By: First Union
Where the Small Business Relief Program Went Wrong…
As part of the 2 trillion dollar federal recovery effort, just over 650 billion was allocated to help small businesses that have most definitely been suffering given the current crisis. COVID-19 saw businesses across the nation have to shut their doors while laying off workers in droves. Any way you look at it, small businesses took some major hits over the past couple of months. And so, the PPP program (Paycheck Protection Program/) was instituted to try and help many of these smaller companies simply survive until the country reopens.
However, it has been just over four weeks and the program has been viewed by many as very much broken. Problem after problem has arisen since the PPP started. And with oversights and lax regulations, those problems will just continue to grow if not addressed. In the meantime, small businesses across the nation continue to suffer from many having to close up shop because they cannot get the relief funds necessary to keep going.
A Few of The Primary Problems
First off, is the fact that within two weeks the program ran out of funds. Numerous company owners were thus left without access to this lifeline that, upon its announcement, they were counting on. Add to that the fact that money went to some companies that no one would categorize as small businesses—quite the contrary. There, of course, was the Shake Shack debacle. Having received a loan in the amount of 10 million, the large national chain returned the funds that should have otherwise gone to much needier small businesses in this circumstance. And Shake Shack wasn't the only one. Other large chains such as Potbelly's and The Ritz Carlton in Atlanta, GA also received substantial loans through the PPP.
How did this happen? Some experts cite loopholes that offered incentives to banks to make significant loans to already established mid and large-sized businesses. Unfortunately, upon issuing the next round of funding, many of the problems were not addressed. And so, yet again, tons of small businesses have been left without the bailout money they thought they'd be getting given the scope of the program in place.
There still is time however for the Treasury Department to make some critical changes and thereby ensure that the business relief funds are indeed going to the small companies that so desperately need the money right now.
Consider Capping Loans
While not many of the loans issued during the first wave were over 1 million dollars, the ones that were, accounted for a large portion of all available funds. And therefore, this is one of the reasons why so many small business owners were unable to receive any money. A needed change: any assistance given out under the program should be capped. Capping the loans at a set amount—some have suggested one million—will ensure that more funds are available to more businesses. The Treasury Department also needs to prioritize smaller loan requests. The companies that are falling through the cracks are generally not asking for millions. This would allow so many more businesses to gain access to necessary funds.
Reevaluate Lender Payments
As of now, the lenders who issue the loans get paid according to loan value—so in essence, they receive a percentage of the total amount loaned. This means that if they issue a 5 million dollar loan, they receive much more than they would by transacting a 400k loan. And so, banks naturally moved to generate the larger loans to bigger companies. Instituting a flat fee per PPP loan instead would level the playing field. This would then also encourage lenders to make more loans to smaller companies across the board.
Revisit Rules that Favor Existing Customers
There are currently regulations in place that encourage banks to loan to existing customers, especially if a said customer already has financing in place with a given lender. And yet, with the small businesses now struggling, many of them don't have existing loans with traditional lenders. This has become a major hurdle for some. One change made in the second wave of funding was to deliberately set aside 60 billion to be disbursed by small banks, as Congress deemed that they tended to have smaller clients. While in theory, this was not a bad idea, the definition of "smaller bank" was not necessarily in line with the original goals. Several fairly large banks received a portion of that 60 billion. Not to mention, we have to keep in mind, there are small businesses that patronize large banks and so yet again, they are left without access to the relief money. What needs to happen is for the Treasury to step in and ensure that these smaller banks do in fact loan to small businesses only.
Since the initial problems with PPP funds, the Treasury has issued several new regulations. This has since resulted in many of the larger firms that received money to return that money so that it could go to the small businesses who direly need it in our current climate. Moving forward, Congress and the Treasury without question have to tighten eligibility criteria, they need to revisit lending incentives and thus prioritize the truly small businesses that are otherwise drowning.
At First Union Lending, we certainly understand how difficult many small businesses currently have it. This is why we are doing our best to help smaller companies survive this pandemic. We offer fast and flexible loan programs that can be used for whatever you may need to ensure that your business makes it through. From merchant cash advances to lines of credit to short term loans, we have a program to fit just about every business need. And all of our products are customized for each company—no one-size-fits-all approach with us. Call today and see how we can help you!