When the CARES (Coronavirus Aid, Relief, and Economic Security) Act passed into law, the part of the legislation most real estate investors and small-business owners were most excited about was the $350-billion loan program intended to tide over small businesses foundering under the weight of coronavirus-related isolation and quarantines. Unfortunately, like many assistance programs of this nature, the bill was passed into law without all of the specifics in place that would make the SBA lending programs actionable. As a result, banks say they have made few, if any loans, and are waiting on the SBA to provide clarification on certain key points before they can process any more applications.
“We are all waiting on the Small Business Administration,” said a Chase senior executive pointedly in an NBC News interview this past Friday. Other “mega-banks” also admitted delays, including Bank of America and Wells Fargo. Citibank refused to even make applications available, although the website promised in early April that “applications will be available shortly.”
What’s Going On at the SBA?
The issue with these loans is mainly that it is unclear how the forgiveness aspect of the programs will affect lenders. No matter how philanthropic the institution, no bank can make millions of dollars in forgivable loans without knowing how that money will ultimately be repaid. The assumption in the case of the SBA lending programs has been that the federal government will ultimately purchase the loans, thereby removing the burden of collecting on loans that do not meet forgiveness requirements and providing the lending institution with the cash it needs to repay investors.
However, without clear-cut commitments from the feds about how this will work, a major banker like Wells Fargo or Citibank cannot even begin to process applications. The banks have no idea how many of these loans they can afford to make or the scope and scale at which they can afford to lend because they have no firm, clear commitment from the government about the scope and scale of the bank end of the program. There is a clear (albeit round) number, $350 billion, but not enough information about how those funds make it from the federal government through the banks and to the borrowers.
The SBA has also not, as of time of publication, issued clear, universal guidance on how small businesses should calculate payroll. This means that banks are either making lots of mistakes when helping borrowers fill out applications or, again, refusing to take action until that clarification is provided. For example, there is a $100,000 per-employee cap on compensation in the Payroll Protection Program (PPP) loans. This could mean that an employee earning $102,000 annually is eligible for only $100,000 in compensation, or, according to some analysts, it could mean that employee is wholly ineligible for compensation through this program. On the other hand, an employee earning $99,999 a year would, based on that interpretation, be eligible for full compensation.
Lenders are asking, “Where is the line? Who is covered, and how should we delineate our employees’ pay?” Even lenders accepting applications do not have clear guidance on this issue, which means applications may contain mistakes or errors that could send them to the “bottom of the stack” without the small-business applicant ever knowing what went wrong.
What You Can Do to Keep Your Loan Application Front and Center
A lot of big lenders out there are recommending small business owners simply wait to apply for these valuable lifeline loans. Even investor and entrepreneur advocates are saying, “Sit back, let the lenders and the feds work it out, then apply.” This is a dangerous strategy to take. $350 billion is a lot of money, but at a loan cap of $10 million, that money will go far, far faster than most people think.
Furthermore, smaller banks and credit unions are already making executive decisions to start making these loans, so simply saying, “Well, I will wait on Wells Fargo to open the door to hundreds of thousands of applications and be one tiny fish in a very, very big pond of applicants” is probably not a very wise idea.
Real estate investors and small-business owners should track the progress of the program but also go ahead and explore the options as they stand today. Find a good lending platform that will not only accept your application and materials, but also keep you informed about updates to the program and help you navigate the process, including updating your application and information as necessary.
The odds are very, very good that you will qualify for some type of CARES Act assistance during this difficult time, but you must be willing to follow the news and update your application and information in real time in a dedicated, detail-oriented fashion.