PPP is not working out for owner Andrew Volk. He secured funding “in the low six figures,” he says, but so far he’s keeping his powder dry. Instead of paying out-of-work employees, he’s letting them collect employment insurance and using a portion of PPP funding for rent and utilities. As for the remaining PPP funds, the question is whether to return the money or keep it as a loan.
Volk says the government program has done little to help him with his most pressing needs. For starters, he was forced to toss out “thousands upon thousands of dollars” worth of perishable foods since his establishment went dark on March 16. All meat, cheeses, sauces, citrus fruit, shrimp, fish and, of course, Maine lobster, went into the dumpster.
Because of a force majeure clause in his insurance policy that explicitly denies indemnification for an “act of God” – “Almost every business interruption insurance policy has a virus and pandemic exclusion,” Volk adds – he will have to eat those losses. “As a small business,” he adds, “we really need support beyond payroll.”
Even many qualified business people who have been approved for PPP funding are still waiting for their funds. Charles Wendel, president of Financial Institutions Consulting, based in Miami, applied for funding “in the five figures,” he says, through Citibank on April 4. That was nearly three weeks ago. “If I were a guy who really needed this money, I’d be screwed,” he says.
In the next round of PPP funding, those who missed out now hope they will be approved quickly by their banks or lenders and that the coronavirus pandemic is brought under control. Meanwhile, the massive unemployment and shutdown of small businesses nationwide are reshaping the contours of the U.S. economy. “Ultimately,” warns Crozier of the Main Street Alliance, “the result of this will be more corporate consolidation and monopolization. That’s what we saw coming out of the ‘Great Recession’ in 2008.”
Ready Capital, a multi-strategy real estate finance company and one of the largest non-bank SBA lenders in the country, was the top PPP lender by loan volume in the country. Company CEO Thomas Capasse appeared on Fox Business yesterday and announced key statistics that aligned with data published by the SBA. By dollars, Ready Capital was the 15th largest PPP lender.
“As a leading non-bank, SBA lender, there’s 14 of us, we’re number two in terms of originations last year,” Capasse said on Fox Business, “we focused broadly, we don’t have deposit relationships, so we open our doors broadly to in particular the smaller mom and pop, the local deli, the pizzeria, the nail salon, so just in terms of the numbers, round one of the PPP, we approved 40,000 loans which is number one in the US, it was about $3 billion in total approvals. And our average balance was only $73,000 versus $230,000 for the average in round one.”
Among Ready Capital’s channels for acquiring PPP loan applications is Lendio, who reported consistent figures (a rough average of $80,000 per PPP loan facilitated), and high volume. Lendio has said on social media that they have been working with several partners, Ready Capital among them.
Ready Capital’s Capasse reasoned that their speed could probably be attributed to an affiliated fintech lender. “We are maybe more efficient than some of the banks because we have an affiliated fintech lender which is able to create online portals and processes to work in a more efficient manner and that enabled us to not only process these loans more efficiently but also to provide broad access to the program, to the smaller business owners.”
The company acquired Knight Capital, a small business finance provider, late last year.
This week, Jared Weitz, CEO of United Capital Source, appeared on Fox News to talk about the PPP, EIDL, and small business lending. Video below:
Lendio processed $5.7 billion of the $342 billion funded to businesses through the Paycheck Protection Program. With this amount going to just over 70,000 business owners, the Utah company facilitated 4.2% of the total 1.66 million deals through its platform.
“The last few weeks have been an all-out brawl, from solving technical issues to deciphering legislation to managing expectations to dealing with incredible frustration,” Lendio CEO Brock Blake wrote in a recent Forbes article. “In this unprecedented time of crisis and need, there is nothing I would rather be doing than helping small business owners. My co-founder and I started a business on the idea that fueling small businesses fuels the American dream. Now the focus is on saving it.”
While not a direct lender, Lendio utilizes its platform to connect businesses owners with those lenders authorized by the SBA who can provide them with PPP money.
With the national average loan size of PPP money being $206,000, Lendio undercut this amount, instead having an average loan amount of less than $100,000. And with 28 million small businesses in the country, Blake is hoping to continue facilitating loans through this model of high quantity, smaller loan deals once more money is allocated to the program. Joining the chorus that is calling for additional PPP funds, Blake suggests that it could take nearly $850 billion in total to allow American small businesses to weather covid-19, as well as a rethinking of the program so that money can be moved quicker.
