“We’re a company with a significant presence in Asia as well as America, so we’ve been a major player on the ground in this crisis nearly from the start,” says Ionenko. “We’ve seen how it unfolds, and we know that speed and capacity are crucial to lenders right now.”
Lending-technology providers are essential to helping banks and credit unions get cash infusions to US businesses upended by the coronavirus pandemic.
What is the New SBA “Coronavirus” Loan Program in Overview?
A stimulus bill just passed by Congress — officially the Coronavirus Aid, Relief and Economic Security, or “CARES,” Act — earmarks $349 billion for small-business loans made between now and June 30. This facility operates mainly through the 7(a) loan program of the Small Business Administration, which is an agency of the US government.
The 7(a) program has in fact been temporarily renamed the Paycheck Protection Program under the CARES Act.
The bill defines “small businesses” as privately owned corporations, partnerships, or sole proprietorships with no more than 500 employees. (For the most part; there are exceptions for certain industries.) Loans under the emergency lending program are capped at $10 million, double the usual amount. In another exception to the normal rules, the SBA provides a loan guarantee rate of 100% (up from 75% to 85%). These emergency loans require no personal guarantees or collateral from borrowers.
How is this Lending Program Intended to Help the US Economy?
To ensure these business loans provide economic benefits to communities, the bill underlines that the loans are primarily intended to help enterprises that keep workers on their payrolls. Labor Department data shows initial unemployment claims have skyrocketed in response to a nationwide business freeze triggered to the pandemic.
Other sanctioned uses for these emergency loans include:
- Group healthcare benefits
- Local employment taxes
- Parental, family, or sick leave
- Vacation pay
- Retirement benefits
- Rents
- Utlities
- Interest on mortgage and other debt obligations incurred before Feb. 15, 2020
How Does the CARES Act Change Other SBA Lending Facilities?
In addition to the 7(a) — aka Payroll Protection — program, the CARES Act has a direct and powerful impact on other SBA lending programs.
- The Express Loan program has increased maximum loan amounts to $1 million from $350,000.
- Businesses may now apply for an SBA Emergency Economic Injury Disaster Loan under the following new rules:
– They don’t have to put up a personal guarantee.
– They’re not required to have been in business for at least a year.
– They don’t have to show they can’t get credit elsewhere. - Borrowers may get a $10,000 emergency advance within three days of applying for an EIDL — and even if the application is denied, that money does not have to be paid back.
- Borrowers can apply for both EIDLs and Paycheck Protection loans provided the funds are put to different uses.
- For some businesses with pre-existing SBA loans, the agency will pay the principal, interest and linked fees for six months.
How Can Lenders Participate in SBA Lending Programs?
To take part in the SBA business-lending program, banks must apply to become SBA-approved lenders, a process that starts with contacting a local SBA lender relations specialist using this tool. Right now there are about 1,700 lenders that participate in the 7(a) program.
With vastly expanded loan facilities, and many of the usual rules waived, the SBA is poised to help banks extend loans small businesses need to stay afloat in this public-health crisis.
What Else Do Lenders Need to Help Businesses Out of this Crisis?
But, says Elena Ionenko, a co-founder of lending-tech provider TurnKey Lender, banks and credit unions need fast and efficient loan processing to get money flowing back into the economy.
“We’re a company with a significant presence in Asia as well as America, so we’ve been a major player on the ground in this crisis nearly from the start,” says Ionenko. “We’ve seen how it unfolds, and we know that speed and capacity are crucial to lenders right now.”
Do Traditional Lenders Face Competition from Pure Play Online Lenders?
In addition to posing operational challenges to traditional lenders, the stimulus bill seems to authorize new competition around SBA lending. The agency now has the authority to greenlight non-traditional lenders that have “the necessary qualifications to process, close, disburse, and service loans.”
This could open the door to online lenders such as Funding Circle, SoFi and Lightstream, as well as the lending subsidiaries of companies as diverse as Square, Amazon, and Goldman Sachs.
Is there a Consumer-Lending Angle that Banks and Credit Unions Should Know About?
These and other nimble tech players may find other ways to compete with traditional lenders in this crisis, specifically around consumer lending.
In an initiative distinct from the Congress-directed SBA response to the coronavirus crisis, federal bank and credit union regulators are urging financial firms to make short-term “small-dollar” loans to consumers — typically defined as loans under $5,000.
How Can Traditional Lenders Compete with New Entrants?
These watchdogs “recognize the important role that responsibly offered small-dollar loans can play in helping customers meet their needs for credit due to temporary cash-flow imbalances, unexpected expenses, or income shortfalls during periods of economic stress or disaster recoveries,”the National Credit Union Administration, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, and the Federal Reserve Board of Governors say in a joint statement.
“Stacked up, these layers of competition form a barrier to banks and credit unions that want to help their communities in this crisis,” says TurnKey Lender’s Ionenko. “But they can make real headway simply by partnering with a lending-tech provider — especially if they can find one that doesn’t also compete with them as a lender.”
How Can Alternative Scoring Help Make Lending Faster and More Secure?
Besides providing end-to-end, AI-powered and mobile-friendly decisioning, processing and administration for loans of all sizes, TurnKey Lender can accommodate lending under circumstances where “traditional scoring models don’t work anymore,” Ionenko says.
“We make sure lenders can see the financial position of a business dynamically, so we’re not just calculating debt-to-credit ratios,” adds Ionenko “With consent, we can look at a variety of inputs, including bank statements and cash flows through accounting software like QuickBooks and Xero — so that, in less than two minutes, a lender can see if this particular business qualifies for this or that type of loan.”