How to Handle $350 Billion in Loans? No One Knows

(Bloomberg) -- The stimulus plan to protect the U.S. economy from the ravages of Covid-19 unlocks hundreds of billions of dollars for small
businesses -- yet the system set to distribute the money is already overwhelmed.

The agency that will oversee the unprecedented $350 billion loan program has been challenged to even maintain a much smaller, existing program, with its website crashing repeatedly. The network of 800 approved lenders expected to divvy up funding have received little guidance so far. It’s unclear, for instance, whether a business owner could apply online or would have to meet with the lender in person.

“There’s a lot we still don’t know,” said Karen Harned, executive director of the Small Business Legal Center at the National Federation of Independent Business, the largest small-business association in the country. Unknowns include: how long it will take for companies to get checks.

That leaves Katalina Mayorga in limbo at a time when she needs financial assistance.

Her El Camino Travel based in Washington, D.C., is losing about $300,000 in revenue this year after three months of canceled trips and refunds.

She tried applying for existing disaster loans from the Small Business Administration more than a week ago and hasn’t heard back. She emailed to follow up and received a message that the inbox was full. She joined a call Wednesday afternoon that her industry association put together with an SBA representative. It was cut short when too many people joined, crashing the line.

“It was just craziness, honestly, the last few weeks,” said Mayorga, whose travel agency creates custom vacations for about $3,000 and has largely ground to a halt amid shutdowns to try to contain the coronavirus pandemic.

Shoring up the roughly 30 million small- and medium-size businesses in the U.S. is a key element of the $2 trillion stimulus package. These businesses employ about half of the private workforce and accounted for two-thirds of net employment gains in recent years. Their financial distress has contributed to a record 3.28 million Americans filing for unemployment last week.

The legislation is waiving some paperwork requirements to speed up the loans, and the government has signaled urgency. “By the end of next week we want all the banks to be able to originate loans same day,” Treasury Secretary Steven Mnuchin said.

Herculean Effort

Doling out $350 billion in loans will require a herculean effort -- the sum is more than 10 times the amount the SBA has ever distributed in a year, said Kurt Chilcott, chief executive of San Diego-based SBA lender CDC Small Business Finance.

The agency is expected to issue guidance on how lenders move forward within a week of the president signing it, according to Chilcott and Stephen Keen, who handles congressional relations for the Independent Community Bankers of America.

Among major question marks: how the secondary market would work if banks want to sell off the loans to others; whether the federal government would have to purchase some of the notes itself; and which financial technology lenders can participate.

Bill Koontz, an SBA spokesman, said the agency is scrambling to keep up with demand for its existing disaster loan program to help businesses, even as its site has been down repeatedly because of the high demand. He declined to comment on pending legislation until it gets passed.

“They have at least promised a very expedited process,” said Sandy Baruah, a former SBA administrator who helped steer the agency’s response to the 2008 financial crisis. “If they’re able to deliver on that promise, I think it could have a real positive impact on mitigating the economic damage and the individual damage to small businesses, and those who work for them.”

There are two major programs in the bill targeted at mom-and-pop shops: one is $10 billion for grants of as much as $10,000 per business to cover expenses. The government would advance the money within three days to businesses applying for an SBA disaster loan.

The $350 billion SBA loan program provides a lot more -- up to $10 million per firm -- and companies can get the debt written off under certain conditions, such as retaining employees and keeping salaries above a certain level, and rehiring those already let go.

Jobs at Risk

On the ground, small businesses may be reluctant to take on debt at a time when the pandemic is still surging and tens of millions of Americans are under lockdown orders. Borrowing a chunk of money without knowing when -- if ever -- their business will again turn a profit is too big a risk for many owners and they may instead opt to close, said Amanda Ballantyne, national director for small business lobby group The Main Street Alliance.

Her group estimates that 84.2 million jobs are at risk of being lost amid business closures and bankruptcy.

Peter Gaetano owns a barbershop in Carmel, a town of about 30,000 in New York state. Despite operating through previous recessions, the doors shut indefinitely Saturday night when the state ordered non-essential stores closed. He says he had to let his three staff go.

“I have no answers for what I’m going to do,” said Gaetano, 41, who has two young kids. The family relies on the roughly $60,000 a year he makes for the mortgage payments and other bills.

“I have a little bit of money saved,” he said. “But if this lasts three months, then I’ll be in trouble.”

©2020 Bloomberg L.P.

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