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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."

$349 billion payroll program to provide federal assistance to small business owners - KPRC Click2Houston

Posted: 03 Apr 2020 06:38 PM PDT

HOUSTON – Cavo Coffee, a specialty coffee house in West University, serves brews, espressos and baked goods.

Owner Michael Caplan said he is trying his best to survive the coronavirus business crash, which is ravaging many restaurants and small businesses throughout the country.

"I've had to layoff half my staff and close one of my stores completely right now," Caplan said.

The Small Business Administration opened registration Friday for the Payroll Protect Program. A new program that will save businesses and employees, Caplan said.

"With this program, I am going to be able to hire back all of my employees, pay them their full salaries, and any benefits they have coming to them. The government will pay that money back to me," he said.

Jerry Tarnopol, the Executive Vice President of SBA Lending with Community Bank of Texas, explained how the $349 billion payroll program would work for small business owners.

"You will get two-and-a-half times what you would normally spend in an average month on payroll to pay your employees," he said. "You don't have to pay that money back as long as you keep everyone working for you up to June 30th."

Caplan said he spends $15,000 on average each month for Cavo Coffee's payroll. He said the government would provide about $37,000 for his employees.

The payroll program is a lifeline for millions of small business owners whose businesses have been impacted by the coronavirus pandemic.

"For me, this is the difference between going out of business and surviving," Caplan said.

3 Financial Steps Small-Business Owners Should Take Right Now - Entrepreneur

Posted: 03 Apr 2020 07:11 AM PDT

An industry expert shares how to secure cash flow and keep operations running during difficult times.

5 min read

The nation's small businesses are struggling, and there's no clear picture of when the current crisis will be over and things will be back to normal. It's a tough situation for any company to be in, and even a $2 trillion stimulus package won't be able to alleviate the worries for many small businesses yet. 

Ben Richmond, U.S. country manager for accounting-software platform Xero, shares the three financial steps small-business owners should take to get their companies in the best possible position. Read on for his tips. 

Optimize cash flow

"We're in unprecedented times," Richmond says. "Businesses will really need to put their soft skills to use. A lot of the techniques they need to use — which I'll call 'peacetime tactics' — they need to apply in a tailored manner, because their customers and suppliers are also going through a really tough time."

When you approach customers about money that's owed to you, be as empathetic as you can. But just because these conversations are uncomfortable doesn't mean you can avoid having them.

"When businesses are in a tough spot and owe multiple people money, it's the squeaky wheel that gets the oil," Richmond advises. Proactively reaching out to customers and collecting bills that are past due could be the difference between your business surviving or failing right now. Remember, when we do eventually come out of this crisis — which we will — the same customers you're approaching now will probably be there in the future. Be firm but fair. 

Although many parts of the country are shut down, other areas are still open for business, or your business might be deemed essential. If so, you need to rethink your payment terms. Or as Richmond puts it, "As you're taking on new business, you need to think about their financial positions.You might want to look at requiring prepayment or retainers or shortening your payment terms." 

After you focus on collecting money that's owed to you, you'll have a better idea of what type of cash will be flowing your way. That will help you start a collaborative dialogue with suppliers you owe money to. "If a business closes, the suppliers generally don't get any payment," Richmond says. " They'll want to work with companies that are being open, transparent and show confidence through having a plan."

Build three forecasts

"If you haven't done it before, it can be pretty daunting," Richmond concedes, though he also notes, "There are a lot of great cloud-based bookkeepers and accountants who can work remotely right now." 

Whether you hire someone or do it yourself, you want to create three forecasts: an optimistic, best-case one; a realistic likely one; and a worst-case one that imagines what will happen if customers who owe you money go out of business and that this crisis drags on for several more months. 

"It's an ever-evolving situation," Richmond says. "This thing is changing almost by the hour. Once you've got those scenarios, you'll be in a position where you can see if you have a surplus or a shortage. Then you can work with your team to see how big [the shortage] is and how you can solve it."

Plan for a cash flow shortage

As Richmond acknowledges, it's imperative to make a plan to minimize expenses as much as you can to cover a shortage. Where you can, cut discretionary and capital-intensive spending. "You want to understand what the fixed costs you can't avoid are, things like rent," Richmond says. "Have an open conversation with your landlords and see if you can negotiate better terms or rent holidays. Landlords will want to support people who have a plan."

Although it's difficult, you need to go through all your expenses and rank them in order of what you can cut first and what you'd like to avoid. "There is a point where you'll have to impact people," per Richmond. "And you want to avoid that as much as possible right now and support them."

Many businesses will be able to cover their shortages through federal funding from the Small Business Administration, which offers low interest rates and generous terms. Applying for these loans does take time and resources, though — Richmond estimates business owners who haven't done it before could spend up to 30 hours filling out all the paperwork. If you can, hiring a remote accountant or bookkeeper again could help ensure you follow all the rules and don't waste precious time and resources. 

Though SBA loans are the easiest way for businesses to get relief right now, there are other options. "Every business is in a different position," Richmond says. "Have an open conversation with your bank. Some businesses will have the benefit of family funds. I highly recommend, if you do go down that route, that you look at it commercially and dot all your i's and cross all your t's."

Another option is the Paycheck Protection Program for small businesses, which is authorizing $349 billion in loans that go towards employee retention and covering expenses. Applications opened Thursday, April 2, so prepare to apply as quickly as you can.

The world is in an unprecedented situation right now, but with the right preparation and hard choices, your business should be able to come out of it on the other side.


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