BANK OF THE FUTURE

The CARES Act: Paving the Way for SBA Lenders

 
May 26, 2020

The impact of the COVID-19 pandemic on small business owners across the United States (US) has been devastating, rendering (millions of) them incapable of going to work. As mandated by several US states, anything that falls under the ‘non-essential’ category is closed for customers. Small businesses are considered the backbone of the US economy, with more than 30 million making up a whopping 99.9% of all United States businesses.

Currently, close to 80% of small businesses are adversely impacted by the prevailing pandemic, according to a research by the National Federation of Independent Business (NFIB) research center. These businesses are experiencing a sharp decline in sales owing to staffing constraints and logistical issues like supply chain disruptions. The other 20% are on the positive side for now, doing reasonably well because of strong demand for essential products and services.

How Small Business Owners are Fighting for Survival

With the cash flow abruptly cut off, businesses are struggling to pay salaries to their employees, monthly rent for their stores, and so on. Most of the small business owners are already taking necessary steps to protect themselves from the impending financial crisis. Some, for instance, are reaching out to lending institutions for loan payment assistance and additional financing needs to support workforce payroll. We are also seeing local communities come to the rescue of these distressed businesses. For example, some are getting listed on websites supported by local bodies, where consumers can buy gift cards that can be used at a later time.

A Little CARE Goes a Long Way

The US government enacted the CARES Act on March 27, 2020, which aims to direct approximately $659 billion to small business owners, enabling them to continue making payroll payments to their employees over the next few months. The program will engage lenders who will make these loans available to small businesses during this crunch time.

A key aspect of this program is that the amount a business spends in eight weeks  - starting from the day the Act was passed - on mortgage, payroll, insurance and rent will be completely waived off and made tax free, provided its employees are neither terminated nor have to contend with pay cuts. As many business owners have started seeking financial help, banks on the other hand are scrambling to understand the applicable rules for the loan program outlined by the act. They need to make necessary changes to their systems rather quickly to start processing such loan applications for effective and timely disbursal of funds.

Coronavirus Relief Options for Small Businesses

Currently, two types of relief measures are being made available, Economic Injury Disaster Loans (EIDL) and Paycheck Protection Program (PPP). Businesses with under 500 employees as well as nonprofits and veterans’ organizations qualify for the EIDL loans. It is offered for up to $2 million for working capital needs such as fixed debt and payroll with automatic payment deferment of one year. However, the interest begins accruing from the time the funds are disbursed.

On the other hand, the PPP loans are provided for up to $10 million, with the eligibility of the loan amount being calculated by taking the average of payroll costs (up to $100,000 per annum per employee) multiplied by 2.5.

The immediate need for SBA lenders is to provide options to the borrowers to submit their applications either online, via emails or other channels, and quickly process them.

The next stage is the loan forgiveness request from the borrower at the end of the 60 days’ period; lenders are required to have a process in place to review the documents, ensuring adherence to SBA PPP guidelines – that the funds were used for payroll, mortgage, rent, and utilities only, in order to provide waiver approval either in full or partial.

While lenders are quickly making changes to their core loan platforms and integrations, many of the large banks have notified their customers about the delay in accepting applications while the details are being worked out – all this is  testing borrowers’ patience.

So, what next?

With thousands of loan applications to be processed, lenders are also facing technical challenges and confusion around integrating with SBA’s online portal for approvals. Currently, many of them are exploring various options to automate loan submissions to the SBA. They understand these are some initial operational challenges and realize that PPP has opened the doors for banks, credit unions, and fintechs to enter the SBA market and acquire new customers.

The small business stimulus package could be the first step in the right direction to support the small business community in making them resilient in the face of the COVID-19 induced economic crisis. The magnitude of the economic impact on small businesses, how long it will last, and how quickly these businesses can recover – all remains to be seen. However, what we do know, is that the Paycheck Protection Program will provide new opportunities to banks and fintechs as they help the hardest hit wade through the COVID-19 crisis.

Minesh Mudaliar is a business architect with the Lending Advisory Group of TCS’ Banking, Financial Services and Insurance (BFSI) business unit. He has more than 16 years of experience in the lending space and was a retail banker before joining TCS. Having worked on various projects for North American banking players, Minesh has built a strong expertise in the lending domain. He works closely with various TCS banking relationships for thought leadership and domain-related support.