Small Business Loans Potentially Overwhelm Banks with Demand - The New York Times

Small Business Loans Potentially Overwhelm Banks with Demand - The New York Times


Small Business Loans Potentially Overwhelm Banks with Demand - The New York Times

Posted: 02 Apr 2020 09:30 PM PDT

Small business owners, desperate for help amid the economic meltdown wrought by the coronavirus pandemic, are eagerly awaiting the start of a $349 billion government relief program.

But just one day before the program's launch on Friday, the banks and other lenders that the government is relying on to fund loans and vet applicants were still waiting for much of the information they need to participate. They are also nervous about how they — and the government — will handle what is expected to be a huge crush of demand.

"The response is overwhelming — it's unlike anything I've ever seen in my career," said Craig Street, the chief lending officer of United Midwest Savings Bank, a community bank in Columbus, Ohio. "We're talking about attempting to do 10 times our normal monthly loan volume, and maybe more than that."

The so-called paycheck protection program, part of the $2 trillion stimulus package enacted last week, offers companies and nonprofits with up to 500 workers a low-interest loan to cover up to two months of payroll and other expenses. Most — and in some cases, all — of the loan will be forgiven if the borrower retains its workers and doesn't cut their wages. (The government will repay lenders for the forgiven portions of the loans.)

That's an appealing deal for many companies that would otherwise be leery of taking on debt in the midst of a global crisis. Jason Dolmetsch, the president of MSK Engineering & Design in Bennington, Vt., said he was eager to apply. His engineering firm and its affiliated architectural company are trying to hold on to their 23 workers despite a rash of canceled and postponed projects.

When he called his business's banker on Monday, he was told to be patient and wait. The bank had no information yet about how the program would work.

Late Tuesday, the Treasury Department and the Small Business Administration released an overview for borrowers and a sample loan application. The S.B.A., which is backing the loans, has waived most of its usual requirements — the loans do not require collateral or detailed financial records — and is encouraging lenders to take applications digitally and make quick decisions.

"This will be up and running tomorrow," Treasury Secretary Steven Mnuchin said on Thursday at a White House briefing. He added that loan checks could be disbursed "the same day" that borrowers applied.

But on Thursday evening, lenders were still waiting for technical information about how to underwrite the loans — which will be break even, at best, for most lenders — and collect reimbursement on those that qualify for forgiveness. A trade group, the National Association of Government Guaranteed Lenders, had to postpone a training call for 1,500 lenders on Thursday because it did not have the needed information from the S.B.A.

"I've asked for the information twice today, and I still have nothing," Tony Wilkinson, the group's chief executive, said on Wednesday. "I worry that they're asking lenders to make loans without the information they need to understand the rules of engagement."

Bank lobbyist groups have warned the Treasury Department that the program as designed will not be workable, expressing alarm about their own legal liability as they try to rush money to borrowers and keep tabs on potential fraud. The Independent Community Bankers of America sent a letter to Mr. Mnuchin on Wednesday complaining that guidelines calling for low-interest loans could mean "unacceptable losses" for lenders.

S.B.A. representatives did not respond to questions about when guidance for lenders would be available.

Although the government has scrambled to pull aid together quickly, the program's slow rollout has frustrated business owners facing a daily fight to salvage their companies. Paul Caragiulo is an owner of a group of restaurants in Sarasota, Fla., that employ around 150 people. He is loath to lay off anyone — even though his restaurants' sales have cratered — but he's also hesitant about borrowing what could be millions of dollars from a program whose details are being worked out on the fly.

The information sheets posted by the Treasury Department and the S.B.A. have not reassured him. "Those are bullet points, not term sheets," he said. "We're not used to having debt, and we don't look at that lightly."

The Trump administration has said it wants the paycheck protection loans to be easy to obtain; a sample application posted on Tuesday is a four-page form that can be completed in less than 10 minutes. But the fine print contains a line that gave Mr. Caragiulo pause: Borrowers must promise to buy only American-made equipment and products "to the extent feasible."

Mr. Caragiulo, who uses Italian pizza ovens, said the requirement seemed like an absurd bureaucratic tripwire. When asked about it, an S.B.A. spokeswoman pointed to a 1992 law that requires the agency to "encourage" business owners receiving financial help to buy American goods. She did not respond to questions about how — or if — that will be enforced.

Other federal small business aid efforts have been generous but chaotic. A program offering low-interest disaster loans funded directly by the government has already had more than 100,000 applicants, according to one person familiar with its operations.