“There’s a lot we have learned over the past two weeks as a nation, as an industry, and as business owners. It’s important to take a closer look at the good, the bad, and the ugly of the Paycheck Protection Program, and most importantly, what needs to be done next … Much of the reason why I have been so vocal about the participation of fintech lenders is due to the fact that these lenders’ super power is processing smaller loan amounts at a higher volume. Community banks, on the other hand, specialize in processing large amounts at a lower volume; this is not what Main Street needs right now.
“The fact that fintech and non-bank lenders have been approved to participate in the distribution of PPP loans will make a world of difference if and when more funds are appropriated. Small businesses would have benefited more had these lenders been approved earlier in the process (most of them weren’t approved until the money had actually run out), but they can take heart knowing that more high-tech options will be available in the next phase.”
Small Business Group Advocates For Community Anchor Loan Program (CAP) In Wake Of PPP Wind Down and Possible RefreshApril 17, 2020
At last tally, more than 800,000 small business PPP applications have gone unfunded since the program reached its limit, many of which are genuine mom-and-pop shops that employ less than 25 people.
Congress is considering another round of additional PPP funding but Americans may be worrying that such funds will once again go into the hands of some of America’s largest chains. (44.5% of the $349B PPP funds went toward loans over $1 million)
Outspoken successful businessman Mark Cuban has proposed a solution, a lottery system next time around to improve the chances that smaller businesses get their share of the pie. While the public debates the merits of such an approach, one organization (the SBFA) is calling for something much more direct, a targeted fix via a Community Anchor Loan Program (CAP) that would appropriate $10 billion for businesses that were PPP-eligible for loans under $75,000 but did not receive funds.
Deployment of this capital under CAP can and should be administered by non-bank alternative lenders with proven success with this particular small business market, they say.
The proposal also calls for 25% of the funds to specifically be allocated for minority, women, and veteran-owned and agricultural businesses.
In a letter the SBFA submitted to Congress earlier this week, the organization said:
“Women and minority-owned businesses are historically smaller and employ fewer people and, in some communities, are under-banked without the established relationships required to secure a PPP loan. Small farms and agricultural businesses are important to communities and often have trouble qualifying for traditional financing.”
The Small Business Finance Association is a non-profit advocacy organization whose mission “is to take a leadership role in ensuring that small businesses have access to the capital they need to grow and thrive.”
This week proved mixed for many fintech and non-bank lenders who received approval from the SBA to issue Paycheck Protection Program funds, only for the $349 billion allotted to the program to run dry almost immediately afterwards.
On Wednesday evening Senator Marco Rubio tweeted that the funds would run short, leaving at least 700,000 small businesses who applied in purgatory without PPP financing. But more money may be made available, as Treasury Secretary Steven Mnuchin said in a statement on Wednesday that “We urge Congress to appropriate additional funds for the Paycheck Protection Program – a critical and overwhelmingly bipartisan program – at which point we will once again be able to process loan applications, issue loan numbers, and protect millions more paychecks.”
BlueVine, OnDeck, Funding Circle, PayPal, Intuit, and Square were among the group of non-bank lenders who were recently approved. While unfortunately late to the party, these businesses will be well-positioned to quickly roll out funding once further PPP money is allocated.
“Millions of small businesses need relief more than ever right now, and providing that relief quickly and diligently is our top priority,” BlueVine CEO Eyal Lifshitz told deBanked. “While most PPP lenders have limited their efforts to existing customers, our aim is to support and protect all small businesses. Using our data and engineering resources, we want to ensure both existing customers and other small businesses seeking relief, are aware of and have access to PPP loans. We will remain a trusted advisor to small businesses and work to get fast capital solutions to those in need.”
Lifshitz’s comment echoes concerns that have plagued the SBA since the announcement of these funds: that its systems, and the processes of the banks it works with to issue this money, are outdated and insufficient to face a financial crisis of this magnitude and speed. Now weeks into the program, businesses are reporting a lack of communication from both their bank and the SBA; and, most importantly for many, no PPP funds in their accounts.
This month Clearbanc announced its latest product, Runway, in response to the impact of the novel coronavirus. Having historically served the needs of those businesses that are seeking funds for digital marketing, with Runway Clearbanc is expanding into capital for more generalized purposes in the face of covid-19.
