The small business lifeline

In less than two weeks, banks and credit unions in the Rochester region funded hundreds of millions of dollars in Payroll Protection Program loans to local small businesses besieged by the coronavirus pandemic. Then the money ran out.

“It was unfortunate that we had to stop PPP applications,” says Keith Cleary, senior vice president at ESL Federal Credit Union. “These funds are vital to help out the many small businesses that still need relief.”

ESL and other lenders should be able to begin taking PPP loan applications again soon, however. After intense haggling on both sides of the aisle, the Senate on Tuesday passed the Protection Program and Health Care Enhancement Act, a $484 billion package that includes additional aid for small businesses. The House is expected to pass the legislation today, and President Donald Trump has said he would sign it.

The legislation contains $320 billion in new PPP funding—$60 billion of which is earmarked for community banks and small lenders—but the injection of cash might not cure the program’s ills.

Problems have extended beyond the inadequacy of the PPP’s initial $349 billion kitty. Confusion about the loan program’s details, difficulties with the application process and other problems hindered local lenders’ efforts to help small businesses get the cash they need. 

The PPP is one element of the more than $2 trillion Coronavirus Aid Relief and Economic Security Act that President Donald Trump signed on March 27. Under the program, small businesses, nonprofits and other organizations can obtain very low-interest loans backed by the U.S. Small Business Administration in order to keep their employees on the job. 

“They’re going to use the proceeds for maintaining payroll or covering other overhead costs—rent, utilities, interest expense etc.,” says Martin Birmingham, Five Star Bank president and CEO.

Qualifying for the loans

To qualify for one of the SBA-guaranteed loans, a business must employ 500 people or fewer, demonstrate that it has suffered as a result of the coronavirus or the responses to it, and meet other conditions. With those funds, it is hoped that small businesses will be able to pay their employees, and stay afloat until the pandemic passes. Sole proprietors, contractors, the self-employed and some nonprofits are also eligible to apply. Lenders began tendering applications to the SBA on April 3. All loan applications must be in by June 30. 

Small businesses welcomed the loan program with open arms. Seventy percent of the small firms that responded to a recent National Federation of Independent Business survey had tried to apply for PPP loans, and another 10 percent planned to make their requests within a month. Monroe County’s small businesses, which numbered more than 13,500 in 2016, also signaled keen interest. Five Star’s branches received 500 inquiries about PPP loans in the first three days that they were available.

The application process

Here’s how the PPP loan approval process goes, in a nutshell. A business obtains an application from the SBA’s website or an SBA-approved lender. After filling it out, the firm tenders it to the bank or credit union, along with payroll information, tax records and other supporting documentation. The lender makes sure the application and documentation are correct—and just that.

“There’s no underwriting in the traditional sense,” says Frank Hamlin III, president and CEO of Canandaigua National Bank and Trust. “We’re not getting collateral, were not doing in-depth analysis of financials, nor does the government want us to.”

Though banks and credit unions are willing to take loan applications over the telephone, or in very rare cases, in person, most prefer that customers tender them online.  An SBA-registered member of the lender’s staff then checks the materials, and uses the agency’s formula to calculate the amount of money to be loaned. Payroll must account for at least 75 percent of the amount borrowed. Once everything is ready, the lender digitally transmits the application package to the SBA, which decides whether to approve it. 

The SBA will fully forgive a PPP loan, and reimburse the lender for it, if the funds are used to pay such expenses as rent, utilities, interest on mortgages and employees’ wages, and the firm maintains its payroll. Money not used for those purposes must be repaid within two years. 

Problems from the start

Problems with the PPP cropped up early on. To begin with, the SBA tinkered with terms for borrowing right up to the day before the loans became available. 

“They changed the program a couple times in, like, 72 hours,” Hamlin explains.

The loans’ interest rate was initially 4 percent, then was dropped to 0.5 percent and finally settled at 1 percent. Other details were changed as well—the loans went from having a 10-year to a two-year term. The SBA also has been less than clear about the requirements for forgiving the debt.

