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PPP Lending in 2021: How Banks Can Make the Most of a Second Shot to Serve Small Businesses

Congress has passed a $900 billion COVID-19 relief bill by an overwhelming margin – the Senate passed it 92-6 – and President Trump signed the bill on December 27, 2020. It will send qualifying Americans $600 stimulus checks after the first payment came in at $1,200. The package sets aside $325 billion for small businesses, with $284.5 billion of that amount going towards a new Paycheck Protection Program (PPP).

The Coronavirus Aid, Relief, and Economic Security (CARES) Act brought us the first round of PPP, which was later amended by the Paycheck Protection Program Flexibility Act (PPPFA). Lawmakers tried to craft the legislation in a way that would funnel assistance to small business owners using the infrastructure of the SBA, a mechanism that banks and other small business lenders know well.

But larger companies vacuumed up a disproportionate share of the funds: according to the Small Business Administration (SBA), 1% of borrowers received more than 25% of the money in the first round of PPP. The process left a sour taste in the mouths of small business owners; a May survey by Greenwich Associates concluded that more than 20% of small businesses and middle market companies say they are likely to switch banks because of how their banks performed during the COVID-19 crisis.

Why Did Lenders Struggle to Service Small Borrowers During Round 1 of the Paycheck Protection Program?

The CARES Act made it easy for lending institutions to disburse PPP funds to larger companies and lenders’ legacy systems made it challenging to provide funds to truly small and midsize businesses (SMBs).

Why lending to larger companies was easier, more profitable, but bad strategy:

The first round of PPP allowed public companies to partake in the program, and set a loan program maximum of $10 million and an employee cap of 500 – all facilitating the flow of funds towards larger enterprises. There were egregious cases of fraud; a Texas man, for example, received $1.5 million for a company that hadn’t been in operation since 2018 and used the money to buy a Tesla.

Not enough money went to those that needed it the most – namely the hardest-hit small businesses – and as a result, those businesses are now suffering. According to a recent survey by the National Federation of Independent Businesses, 25% of small businesses think they’ll go under in the next six months if the economy doesn’t improve. That’s 5x higher than the 5% that said the same thing just a month before the new legislation – in November.

Antiquated systems still threaten to prevent the flow of money to small borrowers:

Small business owners increasingly expect to be able to handle just about everything online – the pandemic has simply accelerated an existing trend – and getting an SBA loan is no different. But many banks and credit unions still require would-be borrowers to apply in person or with a manually-filled application. Setting aside the risks of meeting in person in 2020, PPP funds were quickly getting exhausted. Wasting time on an outdated process was not an option.

The inefficiencies don’t stop with the branch network, either. Many lenders rely on manual processes such as filling out paper forms and scanning documents. Many were looking for borrowers to ‘wet-sign’ their PPP applications, even as state governments were making it harder for anyone to visit a local Fedex Office or Staples store. On top of that, there were PPP-specific requirements that made already inefficient processes even lengthier, including rule changes and loan forgiveness eligibility calculations.

Facing these difficulties, many lenders prioritized their existing customers – the past business dealings made the approval process more seamless. But, of course, larger companies were more likely to have existing accounts at institutions, which left too many small borrowers out of luck.

How Can Banks Use the Second Paycheck Protection Program to Win More Small Business Clients?

The latest relief package has restrictions that will prevent larger companies from taking a huge chunk of the funds. Public companies will not be eligible for the program, decreasing the chances that large tech companies with small numbers of employees will be able to qualify. The employee cap itself will be decreased – from 500 to 300. Ditto for the loan maximum; it will drop from $10 million to $2 million.

A tired structure will be used by administrators to reimburse lenders, and it will offer strong incentives to make smaller loans. The lender processing fees will be as follows:

  • Loans up to $50,000 will be the lesser of 50% of the principal amount or $2,500.
  • Loans between $50,000 and $350,000 will be 5%.
  • Loans of $350,000 and above will be 3%.