“All companies are concerned about one thing and that thing is runway: ‘how many months do I have left and how do we extend that?’ Clearbanc CEO Michele Romanow explained. “So we built this really cool product, where you can give us a little bit of information and we can show you how much runway you have today at your current economics, and then how much we could extend that runway.”
Open to e-commerce, D2C, and enterprise SaaS businesses, Runway has already begun issuing funds. Amounts begin at $10,000 and can run up to $10 million, with monthly cash injections being an option if Clearbanc deems it suitable. Fees range from 6-12% and funding is equity-free.
“These is no playbook for the current economic crisis and recovery, and every founder needs more insight and options to navigate this incredibly difficult time. In addition, venture capital is even harder to come by. Capital is the most important tool to sustain and grow a business, and is now needed more than ever.”
Update 4/16/20: The SBA has put up an official statement on its website that says “The SBA is currently unable to accept new applications for the Paycheck Protection Program based on available appropriations funding. Similarly, we are unable to enroll new PPP lenders at this time.”
A number of fintech companies have just joined the Paycheck Protection Program, but they’re a tad late to the PPParty. On Twitter, Senator Marco Rubio, one of the co-sponsors of the CARES ACT that developed this program, confirmed the rumors that the well had run dry. “Sadly it appears #PPP will grind to a halt tonight as the limit on $ allocated to guarantee #PPPloans about to be hit.”
Now 700000 small business applications are in limbo & no new loans will be made until the game of chicken in Congress ends & additional $ approved.
— Marco Rubio (@marcorubio) April 15, 2020
Here’s the math
Congress approved $349 billion to guarantee #PPP
At 2pm today had over $300 billion in approved #PPPloans
Need $10 billion to cover fees & processing
When we reach $339 billion limit PPP will stop until they end with the ridiculous games & approve more funds
— Marco Rubio (@marcorubio) April 15, 2020
The SBA has often made reference to total funds “approved” when calculating its numbers rather than loaned out, so if you’re a business that has already been approved, then presumably funds have already been allocated for your business and you will still receive them. But if your application is pending, well it’s possible that funding may require additional congressional authorization. That however, as noted by Rubio’s remarks, will require some political compromise.
Update: 4/16 8 AM: Senator Rubio said on Fox Business that the PPP program was now frozen after having reached its limit and has stopped.
We’ll update this as more information becomes available.
Over a month into a nationwide lockdown and it can prove hard to remember what things were like before this. The ease of going to a restaurant and sitting in, the buzz of attending a packed concert, or even the unappreciated experience of not having to maintain six feet between yourself and whoever is beside you.
As well as these small joys, for many small business owners the prospect of growth is a memory, as the latest Federal Reserve Small Business Credit Survey highlights. Released in March, the report is a summary of how small business owners acted and felt towards credit in 2019, as well as how they viewed their future in 2020.
While that’s certainly a grim reminder, the report featured an interesting question which appears prescient in the wake of the impacts of covid-19. “What actions would your business take in response to a 2-month revenue loss” was put to the 5,514 respondents, which were composed of owners of businesses that employed between 1 and 499 employees (coincidentally the same range for PPP loan eligibility). And the answers highlight the extent of the trouble which many small business owners currently find themselves in.
33% said they would lay off employees, 34% reported that they would rely on debt, and just 37% stated that they would reduce salaries of the owner(s) or employees. As well as these hypothetical decisions, 17% of respondents said they would shut down and 47% noted that they would use the owner’s personal funds to ride out the storm, worrying numbers given the current situation.
And while these responses prove eerie in light of what was to come, other answers reflect the optimism that 2019 yielded. 69% of firms expected revenue to increase in 2020, 44% expected their number of employees to grow, and 56% reported revenue growth on from 2018.
Outdated as the report is, it acts as an artifact of sorts: reminding the industry of what can come before the fall, and how even when things are good, many businesses are a few steps removed from serious trouble.
One 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.
- 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:
- 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.
- 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!
OnDeck has applied to become a lender for the Paycheck Protection Program (PPP), according to a post the company made on social media. The online lender is one of the first to publicly announce an official entry for consideration since the application went live for fintech companies Wednesday evening.
OnDeck CEO Noah Breslow said on LinkedIn, “We are excited to be one of the fintechs delivering PPP loans as a direct lender – our team has been working around the clock getting us ready and now we wait and hope we are approved soon!”
