Published in Small Business

TRIAL BY FIRE: SBA races to provide relief to small businesses, but some hiccups remain

BY Sunday, April 26, 2020 05:46pm

The sheer volume of small businesses that have sought federal relief loans illustrates the depth and scope of the economic pain brought on by the COVID-19 pandemic.

The U.S. Small Business Administration quickly blew through $349 billion in just 14 days and approved loans for 1.6 million small businesses nationwide before halting new applications April 16 for the Paycheck Protection Program. That’s as many loans as the SBA processed in the previous 14 years combined.

Rob Scott, the SBA’s Great Lakes regional administrator COURTESY PHOTO

Congress last week allocated another $320 billion for the PPP, $30 billion of which will go to federally designated community development financial institutions, plus banks and credit unions with less than $10 billion in assets. Banks and credit unions with assets between $10 billion and $50 billion will get another $30 billion.

The legislation also directed $60 billion in funding to the SBA’s Economic Injury Disaster Loan program Congress set up earlier in the pandemic.

Before running out of money for the first round of the PPP, the SBA approved relief loans totaling $10.38 billion for nearly 43,500 small businesses in Michigan.

Executives at banks and credit unions say applications for the PPP came from across the economy, including Main Street-type businesses, companies up to the 500-employee threshold, the hospitality sector, restaurants, manufacturers and retailers that have been hurt by the pandemic and resulting stay-at-home orders.

“If you connect enough dots, and some you have to connect more dots than others, you can almost see where every single human being and every single business is going to be affected, whether it’s decreased orders or things of that nature,” said Tony Mandarino, vice president of commercial lending at St. Joseph-based United Federal Credit Union.

“Almost everybody’s going to be impacted in some way, shape or form. We’re having a pretty widespread demand from across all of our business owners,” Mandarino said. “It’s such a strange time because in some cases they are shut down entirely, and in others they are very much restricted. There’s a lot of anxiety out there and uncertainty on when they’ll be able to reopen or get back to a more normal time.”

Strong demand

The anxiety among small businesses played out in the large number of PPP loan applications that banks and credit unions received and processed in a short period of time.

For example, in two weeks, the Grand Rapids-based Mercantile Bank processed and secured approval for 1,549 loans for small business clients totaling $502.9 million. Many more PPP loan applications are waiting to go forward with additional funding for the program, according to CFO Chuck Christmas.

“There are other borrowers out there that would like the assistance and we would like to get it to them,” Christmas said last week during a conference call to discuss Mercantile’s first quarter results.

Fifth Third Bank, the market leader in West Michigan, processed and submitted some 10,000 PPP loan applications for nearly $3.5 billion across its 10-state market. PPP loans for Fifth Third customers averaged $350,000 to $370,000, according to President and CEO Greg Carmichael.

Huntington Bank, the largest SBA lender in the U.S., had PPP applications from nearly 26,000 small businesses for more than $6 billion in seven Midwestern states.

The 177,000-member United Federal Credit Union, with offices in six states, submitted and secured SBA approval for more than 175 PPP loans for members totaling nearly $28 million, Mandarino said. The credit union received more than 500 applications for more than $40 million, a volume that shows the heavy demand for PPP loans, he said.

In a survey by the economic development organization Lakeshore Advantage Corp. of more than 300 companies in Allegan and Ottawa counties, business owners ranked economic relief as their top need. More than eight in 10 of the Lakeshore Advantage survey respondents said they had applied or planned to apply for state or federal assistance, and nearly a quarter indicated they could not survive another four weeks of a stay-at-home order.

Some banks talk

Congress created the PPP in March as part of the massive $2.2 trillion CARES Act enacted in response to the COVID-19 pandemic.

The PPP has provided “an economic lifeline” to small businesses across the country, allowing them “to remain viable and maintain their workforces during the COVID-19 pandemic,” said T. Rann Paynter, CEO of the Michigan Bankers Association.

The SBA got the program up and running within a week of the CARES Act becoming law, although Great Lakes Regional Director Rob Scott admitted the rollout had some difficulties.

Many of the complaints about the PPP have come from small business owners frustrated by how their bank handled the process and bottlenecks in the system. National media reports detailed how some large banks did not expect a large enough return to take on the cost and risk of the PPP loans. 

Crain’s Detroit Business also reported many customers were frustrated with Comerica Bank for how long it took to get a portal operating to take PPP applications.

In a recent media conference call, Scott acknowledged that banks that had never done SBA lending before might “be a little timid.” 

The potential to use the PPP to keep their small business clients afloat should provide banks plenty of incentive, Scott said, adding that banks are receiving a fee to handle the application process.

Even if banks “don’t make a lot of money on it, they are at least saving their customers,” Scott said.

“The lenders, especially the bigger lenders, if they could get a process down, they could actually make some decent money,” Scott said. “Additionally, the lenders that are doing this, it’s also to help their customers. All of their customers are hurting, and if their customers go under without the assistance the federal government is providing through this program, how does that serve the bank’s interests if they have a customer that goes into bankruptcy or is not succeeding?”

Running the gamut

In an interview with MiBiz prior to Congress enacting a second round of PPP funding, Mandarino at United Federal Credit Union said he hoped to see changes to ensure that more money flows to smaller businesses with fewer than 100 employees, or maybe 50 or fewer employees.

“There’s a lot of large companies that ate up a lot of the $349 billion,” Mandarino said. “It would be nice to have more of those dollars designated for those small businesses.”

At the time the SBA ran out of funding for the first round of the PPP, United Federal had members “sitting on the sidelines with their fingers crossed hoping that this second wave does come through,” he said.

Scott McFarland, CEO of Berrien Springs-based Honor Credit Union, also points to how the SBA and the U.S. Department of the Treasury provided guidance on the PPP up until late the night before the program launched, and also changed the application forms.

“It’s extremely difficult to play a game when the rules are constantly changing,” McFarland said. 

Honor Credit Union, with more than 86,000 members, received about 300 applications totaling $27 million for the PPP from across all economic sectors, McFarland said. The credit union had another 100 applications in process to submit to the SBA.

“We have everything from mom-and-pop shops to 40-person restaurants that are trying to keep things going. We have landscapers, construction,” he said. “It crosses the entire gamut. Even churches, everybody. Day camps, YMCAs — you name it.”

‘Unique opportunity’

McFarland hopes that in the next round of PPP funding, the SBA provides “clear and concise directives” to lenders and offers leeway for borrowers. Lenders could use reassurance from the SBA that it will not penalize them for minor mistakes on the application forms, such as a box not getting checked, he said. 

“Remove technicalities. Don’t let us get bit by a technicality,” he said. “We’re talking businesses that are closed, trying not to close, or just trying to keep their head above water, and then we’re asking them for lots of documentation, and we’re diligent about getting it.”

Most small businesses have never sought an SBA loan, and in the PPP “you’re introducing them to an entirely new entity by fire,” McFarland said. “The SBA has a unique opportunity to really show themselves as a solution, but they’re going to need a little bit of grace with both the borrowers and the financial institutions.”

PPP loans are forgivable and designed to help businesses cover payroll, rent, mortgage interest and utilities. Business owners must use 75 percent of the loan on payroll expenses to be eligible for loan forgiveness.

For business owners who take out a PPP loan, bankers recommend they monitor how much they are using and keep some money aside to pay off the loan if they don’t need all of it for eligible expenses. 

Christmas at Mercantile Bank said he expects that most of the small businesses that get a PPP loan will seek forgiveness from the SBA “soon after going through their borrowings to pay their salary, mortgage payments, rent payments and utilities.”

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