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It’s not easy to shovel out billions of dollars of loans to legions of small businesses in a matter of weeks. But that’s what the US, UK, and other countries are trying to do to keep thousands of them from going out of business. Smaller operators are even more important in developing economies, and they represent 90% of businesses and more than half of employment around the globe.
Britain’s SME program went live last week and may offer some lessons for the American effort, which is supposed be available today. The lesson so far is that this is going to be messy. In the UK, smaller companies can use the Coronavirus Business Interruption Loan Scheme to borrow £5 million ($6.2 million). The British Business Bank will guarantee 80% of the principle for the lender.
The legislation was written quickly and has already been revised:
- Borrowers have complained that banks were pushing them to use banks’ existing products before offering the emergency loans—even though this appears to be in line with guidance from the government. The UK chancellor is planning to remove the requirement for banks to assess whether SMEs are eligible for other types of loans, according to Sky News.
- Five UK banks temporarily pulled out because they’ve been swamped with loan applications, Bloomberg reports.
- Some banks required personal guarantees for the emergency loans and they’ve been walloped with criticism; the new guidelines remove this requirement for loans of less than £250,000.
- Banks have been hit with record call volume at the same time their staff members are navigating work-from-home arrangements. Trade group UK Finance is recommending customers go online and use bank websites if possible.
In the US, the Paycheck Protection Program could going live as soon as today. The Small Business Administration loans are intended for any business with fewer than 500 employees, including self-employed people, and are available retroactively from Feb. 15 so that workers can be rehired.
As of yesterday, lenders still had more questions than answers about the program.
Chris Hurn, the CEO of Fountainhead, a specialist in SBA loans in Florida, said in a conference call that he didn’t yet know how intensive the documentation will be, and couldn’t assess how many people he would need to hire to process the borrowing. He argued that the loans, paying an interest rate of 0.5%, wouldn’t be economical for securitization. With no secondary market for the debt, Hurn said, lenders won’t be able to get the debt off of their books to make new loans. A 31-page “interim final rule” arrived late on Thursday, according to CNBC.
While banks are being pushed to make loans as quickly as possible, they risk getting sued down the road. That’s what happened in the aftermath of 2008 crisis when large lenders made government-guaranteed loans that went sour, according to Bill Isaac, former chairman of the Federal Deposit Insurance Corporation (FDIC). The Independent Community Bankers of America said yesterday that the US program puts too much liability on the lenders, and that the 0.5% interest rate is below the break-even rate for community banks.
“All the banks should be willing to step up to the plate to help the country,” Isaac said. “But in making these loans, if they really believe they would not have made it but for the guarantee, they should make that very clear in the paperwork with the government.”
Even if the SBA provides sufficient guidance for the loans this week, Hurn said there wouldn’t be many banks able to “crank up the machinery” that quickly in the US. Based on yesterday’s record jobless claims, the program risks being much too late.
“I worry a lot about whether or not the loans will be dispersed fast enough,” Karen Mills, a senior fellow at Harvard Business School, said in an email. “The pipes available to the government are frankly not quick or reliable enough. Some banks seem to be tightening credit, in a time when small businesses need it most.”
Fintechs in the UK and the US, meanwhile, have been pushing for a piece of the action. Isaac, the former FDIC chairman, says he would be wary of relying on new companies that haven’t proved that their lending models will hold up during a recession. Hurn, at Fountainhead, said fintechs will also have limited capacity if there’s not a secondary market for the loans.
But Mills, a former head of the US Small Business Administration, thinks fintechs could be part of the answer.
“The technology systems for both banks and the government are buckling under the increased web traffic and some processes are still largely paper-based,” she said. “My hope is that the SBA and Treasury will get technology players and alternative lenders involved, like Square, PayPal, Stripe, and the like.”
This week’s top stories
1️⃣ Kabbage cut off credit to small business customers this week. Borrowers told Bloomberg that they didn’t get any notice that their lending had been suspended.
2️⃣ JPMorgan probably won’t be able to process emergency loan applications (paywall) for small businesses today, according to the Wall Street Journal. Bank of America intends to limit them to customers who already have loans and deposit accounts.
3️⃣ Monzo’s CEO will forgo his salary for the next 12 months, and senior managers are taking a 25% salary cut, according to TechCrunch. Some of the digital bank’s UK employees are being offered two months of voluntary furlough. Starling, another banking upstart, furloughed 41 people, most of whom hadn’t completed training and couldn’t work from home.
4️⃣ Robinhood pushed back its UK launch. A spokesperson for the brokerage told AltFi that the timing change isn’t related to the coronavirus outbreak or recent outages.
5️⃣ Most segments of the digital payments and money transfer business are headed south in the near term. Over time, the coronavirus disruption may reinforce e-commerce payments, digital wallets, and digital remittance, according to FXC Intelligence.
The future of finance on Quartz
Money is a source of trouble and arguments for at least 31% of couples. The main reason for these fights is that people don’t understand each other’s financial histories. A “money map” can help.
America’s tiniest banks are needed to get loans out to millions of small businesses. Community banks specialize in borrowing for small entrepreneurs, and many of them have survived wars and multiple recessions.
The mobile money industry has more than a billion registered accounts. Sub-Saharan Africa is the epicenter of the mobile money revolution, and the technology could help contain the coronavirus pandemic.
Even as financial markets crater, brokerage app signups are soaring. The surge suggests some retail investors are hoping to buy stocks on the cheap.
Elsewhere on Quartz
Coronavirus will not make us less connected. While some governments may use this moment to be opportunistic, it will take global cooperation to end this crisis.
Always be closing
- Microsoft is starting a personal finance tool through Excel, in partnership with fintech Plaid.
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