The SBA finally released an individual PPP lender application for Non-Bank and Non-Insured Depository Institution Lenders on Wednesday.
Note that it doesn’t actually say “fintech” anywhere on it but that’s because fintech is a colloquial term. This Non-bank designation and the requirements therein are similar to the SBA guidance published on April 3rd that was widely believed to encompass fintech lenders.
This week the Canadian government announced its coronavirus economic relief plans. Among them are two initiatives that aim to assist small businesses: the Canada Emergency Response Benefit (CERB) and Canada Emergency Business Account (CEBA).
The first of these is a wage subsidy that will cover up to 75% of a company’s payroll. The hope being that this will postpone the overcrowding and clogging of the Canadian unemployment benefits system, known as employment insurance. However this program appears to appeal to only certain types of businesses. With subcontractors not qualifying as part of payroll, there is the fear that CERB could leave many small businesses and startups that rely on freelancers unprotected. As well as this, there is a requirement that the company’s most recent month of revenue be at least 30% less than what it was at the same time the previous year. This specification again acting as an obstacle to startups and high growth businesses.
The second is a loan program that is capped at CAN$40,000 with 0% interest for the first two and a half years, and then 5% annual interest beginning January 1, 2023. There will be an opportunity for the remainder of the loan to be forgiven if the business has repaid 75% by December 31, 2022.
According to Smarter Loans’ Vlad Sherbatov, the situation in Canada mirrors what is happening in the US with regards to PPP. “There are very little details available about how people are going to apply to get the funds,” the President and Co-Founder explained. “Nobody knows what’s actually happening and nobody knows when business owners can actually anticipate to receive any funding.”
Expressing frustration that the Canadian government chose to ignore non-bank lenders in favor of allowing Canadian banks like BMO, RBC, and TD to distribute the funds, Sherbatov noted that it is the lenders who have the technology and processes to speedily disperse capital. “We did a survey that said almost 50% of business owners said they would shut down in less that four weeks without additional help … so it’s not that it’s just fine that there is help available, it’s how fast can [business owners] get the help, because every day that goes by makes the situation worse.”
Speaking to Kevin Clark, President of Lendified, he echoed Sherbatov’s concern.
“It’s all good that the government is making these decisions, but the capital has to move and the programs have to be in effect. So announcing these things is one thing, actually practicing them and executing them is another. There’s a time lag that could potentially put companies out of business and so, for us, it’s about trying to connect with a lot of these borrowers to say, ‘What can we do to help you with payments?’ But at the same time, we don’t want deferments for a long period of time because then our revenue base is challenged. So the fintech lenders all have significant challenges at hand, because defaults that move from within the normal course of between 5 and 10%, say now to between 15 and 25%, or even higher, are significant challenges for the operations of our business.”
Also a member of the Canadian Lenders Association, Clark is involved in the CLA covid-19 working group that was launched in March. Formed with the intention to assist the government’s approach to capital distribution, Clark was disappointed with the government’s decision to exclude non-bank lenders after the group reached out to both the Ministry of Finance and the Business Development Corporation of Canada. And with no government funding operation to assist, Clark, like many lenders in Canada, is turning toward his existing customers, hoping to keep their heads above water.
“What we’re all doing independently is trying to work with our customers to give them guidance on what is going on in Ottawa. And so most of us have made website adjustments to give some education to interested parties on what’s available in terms of subsidy. We’re trying to provide support to our customers through deferments and so forth, just as every lending institution is doing these days. It’s just that I think it’s harder for us and smaller firms that don’t have the margin and the wherewithal to withstand any sort of significant timeline in this situation. So it’s a little bit of week by week for us, trying to manage our own costs and so forth and keep our customer bases as happy and healthy as we can.”
The rush to submit your PPP application may be for naught if you own an ineligible business. The SBA prohibits loan guarantees to “businesses primarily engaged in lending, investments, or to an otherwise eligible business engaged in financing or factoring.” If there’s any confusion as to what that includes, the SBA lists 7 specific ineligible business types under this definition in the statutory code. They include:
- Life Insurance Companies (but not independent agents);
- Finance Companies
- Factoring Companies
- Investment Companies
- Bail Bond Companies
- Other businesses whose stock in trade is money
The PPP’s interim final rule refers to this statute as a rule for ineligibility as it applies to the PPP.
