SBA loans charge 0.5% interest, can be forgiven if used to save jobs

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WASHINGTON — Borrowers will pay just 0.5% interest in new federally funded loan program to help keep small businesses afloat, and loans will be canceled as long as they keep their employees on their list payroll for two months.

Under the Small Business Administration’s paycheck protection program, lenders would make available up to $ 350 billion in government-guaranteed loans to cover eight weeks of payroll and other expenses.

Business owners can start applying on Friday, followed by independent contractors and self-employed workers on April 10. The government says it will cancel the loans if they keep their workforce largely intact and use the loans for qualifying expenses such as rent and utilities.

Jovita Carranza, administrator of the US Small Business Administration, appeared during an event with President Trump at an event in Washington earlier this month.


Photo:

Andrew Harrer / Bloomberg News

The Trump administration expects the vast national network of banks, credit unions and institutions in the farm credit system to handle the loans, senior administration officials said on Tuesday. Most claims are likely to be filed online, they said, and the money could be paid in as little as a day.

The plan was funded as part of the $ 2 trillion economic stimulus package approved by Congress and signed by President Trump last week to deal with the economic fallout from the coronavirus pandemic.

The loan has a term of two years, with deferred payments of six months. Interest accrues during the deferral period. The loan forgiveness amount is reduced if borrowers reduce their payroll by more than 25% during the eight-week period covered by the loan.

The loan program represents a huge expansion of loans overseen by the SBA, which typically approves about $ 25 billion in loans each year by the agency’s 1,800 participating lenders.

President Trump on Friday signed a landmark $ 2 trillion bill aimed at providing relief to workers and businesses affected by the novel coronavirus pandemic. WSJ breaks down what’s in the package. Photo: G. Ronald Lopez / ZUMA Wire

But questions remain unanswered about how exactly the program works, according to lenders. It is not known how quickly the system will be able to meet the expected high demand for new loans.

Administration officials on Tuesday provided “the basic application form and some initial advice,” said Tony Wilkinson, president of the National Association of Government Guaranteed Lenders, a trade association of traditional SBA lenders. “We are looking for the program guide that will really describe all the requirements in detail. ”

Some critics of the SBA are skeptical that the agency’s technology and workforce are up to the task. The program “is almost certainly going to be an epic failure,” said Rebel Cole, professor of finance at Florida Atlantic University, who anticipates vast unmet demand and large-scale business bankruptcy.

Tom Bennett III, managing director of First Oklahoma Bank, a community bank in Tulsa with around $ 750 million in assets, is cautiously optimistic. In anticipation of the new program, Bennett gave his 13 loan officers the task of providing SBA loans.

“I think it’s a good start,” said Bennett, who said he received 50 loan applications in just an hour after the program was announced. But he added that it was not clear how quickly his loan officers would be able to process loans through the SBA or how the program would work with other banking regulations.

Administration officials have said payroll protection loans will be much easier to approve than conventional SBA loans and expect many other federally insured banks and deposit institutions to qualify.

The form is only two pages long and essentially asks borrowers only an estimate of their average monthly payroll, number of jobs, and other expenses.

Borrowers are also required to pledge that the funds will be used to withhold workers and other essential bills like mortgages and leases.

The SBA will not have to approve the loan, officials said. Rather, the agency would simply verify that the borrower has not already applied for and received a loan by working through another bank.

“It’s a balancing act between speed and efficiency (on the one hand) and anti-fraud on the other,” said a senior administration official.

All businesses with fewer than 500 employees are eligible, including nonprofits, veterans organizations, and tribal businesses. Some large businesses may also apply, and the loans are 100% guaranteed by the federal government.

The size of the program could come as a backlash where many loans go to those wealthy enough to survive a two-month shutdown but savvy enough to apply for loans quickly, including law firms, government-funded startups. venture capital and other cash rich. entities. The bailouts during the 2008 global financial crisis sparked a political backlash that fueled populism on the right and left.

If a million entities borrow an average of $ 350,000, it would deplete public funds, Wilkinson said. There are about 30 million small businesses in the United States, Cole estimated. If more money is needed, US officials said, the administration would ask Congress for more money.

Bankers and other financial institutions said there was a significant demand for the new loans.

Fountainhead Commercial Capital, a non-bank lender specializing in SBA loans, said it received around 4,000 preliminary loan applications during the 10-day period ended March 27.

The Treasury also said it wanted “a wide range of additional lenders” to start lending. But the administration did not provide details on what additional lenders would need to show to qualify, banking experts said.

Chris Hurn, managing director of Fountainhead, said increasing the number of lenders that can participate in the program would be helpful in securing the capital small businesses so badly need, but questioned the one-day timeframe for disbursement as Treasury Secretary Steven Mnuchin and other government officials have described.

“I’m not trying to spit in the eye of the Treasury Secretary,” Mr. Hurn said. “I understand that we are expected to perform a near miracle here and he would like that and I would like that, frankly, but how it goes is a whole different story.”

The very low interest rates and the short duration of the loans could make the program unattractive for some lenders, according to some experts.

“Most lenders won’t be able to provide this financing and even foot the light bill,” said John Moshier, president of small business loans at Ready Capital. Corp.

, a licensed non-bank SBA lender in Berkeley, NJ. Mr Moshier said his company had received many requests from borrowers, but still did not know how to administer the program.

Lenders would be compensated with processing fees. Loans of $ 350,000 or less would be paid a 5% fee. Loans between $ 350,000 and $ 2 million would receive 3% and loans over $ 2 million would receive 1%.

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Write to Bob Davis at [email protected], Amara Omeokwe at [email protected] and Ruth Simon at [email protected]

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