Banks are struggling to deal with a massive wave of loan applications aimed at helping small businesses keep employees and pay other bills as the coronavirus pandemic increasingly weighs on the economy.
How quickly loans – which are forgivable if a small business retains employees – can be disbursed is likely to determine which part of businesses can survive the crisis, which has closed restaurants, stores and other problems in the main street across the country.
The Federal Reserve, meanwhile, said on Monday it was creating a program to make billions of dollars in additional funds available to banks for lending.
The Treasury Department and the Small Business Administration allowed businesses with fewer than 500 employees to start applying for loans on Friday, but the early rollout was marred by confusion, technical issues and bank lending volume limits.
“Each bank must find fairly quickly how to handle them, how to prioritize them and how much of its balance sheet to allocate to them,” explains Ami Kassar, CEO of MultiFunding, a small business loan adviser.
The $ 2.2 trillion CARES Act, passed by Congress late last month, provides $ 349 billion in loans guaranteed by the Small Business Administration. A business can apply for a loan of up to $ 10 million to cover payroll and other expenses. If the company retains its staff – or rehires laid-off employees – eight weeks of fees are waived. The loans do not require any collateral and only carry an interest rate of 1%.
The system was put in place at breakneck speed, just a week after the law was passed.
Wells Fargo says it has already hit the $ 10 billion in loan applications it can handle under a cap imposed by the Federal Reserve because the company created millions of fake accounts between 2002 and 2016.
âAs we actively work to build financing capacity for the balance sheet, we are limited in our continued ability to use our strong capital and liquidity position to extend additional credit,â said Wells Fargo CEO Charlie Scharf , in a press release.
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Bank of America says it has received 183,000 requests for more than $ 33 billion in loans. To be eligible, however, the business must have an existing checking account with the bank and be an existing borrower. Alternatively, the business can simply have a checking account as long as it does not have a credit relationship with another bank.
Bank of America accepts applications on its website and then sends them to the SBA.
Small community banks face greater technical hurdles, according to the Independent Community Bankers of America. Many simply refer small businesses to the SBA website to apply. The SBA system, in turn, is overloaded, says ICBA CEO Rebecca Romero Rainey.
Monday, “He just came to a complete stop,” she said. âThe challenge is the incredible amount of volume going through the system at the same time. “
Additionally, she said, many banks that do not have an existing relationship with the SBA have yet to receive passwords to access the agency’s system.
While the loans are secured and theoretically pose no risk to banks, many banks are still struggling to determine how much of their portfolios to spend on the SBA program, Kassar said. The Fed, meanwhile, will offer financing for the loans, providing a new source of funding for banks that may have limited liquidity, Rainey said.
Kassar estimates that it could take a few weeks for the problems with the SBA program to be resolved. It’s manageable for many companies, but it could be a problem for many under five employees, whose cash reserves will likely only last for several weeks, Kassar said.
President Donald Trump on Saturday called the program “flawless.” On Monday, Trump admitted that the paycheck protection program had had “minor issues” but had “got off to a great start.” And he said these issues have been fixed.
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Contribute: Ledge King