As part of our federal government’s effort to keep the U.S. economy from completely collapsing, Congress passed, and the President signed the $2.1 trillion CARES Act. Part of that legislation was the SBA Payroll Protection Program, or PPP. The PPP provided $349,000,000,000 in forgivable loans to “small businesses.” The entirety of that money was gone in 14 days. In the aftermath, we’ve learned a lot about what happens when the government takes taxpayers money and tries to give it back to us through our small businesses.
Who Wins? The Banks.
Part of the PPP was the stipulation that each loan, regardless of amount, would pay the originator a 5% commission. Quick math shows that banks who were already approved to originate loans on behalf of the SBA “earned” $17,450,000,000 (that’s 17 billion).
I put “earned” in quotes because, while the banks did have to do an enormous amount of paperwork (that’s what they’re good at), these loans were fully backed by the federal government, mostly forgivable, and came with literally zero risk to the banks.
Approximately 4,900 banks originated loans. More quick math shows that the average bank pulled in over $3.5M in commissions. The biggest banks pulled in billions.
Who Loses? It’s Complicated.
I’ve engaged in dozens of conversations with friends and colleagues who applied for a PPP loan for their small business. Not one of them actually got a loan. Their applications went into black hole. They never heard anything. No status. No approval. No rejection. Nothing.
There are 30 million ‘small businesses’ in the U.S., according to the SBA’s definition of small business, which is ‘fewer than 500 employees’ (with a few exceptions). Just over 1.5 million loans were processed. That means 5% of small businesses received one of these loans. Those companies got their loans, and now they just need to comply with the forgiveness rules, which are pretty simple, and they’ve effectively been given free money by the government. They’ve been subsidized to keep the economy running.
How Did They Get Their Loans?
THAT is the real question. Why did 1 in 20 small businesses get a loan? What qualified one small business over another? Here’s the rub. It is clear now that two things happened within the banks that determined which businesses would get this free money.
First, the banks saw an opportunity, handed to them on a silver platter by their friends in Congress, and took it. I would normally say, “Good for them!” but this time I can’t. Lawsuits have already been filed against Wells-Fargo, Chase, and others, alleging that these banks took all the applications, sorted them from big to small, and put the big ones into the SBA queue for approval.
Why lawsuits? Because the CARES Act legislation specifically stated that these loans should be “first come first served”. In short, the banks cheated. They saw the golden $17 Billion opportunity, and they took it by shoving the biggest loans – from which they got the biggest commissions – to the front of the line.
acted cheated in their own best interests, not in the spirit of the legislation, which could have been in the best interests of small businesses.
Who Is Your Banker?
Second is that question, which most small businesses cannot answer with a person’s name. If you could answer that question with a person’s name, then you are among the minority of small businesses, and you are probably over 50 years of age.
The younger generations do not go into a bank. They’ve done everything online. There’s no “banking relationship” there. So, when the time came for them to apply for this free money, they did what they’ve always done. They went to their bank’s website and looked for an application. Those who have their money at a big bank found an electronic application. Those who have their money at a credit union or small community bank may have found a phone number or a downloadable PDF to complete.
They applied. They submitted. They waited. Then the money ran out. These small businesses did not get their PPP loan. Why not?
Because they didn’t have a phone number of their personal business banker to call and say, “Hey, we’re good, right? Good credit, customer for a few years, paid back that LoC…right?” Those that could make that call got moved towards the front of the line.
Now PPP 2 Is Coming
The same thing is going to happen with PPP2, which is imminent. Yes, our federal government is going to borrow another $400 (or so) billion, and run it through the same banks, pay them the same 5% commission, and further try to keep the economy from collapsing.
If you’re a small business, I suggest you get on the phone – or better yet go in person! – with your bank. Yes, you can still go into a bank branch (some of you just asked, ‘where’s that?’) and talk to a human being. If you want one of these PPP free money loans, that’s what you’ll do.
If not, one of two things will happen. Your loan will be smaller than most of the others, so it’ll get pushed down the queue. Or, nobody will know your name on the top of that application, and so it’ll get ignored.
That’s how this game works.
How Could Congress Fix PPP2?
There are 3 very simple changes Congress could and should make to the PPP rounds 2, 3, 4, 5…you get the idea. Those fixes are as follows.
1. Decrease the commission on each loan from 5% down to 2%. The idea behind the CARES Act and PPP was to shore up small businesses, not reward banks.
2. Enforce the “first come, first served” rule. No, it’s not that hard. The SBA hands out a loan number each time it receives an application electronically. Those loan numbers can and should be used to create and manage the queue. That means the banks cannot stand in the middle of the application and the SBA computer system. That means the bank has to actually move into the 21st century and accept loan applications electronically. They just got millions, put it towards the tech!
3. Lower the maximum loan amount down from $10 million down to $2.5 million. Again, this is supposed to be about the little guys. We’ve also learned in the aftermath of PPP that some really big companies got some really big money. Maybe they needed it, maybe they didn’t, but it wasn’t intended for them.
I’m surprised PPP has gone as well as it has! Consider that the largest federal government in the galaxy put together a half decent plan, did their usual idiotic charades and finger pointing, passed the largest bailout bill in history, and dumped it on the banks in less than 30 days?!? That’s pretty good, so it shouldn’t come as any surprise that it’s not perfect.
PPP2 and PPP3 and PPP4 won’t be perfect either, but it’s now glaringly obvious where immediate improvements can be made.