The S.B.A. started taking applications weeks ago, but last Friday's stimulus bill added a new sweetener: Applicants, including those who are rejected for loans, are eligible for up to $10,000 in cash grants. (The funds are described on the S.B.A. website as a "loan advance," but an agency spokeswoman confirmed that it does not have to be repaid.)

Abninder Mundra, who owns a franchise of the UPS Store in Portola Valley, Calif., applied for a disaster loan on March 20 and was approved four days later for $210,000. Then the stimulus bill introduced the grants. Mr. Mundra said an S.B.A. representative had told him to fill out a second loan application if he wanted the grant funds. He was still waiting for both his disaster loan check and a response to the grant application.

Mr. Mundra said he could afford to wait a few weeks and was grateful for the aid. He also plans to seek a paycheck protection loan as soon as his bank starts taking applications. He had to cut his three employees' hours to offset a drop in foot traffic, and hopes the loan will help restore them.

"I think the government really understood that small businesses are the backbone of the economy," he said. "If we stop employing people, they won't have money to pay their bills."

But with job losses already setting records and certain to worsen, lenders fear that the $349 billion Congress allocated for the paycheck program will quickly run out. Senior officials from the Treasury and S.B.A. told reporters on Tuesday that they were prepared to ask Congress for more money if needed.

Jim Donnelly, the chief commercial officer of Bangor Savings Bank in Maine, said his small staff was working around the clock to accommodate the pent-up demand. In a typical year, his bank handles hundreds of business loans. He expects to process thousands in the coming months.

And even though his bank was still waiting for critical technical information, it planned to start taking loan applications on Friday.

"We have local businesses like restaurants that have shut down and are looking at these loans as a way to reopen their doors," he said.

Many of the nation's largest banks said they planned to offer the loans, though some will restrict which applicants they will work with.

JPMorgan Chase, for example, said it would make the loans available to customers with Chase business checking accounts as of Feb. 15. Bank of America and Citi both said they planned to participate but did not yet have details.

The Treasury has encouraged non-bank lenders to also offer the loans, but some that want to do so say the process has been maddening. Kabbage, one of the biggest online lenders, said the system for becoming an approved lender was opaque.

Mr. Street, at United Midwest Savings Bank, was also desperate for more information, including details about how thoroughly banks are expected to scrutinize potential borrowers. Any choice involves trade-offs: Quick approvals and cash disbursements raise the risk of mistakes and borrower fraud, but rigorous underwriting takes time that desperate business owners and overtaxed bankers don't have to spare.

Mr. Street hopes the S.B.A. and the banking industry's regulators will give lenders leeway to err on the side of speed.

"We're trying to set things up so that we can crank these things out," he said. "We had calls starting Monday morning from people who wanted to borrow right away. It was hard telling people they had to wait. Nobody can afford to wait."

Mark Cuban on $349 billion in small-business loans: 'It is literally the best stimulus bill ever for small businesses' - Yahoo Finance

Posted: 02 Apr 2020 04:42 PM PDT

Billionaire entrepreneur Mark Cuban, the owner of the Dallas Mavericks and investor on the hit TV show "Shark Tank," is encouraging small businesses to apply for the $349 billion in forgivable loans as part of the CARES Act, calling it "literally the best stimulus bill ever for small businesses."

"There are issues for every company of every size. The small business always takes the brunt of it because they live month-to-month. I remember my first company just being excited I was in business one month, two months, three months," Cuban said in a wide-ranging interview with Yahoo Finance this week. 

He added when you have a "cataclysmic event" like the COVID-19 pandemic, small businesses need to be aware of the "Paycheck Protection Program," which is part of the emergency stimulus package to help small businesses pay employees during the crisis.

In sum, businesses with 500 or fewer employees can apply for the loan through an existing bank. According to a fact sheet posted on the Treasury's website, the loan amounts will be forgiven as long as the money is "used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8 week period after the loan is made" and "employee and compensation levels are maintained."

[Read more: How small businesses can get CARES loan forgiveness]

"It is literally the best stimulus bill ever for small businesses," Cuban said, adding, "So, if you are an entrepreneur, if you're a small business operator, you need to be cognizant and you need to apply ASAP."