This structure should ensure that small business loans are worth lenders’ time, increasing the chances that loans find their way to struggling mom-and-pop businesses. But the question now facing lenders is can they operate at scale across the smaller spectrum of sole proprietorship and partnership businesses that characterized the smaller end of the PPP borrower pool?

Providing service to these truly small businesses at this moment makes strong strategic sense. Borrowers who develop a relationship with a lender during a period of crisis often develop a stronger financial relationship with that company over the long-term. Small companies that receive a PPP loan today can grow and become highly profitable over time, if serviced the right way.

Why Loan Forgiveness is a Big Opportunity for Lenders

Loan forgiveness promises to be a lot simpler after its complexities scared some small business owners from applying for the first round of PPP funds. Borrowers will still be able to choose an eight-week period or 24-week period, just like under the PPPFA. The 60/40 cost allocation between payroll and nonpayroll costs – lowered from the original 75/25 allocation – will also remain the threshold for full loan forgiveness.

What has changed, however, is the loan forgiveness application process itself. It will be much easier and simpler for loans under $150,000. The borrower will just need to send the lender a one-page (or less) certification that, according to the legislation, “includes a description of the number of employees the borrower was able to retain because of the covered loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount.”

The Economic Injury Disaster Loan (EIDL) Advance Deduction will also be repealed. Under the CARES Act, PPP borrowers were forced to subtract their EIDL advance amount from their PPP forgiveness amount.

These changes are good for borrowers, but they are also good for lenders. A simpler process that means clients will be more comfortable completing the required steps with their bank can ensure that these small business owners walk away feeling better about their experience than they did during the initial PPP funding round. For lenders, having a smooth, online forgiveness process is one important part of that strategy for capitalizing on the benefits (especially in goodwill) that an easier loan forgiveness process will offer.

What Steps Can Lenders Take to Improve Their Services for the Second Round of PPP?

Banks and credit unions must create more efficient processes if they hope to build long-term relationships with business owners during the second round of the Paycheck Protection Program. Financial institutions should look to automate where possible, while maintaining the human touch for parts that can’t be turned over to software. Finding the right business lending platform is one of the first steps.

The archaic onboarding process at a lot of institutions has plenty of room for improvement. In-person meetings and paper documents need to be replaced by calls and online applications. Lenders can use software that integrates with borrowers’ software to quickly harvest data. Instead of requiring payroll data to be entered manually, lenders can use software that links to borrowers’ payroll applications.

Artificial intelligence (AI) can evaluate borrowers’ eligibility, running the numbers to ensure that they qualify for Paycheck Protection Program loans. Human beings, however, should still be the final arbiters – they will just have a lot less to take into consideration.

After a loan application is approved, banks and credit unions should use customer relationship management (CRM) software to make it easier to stay up-to-date with customers. This is important under normal circumstances, but even more so with Paycheck Protection Program loans; with the rules likely to change over time, financial institutions need to have customer data at their fingertips. Many institutions were left scrambling when the PPPFA was signed into law in June, and should try to avoid a repeat if there are modifications to the second round.

Banks and credit unions must allay borrowers’ concerns about loan forgiveness eligibility and the loan forgiveness application process – should it come to that – ahead of time. The fear of being on the hook for a large loan in the event that business doesn’t pick up has gripped countless small business owners. Financial institutions can do two things to ease those concerns: a) educate business owners on loan forgiveness eligibility and b) give borrowers confidence that they have the infrastructure in place to efficiently handle the loan forgiveness process.

Lenders Can Improve Borrower Sentiment, Use PPP to Grow SMB Banking

Many financial institutions are facing an uphill battle with small business owners; a May survey by Greenwich Associates found that 29% of small businesses said their opinion of banks has worsened due to PPP, while only 13% said their opinions improved.

Banks and credit unions are getting a second chance to capture small business owners’ trust and loyalty with the next round of the Paycheck Protection Program. Many borrowers that felt burned by their experience in the first PPP are going to be evaluating their options this time, but savvy financial institutions can foster confidence by demonstrating to borrowers that it will be different – and better – this time.