ImpactAlpha, April 15 – Earlier action and COVID testing could have saved lives. Faster and more effective financial support could save millions of small businesses and their employees.
As the Paycheck Protection Program entered its second week, the prognosis was not good for millions of small businesses that have struggled to access the U.S. relief program, which offers forgivable loans to firms with fewer than 500 workers that retain their workforce through the crisis.
Already, nearly three-quarters of the $349 billion allocated to the program has been committed; Democrats and Republicans have been unable to break a stalemate to provide an additional $250 billion in relief funds. The fear is that larger businesses, chains, and even hedge funds with the right resources and banking relationships will grab the bulk of the funds, leaving only crumbs for truly vulnerable small businesses. Most at risk: businesses in African American, Latino, Native, immigrant and rural communities. Already, one in three small businesses have closed, according to a survey by Small Business Majority.
As of Tuesday afternoon, 1.1 million loan applications totaling $257 billion had been approved, an average of $234,000 per loan, according to the Small Business Administration, which runs the program. Small Business Majority is calling for an additional $600 billion in direct relief to small businesses.
The biggest impediment to access is that PPP loans are primarily flowing through big banks and established SBA lenders. That doesn’t reflect the evolving small business capital market. Less than half of small firms obtained funds from a bank in the last five years, according to a Fed survey earlier this year.
“Many small businesses do not rely on traditional banks for credit,” the report states. “Any program designed to support them should take that into consideration.”
This week, the government took the first steps to broaden PPP distribution channels with the addition of non-bank lenders including PayPal, Intuit and Square. These online ‘financial-tech’ lenders use technology to quickly assess risk and extend loans. They also have more leeway to lend than highly regulated banks do. That’s made online lenders an increasingly attractive choice for a diverse range of small businesses that might not be able to secure a bank loan.
“Alternative online lenders have the reach, relationships, and digital capabilities to reach those businesses most vulnerable – right now,” wrote the industry group Financial Innovation Now in a March letter to policymakers.
The COVID crisis may be fintech’s moment to shine. “This is where we see ultimately the value of speed and digital services,” says Jacob Haar of Community Investment Management, which provides capital to responsible fintech lenders. He noted that online lenders were not around in 2008 when the last crisis hit.
Three-quarters of Intuit’s QuickBooks Capital customers are microbusinesses with fewer than four full-time employees, for example. A 2018 study by the firm found that 60% of its customers would likely not get a loan elsewhere, and almost half had never applied for a loan before. More than a third of PayPal’s working capital loans go to low- and moderate income businesses, and nearly two-thirds to young firms in business for less than five years.
Square, which makes online loans to merchants who use its digital payment system, says 58% of its Square Capital loans went to women-owned businesses, and 35% to minority-owned businesses.
Other online lenders have applied to take part in the program but are still awaiting approval. One of them, San Francisco-based Funding Circle, has been processing applications and referring borrowers to lending partners while it waits for approval. The company’s typical customer has an average of $1 million in annual sales, 12 employees, and borrows roughly $133,000. Funding Circle’s average PPP request so far has been $43,000. That’s less than one-sixth of the average PPP loan size being reported by banks.
“We’re seeing smaller businesses who have been turned away from banks and traditional financial institutions are turning to non-depository lenders like Funding Circle,” said Ryan Metcalf, the company’s head of U.S. regulatory affairs and social impact. Bigger banks, he said, are prioritizing existing borrowers, larger firms and bigger loans.
There’s another way fintech firms can help strengthen the PPP process and get loans to those who most need it: by offering their tech finesse to smaller community lenders who lack such sophistication. That’s the opportunity StreetShares, an online lender serving veteran-owned businesses, is seizing on as it waits for its PPP lender application to be approved.
Many community banks and credit unions are not set up to process applications online – a challenge when branches are closed due to social distancing. Southern Bancorp, for example, a CDFI that is participating in the PPP, set up drive through windows at branches where customers could present documentation and sign paperwork.
The other challenge is the SBA’s clunky E-Tran interface, which requires applications to be uploaded one at a time. “It’s like a combination of a Commodore 64 and my first Atari,” says StreetShares’ Mark Rockefeller. “It’s really old school.”
Rockefeller’s team tweaked its digital underwriting software for the PPP process and married it with a tool from banking infrastructure provider Fiserv that can bulk upload E-Tran applications. The companies are now offering the technology to small banks. “Community banks get to be the heroes here,” says Rockefeller. “They just need just the tech.”
Main Street infrastructure
The COVID crisis underscores just how much banking has changed in the last decade, as banks have consolidated and alternative lenders have sprung up to fill the gaps. In addition to the growing presence of online lenders, CDFIs and nonprofit loan funds operate in underserved communities where they are often the only source of capital for local businesses. They also provide technical assistance and cultivate the kind of relationships with clients that bigger banks gave up long ago.
These community banks, credit unions, CDFIs, nonprofit loan funds and fintech lenders form the infrastructure for much of the Main Street economy, particularly underserved communities excluded by traditional financial service providers. Yet many of them were not, at least initially, eligible to participate in PPP.
The government relief program could leave behind community-based and fintech-enabled distribution channels for providing access to capital for a broader swath of businesses. The same underwriters could provide businesses in underserved communities with access to different types of capital with different terms and conditions – whether public, impact, philanthropic, catalytic or various blends of capital .
“It is incumbent on impact investors to reach businesses as quickly as possible,” says Community Investment Management’s Haar. “How do we step up with all the capital we have in our toolbox to serve the need for folks who need funding beyond what commercial capital can provide?”