SHARK TANK - "1111" - An entrepreneur from Philadelphia, Pennsylvania, is banking on his cutting-edge stem cell technology to save pets from diseases in the future. A native New Yorker, who now lives in Los Angeles, California, introduces her healthier alternative to a traditional style deli meat; while an entrepreneur from Santa Monica, California, hopes his innovative and multifunctional exercise device will become the next multimillion-dollar hit in fitness. Finally, entrepreneurs from Santa Monica, California, introduce a genius innovation in outdoor furniture on "Shark Tank," SUNDAY, NOV. 17 (9:00-10:00 p.m. EST), on ABC. (Jessica Brooks via Getty Images) MARK CUBAN

Julia La Roche is a Correspondent at Yahoo Finance. Follow her on Twitter

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Recession Coming? 10 Reasons To Start A Company In A Downturn - Forbes

Posted: 11 Mar 2020 10:24 AM PDT

The economic dislocations and loss of life caused by the coronavirus are heartbreaking and will get worse, before they get better.

No one knows the ultimate economic impact of the coronavirus. However, it seems nearly everyone believes a global economic reset is upon us. The current 128-month expansion cycle of the U.S. economy is a record breaker, exceeding the 120-month, 1991 – 2001 economic boom. However, if you are considering starting a business, keep in mind that economic downturns offer startups certain advantages.

Market Timing Is Hard

Determining the perfect moment to enter the startup market, whether by creating a company or joining an ongoing venture, is akin to attempting to time the financial markets. According to financial columnist Daniel Solin, "One large study looked at more than 15,000 predictions by 237 market timing newsletters over a 12-year period. At the end of the period studied, 94.5% of the newsletters went bust."

Economic conditions periodically create headwinds and tailwinds, but it is impossible to accurately time such exogenous factors. It often comes down to personal factors when determining the "right" time in your life to launch a venture.

Ten Startup Advantages During An Economic Downturn

1.    Survival Is Winning

It may sound counter intuitive, but the greater constraint investors place on their financial resources during a downturn, the better your chances of success, if your venture can self-fund, secure friends and family money or generate adequate revenue from its customers. You might grow more slowly than if you had institutional capital, but if you can weather the downturn, you'll be well positioned to reap the rewards of the next economic expansion.

Marginal ventures that might be funded in a vigorous economic environment will not attract sophisticated investors' time, attention or money in a downturn. Fortunately, this reality results in valuable resources being applied to a fewer number of viable opportunities.

2.    Hard Knocks University

"You can learn very little from victory. You can learn everything from defeat." Christy Mathewson, Professional Baseball Player

Mr. Mathewson was correct. Victory usually satisfies, but it seldom educates. Successful entrepreneurs learn far more from setbacks than they do from successes beget by riding out upward economic trends. Economic headwinds require you to be more creative and wily, thereby enhancing your problem-solving toolkit.

Elbert Hubbard, a 20th-century writer, once said, "A failure is a man who has blundered but is not capable of cashing in on the experience." Blunder away but be sure to learn from each setback. Rising with the tide requires little effort, but it seldom positions you well for the market's inevitable vagaries.

3.    A Loyal Team With Great War Stories

"The only thing that overcomes hard luck is hard work." Harry Golden, U.S. Newspaper Publisher

Adversity brings teams closer together. Behavioral scientists have proven that the more arduous your collective journey, the stronger your team's cohesion. For instance, Elliot Aronson and Judson Mills' 1959 study confirmed that the more adversity a person endures, the greater value they associate with the experience and the higher their degree of loyalty to the team with whom they shared the challenges.

Aronson and Judson concluded that, "…persons who go through a great deal of trouble or pain to attain something tend to value it more highly than persons who attain the same thing with a minimal effort." As such, a startup team that faces a variety of rigors, before it succeeds, is likely to have a high group affinity and a resulting low turnover rate.

4.    Take A Dip In The Brimming Talent Pool

"If you think hiring professionals is expensive, try hiring amateurs" Unknown

One upside of an elevated unemployment rate is an increase in the overall size and quality of potential employees, coupled with downward pressure on recruiting costs. New hires in a depressed economy also tend to be more willing to accept below-market salaries in exchange for solid benefits and equity-based compensation.

Market uncertainty also tends to reduce the number of wantrepreneurs, as they are generally more reticent to join a startup when their path to riches is less certain. However, a recessionary market also generates a surplus of big company refugees. Such individuals are often desperate and willing to talk themselves into nearly any position that will pay their bills. Although you might get lucky and identify an entrepreneurial star, be wary of hiring folks who've been laid off from large organizations.

5.    Above The Crowd

"Why march to the beat of your own drummer when you can skip?" Dave May, Professional Baseball Player

Every entrepreneur who has competed in a vibrant market knows that one of the biggest challenges is getting noticed. As the overall industry noise mounts during a boom cycle, it becomes increasingly difficult to attract the attention of journalists, investors, potential customers and would-be partners.

