Congress on Thursday passed a bill that will put $320 billion more into a forgivable loan fund aimed at helping small businesses through the COVID-19 state of emergency.
This supplements $346 billion for the Small Business Administration’s Paycheck Protection Program, or PPP, a first round of loans that started on April 3, then ran out of money within two weeks.
The loans are designed to help businesses continue paying employees through the shutdown.
Judy Buxton Elmendorf, owner of Chopin Mon Ami, a Galveston-based catering company, applied to her longtime bank, Bank of America, in the first round but was told when funds were depleted she should find a small local bank to apply for the next round, she said.
Elmendorf told the small business representative who called her she didn’t have a relationship with any small local bank.
“He said I’d have a much better chance of getting it with a small bank, and that sent signals up to me,” Elmendorf said. “It didn’t make sense. They’ve been my bank since 2005.”
As it turned out, Elmendorf’s concerns weren’t unfounded.
News spread quickly over the past week that many larger banks, including Bank of America and Wells Fargo, have been sued by small business interests for prioritizing larger loans with bigger clients as opposed to their smaller business customers, like Elmendorf.
The lawsuits allege higher fees enticed those companies to serve bigger clients first. For loans of more than $2 million, banks receive a fee of 1 percent; a loan in the $25,000 to $35,000 range pays 5 percent to the bank.
Bankers, accountants and small business advocates agree money in the second round is likely to be depleted even quicker than the first round, and where an application like Elmendorf’s sits in the queue is important.
HomeTown Bank, headquartered in Galveston, processed 435 loans in the first round — nearly half the number of business loans the bank processed in the entire previous year — and has 90 teed up and ready to feed to the Small Business Administration portal as soon as the second round opens, said Jimmy Rasmussen, president and CEO.
In the first round, big banks were able to create bulk files, put them all into a program and send them to the SBA at once, Rasmussen said. Smaller banks like his had to file one loan application at a time.
“They’re telling us there’s a new and improved portal this time,” he said. “When the bell rings, we’ll be ready to go.”
But Rasmussen’s staff is exhausted from the bulk of loan applications it has handled over the past few weeks, and from dealing with a new level of bureaucracy and red tape, he said.
“We don’t normally do SBA loans, so this is new to us,” he said.
Capacity at bigger banks is greater, but so are their client lists.
Rasmussen said a “third-hand rumor” had been circulating through his bank that some 700,000 applications are waiting in the queue for round two. He expects the money will be gone much quicker this time than in the first round.
Robert Johnson, a certified public accountant and president of Sabre Financial Group of Katy, thinks the money might last a week, he said.
“The first $349 billion was extinguished in two weeks; the second batch will be gone within seven days because there’s this huge number of applicants who’ve submitted their applications and when the first batch ran out, they were waiting,” Johnson said.
Johnson worked for large accounting firms and big corporations then hung up his shingle a few years back to offer financial services to small businesses such as help with budgeting, projections, planning expansion and securing funding.
And while he’s glad the federal government has made these loans available, there’s not enough money in the first two rounds to help the bulk of small businesses, he said.
“A lot of people need help. They’re struggling and scared,” he said. “Small banks, in general, have done better in the process. They are able at least to give their customer an idea of where their application stands in the process.”
Small companies that don’t have existing relationships with a bank are at a disadvantage getting the funds they need through the program, especially with a large bank, Johnson said.
He advised applicants like Elmendorf to get on the phone and stay on hold for two or three hours, if that’s what it takes, to find out whether their loan has been approved by the bank and is ready to be passed on to the Small Business Administration. If so, they are probably OK. If not, they should put in an application someplace else, preferably at a small local bank, he said.
Rasmussen and Johnson agreed they expect to see a third round of funding for the program.
The Main Street Alliance, a Denver-based advocacy group for small businesses, said the next round of loans won’t begin to meet the needs of small businesses at large and was plagued in the beginning with several design flaws that favored bigger lenders over smaller ones.
“What small businesses really need is direct support, grants through the U.S. Treasury,” said Sarah Crozier of the alliance.
Some legislation being introduced in the next few days will include direct subsidy components, she said.
The Main Street Alliance argues there’s still time to keep small businesses out of bankruptcy, but it will require significantly more money than has been allotted at this point.
Meanwhile, small-business owners such as Elmendorf wait to see what will happen in round two.
Elmendorf hasn’t furloughed any of her company’s seven full-time employees, although the catering and events business has come pretty much to a standstill, she said. She has turned to selling meals for pickup through an online enterprise, Easy2GoMeals.com, but the bulk of her incoming revenue is dried up for as long as large social gatherings at events centers are on hold, she said.
The federal loan money would buy her time, she said.
“We’re operating off last year’s profits, and we’ve just about used it up.”