The statute does list a handful of businesses engaged in lending that may traditionally qualify for an exception. They are as follows:
- A pawn shop that provides financing is eligible if more than 50% of its revenue for the previous year was from the sale of merchandise rather than from interest on loans.
- A business that provides financing in the regular course of its business (such as a business that finances credit sales) is eligible, provided less than 50% of its revenue is from financing its sales.
- A mortgage servicing company that disburses loans and sells them within 14 calendar days of loan closing is eligible. Mortgage companies primarily engaged in the business of servicing loans are eligible. Mortgage companies that make loans and hold them in their portfolio are not eligible.
- A check cashing business is eligible if it receives more than 50% of its revenue from the service of cashing checks.
- A business engaged in providing the services of a financial advisor on a fee basis is eligible provided they do not use loan proceeds to invest in their own
deBanked is not a law firm. Consult a CPA or an attorney to provide better guidance on your company’s eligibility.
Update: 4/8/20 The PPP Application for Fintech Lenders is Here
Senator Marco Rubio tweeted on Saturday that he expects the US Treasury Department to release a separate PPP application for non-bank lenders early this week. The Treasury and SBA have previously issued guidance on the minimum criteria a fintech lender would have to meet to be eligible, leading to confusion when the official application released a day later omitted any mention of fintech lending.
The rollout has not been perfect. One challenge facing fintech lenders is the supply of capital as the loans must be issued from their own balance sheet and held on their books for at least 7 weeks until they can be purchased by the federal government. Rubio said that we will need a defined purchase mechanism for such a transfer to take place to assist not only fintech lenders but also community banks.
The good news is multiple FinTechs including @PayPal & other online lenders are ready,able & willing to process #PPPloans for them & anyone else.But they need @USTreasury to release application for nonbank lenders to become certified.
I expect that very early next week. 5/13
— Marco Rubio (@marcorubio) April 4, 2020
This week a cohort of businesses announced the formation of the #paytoday coalition, a union whose purpose is to promote the swift repayment of any receivables due to small businesses. The group, made up by Fundbox, SmallBizDaily, Womply, among others, was formed in the aftermath of covid-19’s rapid spread across the United States.
The coalition was the result of both conversations between the members about the fate of small businesses as well as long-term research, Fundbox Chief Market Office Leslie Olsen told deBanked.
“We’ve been working on it for a couple of weeks, but it’s really based on some pretty deep research that we’ve done over the years, and more recently last year, that exposed this issue that businesses have of paying each other, where there are typically a large number of outstanding receivables in the market at any given day,” Olsen explained.
According to Olsen and the #paytoday campaign, there is currently $900 billion in outstanding receivables owed to small businesses. This mass of unpaid money combined with the pressures of the coronavirus and the info gleamed from their research, such as the stat that nearly 40% of small businesses have 30 days or less worth of cash available, are what’s motivating the group to act.
Currently the collective is running campaigns to get the word out and encourage those who owe small businesses money to pay them. Beyond that, #paytoday hopes to grow in coalition size and eventually branch out with larger partners.
“In our social campaigns, we’re inviting businesses like Target and Walmart, the Fortune 100 and 50, to see if they will join us as well as smaller businesses,” Tim Donovan, a spokesperson for Fundbox noted. “If you think about large enterprises and how many vendors they deal with on a regular basis, it could be thousands. So we’re trying to think about how we can create the biggest impact by having these bigger enterprises join the movement.”
The elusive application to apply for PPP lender-approved status is expected to become available sometime on Friday. In the meantime, the SBA has published the requirements that a financing provider will have to meet to be eligible for approval. Federally insured depository institutions are already approved so these bullet points apply mainly to non-bank financing providers and online lenders.
- Must already originate, maintain, and service business loans or other commercial financial receivables and participation interests
- Have already been in compliance with the Bank Secrecy Act since at least February 25, 2019
- Have already originated, maintained, and serviced more than $50 million worth of business loans or other commercial financial receivables during a consecutive 12 month period in the past 36 months, or is a service provider to any insured depository institution that has a contract to support such institution’s lending activities in accordance with 12 U.S.C. Section 1867(c) and is in good standing with the appropriate Federal banking agency.