In contrast, success stories are novel in a down market, which generally results in meaningful exposure for those startups which succeed. At Expertcity (creator of GoToMeeting, acquired by Citrix), we received pervasive media coverage as a contrarian success story during the depths of the dot-bomb crash. Although it can be more difficult to extract money from customers' wallets in an economic downturn, the overall decrease in market activity makes it easier for emerging companies to cut through the clutter and tell their story. 

6.    Match Value Prop With Market Realities

"A bend in the road is not the end of the road... unless you fail to make the turn." Unknown

Some startups are well-matched to succeed in economically challenging markets. However, even if your venture is not ideally suited to a market slowdown, you may be able to modify your company's value proposition to conform to the realities of the market. For instance, a product that enhances productivity can be sold as a revenue generator in an "up" market and as a cost saver in a "down" market.

Selling a cost-saving solution is more difficult in a robust market, as greater value is placed on making money when times are good, as opposed to saving money. However, when survival becomes an immediate goal, products that help companies weather near-term economic storms become especially attractive.

7.    Customer Dollars Taste Great

"Money is plentiful for those who understand the simple laws which govern its acquisition." George Clason U.S. Financial Author

In flush times, startups tend to raise too much money. An excess of capital is often driven by VCs who prefer to stuff as much money as possible into the deals they like. Ventures with excess capital often dither, attempting to craft an ideal solution. In contrast, when wily entrepreneurs are faced with a precarious bank account, they quickly iterate on a minimally viable product, thereby avoiding an over-engineered solution.

Sophisticated entrepreneurs understand that the ideal source of capital is from customers' wallets, not VCs' Limited Partners. Not only does such revenue validate the startup's value proposition, it results in zero dilution. The sooner you generate customer revenue and internalize customer feedback, the shorter your path to self-sustainability.

8.    Phoenix Effect

"If you want to succeed, double your failure rate." Thomas J. Watson, Founder, IBM

A firm that survives an economic nuclear winter is better positioned to take advantage of an economic uptick, as opposed to a startup launched during an economic turnaround.

This was the case with Computer Motion (NASAQ: RBOT, sold to Intuitive Surgical). We entered the medical device market in the midst of a recession. We addressed the market realities by leasing our surgical robots, rather than following the conventional path of selling them outright. We then sold the leases to a finance company, which generated cash to pay our bills, while allowing the hospitals to acquire the robots for a relatively small monthly fee.

If we had stayed on the sidelines, waiting for less market uncertainty, we would have lost the opportunity to file the landmark medical robotic patents that eventually motivated Intuitive Surgical to purchase Computer Motion for approximately $150 million.

9.    Measure Thrice, Cut Once

"Failure to prepare is preparing to fail." John Wooden, U.S. Basketball Coach

That is correct, do not measure twice – measure thrice. A market downturn slows the velocity of everyone's efforts. This does not give you a license to only work 10-hour days and take off both days every weekend. However, it does afford you the luxury of some deliberation, which is often more challenging to employ during periods of economic frenzy. A heightened degree of thoughtfulness will reduce costly mistakes, such as bad hires, pursuing multiple, disparate markets simultaneously, crafting one-sided partnerships to gain media exposure and making inefficient marketing commitments.

10.  Bargains Galore

"The bargain that yields mutual satisfaction is the only one that is apt to be repeated." Unknown

Top talent is not the only resource you can economically acquire in a downturn. Nearly everything you need to fuel your business will cost you less when times are tough. An entrepreneur's two most valuable resources are her time and money. A down market results in a much higher propensity for companies to negotiate below their list prices and to even barter for in-kind services. Such markets allow you to creatively craft deals that reduce your costs and conserve your cash.

If your business model is predicated upon a significant marketing spend, a depressed economy can be to your benefit, as publishers are generally willing to heavily discount their perishable ad space.

Pollyanna Need Not Apply

Salmon live most of their lives swimming with the current; however, once they reach reproductive maturity, they make an arduous journey upstream, often jumping up waterfalls, in order to reach the spawning grounds of their birth. Salmon begin their journey when their biological alarm sounds, irrespective of exogenous conditions.

This is the mindset would-be entrepreneurs should have when deciding the right time to jump into a startup. If you wait until macroeconomic conditions are ideal, you may find that your personal situation is no longer suited to either starting or joining an venture.

In the startup world, there is always an upside to an economic downturn. Adversity translates into opportunity for those willing to swim upstream and not wait until the tide turns. Go ahead and jump in, the water feels great.

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