“The banks want to understand what their responsibility is in terms of monitoring and tracking the underlying documentation, so that when we come to the end of the period where loan forgiveness is considered we’re all on the same page—the borrower, the bank and the Small Business Administration,” Birmingham explains.

Lenders also are unclear about the loan’s timeline.

“Normally, we would have a pretty good idea of the time it takes from application to approval to actually receiving the funds,” Cleary says. “That’s something that a business owner would really appreciate knowing.”

Reaching the SBA by phone has sometimes been hard, and the people on the other end of the line haven’t always been able to field lenders’ questions.  

“As helpful as they were trying to be, I think that trying to take directions from the national folks, they weren’t getting the answers they wanted,” explains Tim Jones, Genesee Regional Bank executive vice president. “We couldn’t get the answers that we wanted.” 

Confusion about the PPP loan’s requirements and application process has left some local lenders scrambling.

“The banks were trying to respond and set up workflows and systems, and make sure they’re using the right application, the right rules, the right structure,” says Charles Vita, CNB executive vice president. “We had to do a lot of reworks, as the SBA changed the rules two to three times.”

Finally, the volume of PPP loan applications has sometimes been too much for E-Tran, the SBA’s digital platform for applications. Response times have ranged from two to 36 hours.

“The SBA website that this is logged through certainly wasn’t designed for this kind of crush,” Hamlin notes. 

E-Tran went down for as much as four hours just two days after the SBA began accepting applications. Lenders around the U.S. were sometimes forced to take applications by phone, which requires more time and effort.

As a result of Gov. Andrew Cuomo’s New York State on PAUSE executive order, and concerns about spreading the coronavirus, many bank and credit union employees are home—90 percent of those on GRB’s payroll are doing their jobs remotely. Many banks and credit unions have closed branches to the public or severely curtailed onsite operations. 

“Lobbies are closed, we take in-person services by appointment, and then a number of transaction services through our drive-throughs,” says Jeremy Newman, ESL vice president and deputy general counsel.

Reassigning staff

At the same time, the current economic climate has reduced demands for lenders’ other services, freeing some on their rosters to work on PPP loans. CNB, which began with just five employees who were registered to file PPP loan applications on the SBA’s website, now has a total of 18. 

“Some of those staff members that we’ve reassigned have been from areas where we’re not having as much traffic,” Senior Vice President Michelle Pedzich says.

CNB also was able to prepare itself for the torrent of PPP loan applications. 

“We used our marketing group to create a website—(an) information content landing page—along with a semi-automated application process to make it easier for our customers to apply,” Vita says. 

Reduced demand for other services has allowed ESL as well to reassign staff to assisting with PPP loans, while continuing to take care of its other customers.

“We’ve got a dedicated contact center, we’ve got certain branch employees supporting the contact center, and then we’ve got hundreds of employees in our branches all trained and prepared,” Cleary says. 

GRB has 26 employees directly helping businesses apply for PPP loans, including 20 commercial bankers and relationship managers. Customers can use a spreadsheet created in-house to begin that process.

“They were able to fill out the application, but also to put all the payroll information on the spreadsheet,” Jones explains. “It calculated the loan amount for them.”

Lenders’ efforts appear to have proved out so far. SBA approved a total of $114 million in loans to GRB’s customers before the PPP’s original appropriation was gone, of which the bank funded about $82 million. More than 2,500 of the small businesses that came to CNB, including existing and new customers, secured SBA approval for PPP loans.

“That represents over $289 million of monies deployed into our local Rochester and Finger Lakes communities,” Hamlin says.

While lenders’ efforts benefit local small businesses and their communities, PPP loans probably won’t help their bottom lines—not at 1 percent interest. 

“We’re not making money on the interest rate, which is frankly below our cost of funds,” Hamlin explains.

Still, banks and credit unions could benefit in other ways.

“The one silver lining here is that we’re actually generating business from new clients,” Jones says.

For now, local lenders await word from Washington on the PPP program.

“We are prepared to continue to seek SBA approval on applications as soon as funding is restored,” Cleary says.

Mike Costanza is a Rochester Beacon contributing writer. All Rochester Beacon coronavirus articles are collected here.