SBA Payroll Protection Program is Closed… For Now

Community banks are getting a reputational tailwind after doing their part to disburse the Small Business Association’s (SBA) Payroll Protection Program (PPP) loan funds to small businesses with Jim Cramer famously saying that he, “should have used a community bank” on CNBC.

Community banks and credit unions have been the primary vehicle for small business funding and found creative ways to navigate an uncertain and novel loan program from the SBA lending program. As of Thursday, April 16, the Small Business Administration announced that its Payroll Protection Program was no longer accepting new applications and that its funding limit had been reached. This news comes 13 days after the SBA had initially opened the program to help American small businesses.

What Did We Learn From This First Round of Coronavirus Relief Funding?

Looking back at a frantic two weeks, the challenges facing community banks and credit unions became very clear; competition, organization, and regulatory uncertainty. The scramble to get funding to small businesses put on display how competitive the banking environment has become with nontraditional lenders in the fintech space getting SBA approval to underwrite and fund these types of loans. This falls in line with trends we have seen over the last five years in which the prominence of fintech and digital lenders has been on the rise, not only for consumers, but for commercial as well.

The way banks have dealt with the influx of requests have been wide ranging from internal manual processes to completely outsourcing the function altogether to third parties. Banks who are accustomed to a large SBA volume were quick to adopt these loans into their existing processes. Others, who may see single digit SBA loans in a quarter, relied on a bevvy of software solutions and consulting firms to plug their process and tighten their organization around them.

In many cases, banks have refused to participate altogether. Some of this is due to internal processes but much of it may be caused by regulatory uncertainty. The SBA released interim rules and guidelines as did the FDIC, OCC, and the Federal Reserve, citing the requirements for SBA guarantees and allowing these loans to be risk weighted at 0%. However, these rules have changed several times before and during the program’s short life, leaving bankers feeling uneasy about the true risk associated with these loans.

What’s to Come for Community Banks and Credit Unions Now?

Now at the end of a whirlwind two weeks of SBA lending activity, there are a few things we can realistically expect moving forward. The first is that this will not be the last round of funding. Outside of some party bickering, there is a bi-partisan movement to help small business and additional funding is forthcoming. The amount may be unknown but those who have been on the sidelines must decide in the coming days whether they will decide to get into the game.

The next is that no organization will be able to foresee rule changes for these loans, they will have to reflect the current environment and be as nimble about their process as possible. Organization will be key as rule and document requirement changes will force institutions to have reliable data to look back on. Additionally, as we move into a period that may be difficult for many financial institutions, the competitive landscape will create volatility in market share as small business owners are prompted to create new relationships with lenders sparked by this new assistance.

If there are any questions on how to handle SBA lending in general, speak to someone at Baker Hill about our solution. We have an easy, automated way for your borrowers to give you the information you need, your teams to underwrite, and submit to the SBA. It gives you one place to store and view all your data, the flexibility to look back and gather new information and documents, and the ability to have useful and powerful reporting. Once the PPP program is exhausted for a second time (maybe third?) you can repurpose our solution to handle more traditional SBA lending lines creating an ROI that will extend far beyond the life of a temporary program.

For additional resources on the SBA Paycheck Protection Program and how Baker Hill can help, visit our resource page.