Loan underwriting requirements
- Confirm receipt of borrower certifications contained in Paycheck Protection Program Application form issued by the Administration;
- Confirm receipt of information demonstrating that a borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020;
- Confirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application; and
- Follow applicable Bank Secrecy Act requirements
Notes from the SBA:
Entities that are not presently subject to the requirements of the Bank Secrecy Act, should, prior to engaging in PPP lending activities, including making PPP loans to either new or existing customers who are eligible borrowers under the PPP, establish an anti-money laundering (AML) compliance program equivalent to that of a comparable federally regulated institution. Depending upon the comparable federally regulated institution, such a program may include a customer identification program (CIP), which includes identifying and verifying their PPP borrowers’ identities (including e.g., date of birth, address, and taxpayer identification number), and, if that PPP borrower is a company, following any applicable beneficial ownership information collection requirements. Alternatively, if available, entities may rely on the CIP of a federally insured depository institution or federally insured credit union with an established CIP as part of its AML program. In either instance, entities should also understand the nature and purpose of their PPP customer relationships to develop customer risk profiles. Such entities will also generally have to identify and report certain suspicious activity to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). If such entities have questions with regard to meeting these requirements, they should contact the FinCEN Regulatory Support Section at FRC@fincen.gov. In addition, FinCEN has created a COVID-19-specific contact channel, via a specific drop-down category, for entities to communicate to FinCEN COVID-19-related concerns while adhering to their BSA obligations. Entities that wish to communicate such COVID-19-related concerns to FinCEN should go to www.FinCEN.gov, click on “Need Assistance,” and select “COVID19” in the subject drop-down list.
Each lender’s underwriting obligation under the PPP is limited to the items above and reviewing the “Paycheck Protection Application Form.” Borrowers must submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
The lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs. The Administrator will hold harmless any lender that relies on such borrower documents and attestation from a borrower. The Administrator, in consultation with the Secretary, has determined that lender reliance on a borrower’s required documents and attestation is necessary and appropriate in light of section 1106(h) of the Act, which prohibits the Administrator from taking an enforcement action or imposing penalties if the lender has received a borrower attestation.
Sales and Marketing Expenses declined dramatically for StreetShares for the six-month period ending December 31, 2019, according to the company’s latest SEC filing, but the company’s payroll expense still wildly exceeded revenue, putting them yet again into deep net loss territory.
StreetShares recorded total operating revenues of $2.43M, payroll expenses of $3.49M, and a net loss of $5.18M for the period.
The company’s accumulating losses over time has translated into a stockholder deficit of $35.2M. This reporting period is pre-COVID-19 but the company disclosed that future financial results may be adversely affected by the virus.
The company also borrowed $3M in the form of a convertible promissory note issued to an investor.
Only 16.81% of loans on the StreetShares platform were funded by institutional investors for the period. Retail investors, the largest segment by far, funded 70.63%.
Update 4/8/20: The PPP Lender Application for Non-banks/fintech Companies is HERE
Update 4/3/20: The PPP Lender Application for Banks is HERE
The Treasury Department has set an April 3rd expected start time for lenders to begin accepting Payroll Protection Program loan applications. But who exactly can make the loans? Are fintech lenders in or out?
According to the Treasury, the following are already approved:
- All existing SBA-certified lenders
- All federally insured depository institutions, federally insured credit unions, and Farm Credit System institutions
BUT! A broad set of additional lenders can begin making loans as soon as they are approved and enrolled in the program. This “broad set,” that presumably includes fintech lenders, can apply by emailing an application to DelegatedAuthority@sba.gov.
While the loans are 100% backed by the full faith and credit of the United States. Lenders will be compensated in accordance with the following structure, a percentage of the financing outstanding balance at the time of final disbursement:
- Loans $350,000 and under: 5.00%
- Loans greater than $350,000 to $2 million: 3.00%
- Loans greater than $2 million: 1.00%
Lenders may not collect any fees from the applicant.
Who can be an agent/broker?
- An attorney;
- An accountant;
- A consultant;
- Someone who prepares an applicant’s application for financial assistance and is employed and compensated by the applicant;
- Someone who assists a lender with originating, disbursing, servicing, liquidating, or litigating SBA loans;
- A loan broker; or
- Any other individual or entity representing an applicant by conducting business with the SBA
Agent fees will be paid out of lender fees. The lender will pay the agent. Agents may not collect any fees from the applicant. The fee structure is below:
- Loans $350,000 and under: 1.00%
- Loans greater than $350,000 to $2 million: 0.50%
- Loans greater than $2 million: 0.25%
For more info, check here: https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses