Small Businesses Face Major Issues When Applying For Bailout Loans Amid COVID-19 Outbreak

The frenzy began before most banks even opened. By 9 a.m. on Friday, banks had already processed 700 loans totaling $2.5 million for small businesses as the spigot opened on a federal emergency relief program. But that was just the beginning. By early afternoon that number had ballooned to $1.8 billion. And by evening it was $3.2 billion in loans that will go to more than 10,000 small businesses desperate to save themselves.

It was all part of a scramble by small businesses around the country to stay afloat by grabbing a piece of a Treasury Department program to pump $349 billion into the sputtering U.S. economy due to the coronavirus pandemic. Small businesses, which employ nearly half of America’s private-sector workers, are hemorrhaging, and the loans are meant to help them retain employees or rehire those they let go.

But business owners found that applying for the money was harder than they had anticipated. Lenders had received guidance from the Treasury Department only the night before, just hours before they were to start making loans. On top of that, banks imposed their own rules on which businesses could and couldn’t borrow. And many lenders, including JPMorgan Chase, the nation’s largest, didn’t have their websites ready for borrowers until later Friday.

For small-business owners, many of whom have run out of cash to pay salaries and rent, time was everything. Fearful that the money will run out — Treasury Secretary Steven Mnuchin said the loans would be on a first-come, first-served basis — they flooded banks with calls and emails as they tried to get to the front of the line.

The small-business bailout — otherwise known as the “Paycheck Protection Program” (PPP) — was arguably the most ambitious provision of the $2 trillion stimulus bill that Congress passed.

Under the policy, any business (or nonprofit, veterans organization, or tribal concern) with 500 or fewer employees is eligible for a government-backed loan equivalent to eight weeks of its prior average payroll, plus an additional 25 percent of that sum. In reality, these loans are really more like grants: Firms don’t need to make any payments on their loans for six months — and if they maintain their workforces, then the government will forgive almost all of the loan. The idea is to keep the small-business sector frozen in place, so that it can rapidly defrost once the coronavirus pandemic has passed.

But you can’t freeze something for later if it’s already spoiled. And many small firms directly impacted by social-distancing measures were already rotting by the time Congress finally passed legislation. For these reasons, the Trump administration was eager to get the PPP up and running as quickly as possible. To that end, the administration made it possible for small-business owners to secure government-backed loans at any federally insured lender that wishes to participate in the program, regardless of whether such banks or credit unions are affiliated with the Small Business Administration, and officially launched the program last Friday.

Some issues that are coming up among the bailout include:

• Banks see the bailout as high risk, low reward.
• The bailout fund is far too small.
• The most vulnerable small/family businesses will likely walk away empty handed.

America is facing yet another grim unemployment report. On Friday, the Labor Department said employers shed 701,000 jobs last month — the biggest monthly drop in more than a decade, ending a landmark 113 months of job creation. Nearly 10 million people applied for unemployment benefits over the previous two weeks.

Companies with fewer than 500 workers have slashed millions of jobs in recent weeks as restaurants, bars, and retailers across the country were forced to shut their doors.

The PPP program offers companies loans of up to $10 million. The Small Business Administration is backing the loans, but customers must apply through banks or other lenders.

Bank of America was the first big bank to begin taking applications, and it had around 10,000 by early Friday, Brian Moynihan, the bank’s chief executive, said on CNBC. By evening, its loan requests totaled $22 billion, a spokesman said.

But many Bank of America customers were dismayed to find that the lender would not work with them because they had only accounts, and not loans, with the bank. The bank said it was accepting applications only from customers who had both “a pre-existing business lending and business deposit relationship” as of Feb. 15.

Several Arizona businesses reached out to The Upper Middle to report they too faced the major pushbacks from their banks.

Arizona businessman Eli Faustinos shared his experience, “I have a small business with about 20 employees and bank with Bank of America for the last 5 years.  I received an email from the bank explaining that they won’t process my application unless I have both a banking relationship and a lending relationship with them. I have been able to run my business without debt and now that I truly need it, my bank won’t support me, despite the fact that this is a national emergency and they are being given the funds to support their customers.  What a huge disappointment and betrayal.  There has to be a legal way to stop them from doing this.”

An Arizona businesswoman faced the same action with Bank of America. “I too have been a long time client of Bank of America and as other people have indicated I do not have any debt or loans so I do not qualify after filling out the paperwork. I have a credit card with another bank that at the time provided me with credit line that I needed early when I started my business but I have never been able to obtain that with my own bank after continuously banking with them for over 30 years. I now have to figure out how I am going to pay utilities, insurance premiums, and equipment leases. Even though I have only three employees that have been with me over 20  years, I would hate to lose them and I am doing all that I can to keep this business going remotely with my staff.”

Dean Athanasia, the head of Bank of America’s consumer and small business group, sent a memo to employees on Friday pledging to “enhance” the program soon “to accommodate more and more of our small-business clients.”

JPMorgan Chase said it would take applications only from people who had a business checking account with the bank as of Feb. 15. A notice on Wells Fargo’s website said it, too, required an existing business checking account. Citi has not yet announced its rules; a spokesman said it was reviewing the program’s rules and planned to start accepting applications “as soon as possible.”

Hundreds of business owners complained on Twitter that they were ineligible for their bank’s program or that it had not yet started accepting applications. The National Federation of Independent Business said many feared they would be shut out of the aid effort.

Adding to the pressure: Many expect the program’s $349 billion lending pool to run out unless Congress allocates more money.

The Treasury Department had hoped to bring nonbank lenders into the program, but as of Friday, the government had not even released an application that would let financial technology companies apply to participate, industry executives said.

Lenders struggled with operational issues throughout Friday.

Chase’s website for the program returned error messages at times in the morning, leading many aspiring applicants to assume it was overwhelmed with traffic.

A Chase spokeswoman said that the site had not crashed and that it was taken offline for updates. The bank started accepting loan requests shortly after 1 p.m.

Some of the features that were supposed to make it easier for banks to quickly ramp up lending through the program may actually make it harder for people who need the money to get it.

Participating banks are protected from liability for some things that regulators would normally punish them for, like not performing a thorough-enough background check on a borrower who later turns out to be a criminal. But they aren’t completely exempt from having to look into customers’ profiles, and one way they can avoid having to do too much extra paperwork is to lend only to existing customers.

That barrier is causing problems for small businesses that have not borrowed money recently. It is an even bigger problem for minority-owned businesses, which struggle even in good times to get banks to lend to them.

Another fear is that the program will be overrun by fundamentally healthy businesses eager to have the government cover up to two months of their payroll costs. Borrowers don’t have to document a hardship like a sharp sales drop; they simply have to affirm that “current economic uncertainty” makes the aid necessary to support their “ongoing operations.”

Despite the paycheck program’s chaotic start, Mr. Steinour of Huntington Bank said he hoped it would play a vital role in salvaging tens of thousands of businesses that would otherwise collapse.

“This is an extraordinary program, and to have it all put together in a week was a phenomenal, around-the-clock effort,” he said.

Click here for small business loan resources from the U.S. Small Business Association.