What you need to know: NPR
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As of today, small businesses can apply for nearly $ 350 billion in available loans as part of Congress’ economic bailout.
The loan program, known as the Paycheck Protection Program, is intended to help businesses overcome economic hardships and, most importantly, help either keep current workers or rehire those who have been made redundant. .
It’s a badly needed balm for all kinds of small establishments nationwide. Half of small businesses have less than 27 days of financial cushion, according to one 2016 report, and many have already suffered weeks of little or no income.
Below are some basics of how the program works and what business owners can expect.
How Much Money Can Small Businesses Get?
They can earn up to 2.5 times their total monthly payroll (with a maximum of $ 10 million). It is important to note that since many companies have already cut jobs, companies will rely on the payroll figures of before crisis. The Small Business Administration has set an interest rate of 1% on loans, and repayment will be deferred for six months.
Congress has allocated $ 349 billion for this program. This may not be enough to meet demand, but Congress may decide to devote more funds to this program. (Read on to learn more about this.)
Who is eligible?
A parcel businesses – those with less than 500 employees, including sole proprietorships and the self-employed, as well as non-profit organizations.
The application requires much less information than a typical small business loan. A sample form released by the SBA before the program showed there were only two pages of questions on basic information, like the size of the payroll and what the owner intends to use the money for.
Notably, these loans do not require personal guarantees or collateral, which administration officials hope will allow a swift approval process.
The program will currently run until June 30.
Some banks will not be ready immediately
Currently, approximately 1,800 banks are part of the SBA primary loan program. A senior administration official said this week that thousands more financial institutions could also lend through the program.
But some will not be ready on Friday. From Thursday evening, JPMorgan Chase’s website said he “probably won’t be able to start accepting applications on Friday.”
Reuters also reported this week that some major banks are considering not participating in the program. This is because one would expect them to issue loans quickly – within days – which could put them at legal risk.
In addition, some banks initially said they might not want to participate due to the unattractive loan terms stated by the SBA. Independent Community Bankers of America sent a letter this week to SBA Administrator Jovita Carranza and Treasury Secretary Steven Mnuchin outlining their concerns, including the low 0.5% interest rate initially set by the SBA, although the law provided that interest rates could be as high as 4%.
“Community bank lenders cannot ‘break even’ with such a low interest rate, and for many it will be neither economical nor feasible to participate in the program,” wrote the CEO and President of the ICBA, Rebeca Romero Rainey.
At a White House press briefing Thursday, Mnuchin said interest rates would now be set at 1%, citing concerns from some small banks.
Can Businesses Really Make Money in a Day?
Here’s what we know: Friday is the opening of the program. Administration officials said they hope businesses will be able to claim and get their money on the same day. Whether this is doable will quickly become clear once things get started. One day is a much faster turnaround than for standard SBA loans, which usually take five to 10 days to process.
Additionally, some banks may not be ready to lend right away on Friday.
“This is an entirely new program, and it’s something that banks and customers will have to get used to,” said James Ballentine, executive vice president of congressional relations and political affairs at the ‘American Bankers Association. “There will be banks that are ready to go, and there will be others that are still learning how to do it and working on it for a few more days.”
He added that the process could be faster for companies with already strong ties to their banks.
“These customers who have these relationships with their banks, the banks already have a lot of information on their records, so some of these loans will be easier to reverse,” he said. “Others who may not have a banking relationship with their local or national bank. We certainly encourage them to come into that bank to get these loans and apply for them.”
Indeed, Friday, The Bank of America website said the program was open to “customers with a corporate loan and deposit relationship with Bank of America.”
There has been some concern that some businesses may be able to get loans faster and easier, due to their existing relationships.
“Small businesses that [existing SBA lenders] small businesses don’t need it most, ”said Michael Roth, managing partner of Next Street, a consultancy that works with local governments to boost small businesses. “It’s not small businesses that need the money within 30 days. , within 90 days. And that will only exacerbate the inequalities that already exist. “
In particular, he said, he is concerned about the availability of these loans for non-white businesses and those in low-income neighborhoods.
Loans are repayable if you keep employees
A business loan could be canceled entirely, but only if a business meets certain criteria.
First, to be forgiven, the money must be spent on payroll, rent, mortgage interest, and utilities within eight weeks of the loan being granted. Any portion spent on something else will not be forgiven.
Additionally, the SBA has stated that at least three quarters of the remitted portion should be used for payroll, which may include benefits in addition to salary.
Many businesses can have their loans partially canceled. The remitted amount will be reduced if companies reduce their number of full-time workers, as well as if they reduce their pay levels beyond a certain amount.
If a business owner has already laid off workers, they can rehire employees and still get a pardon, provided they rehire these workers before June 30.
Will there be enough loaned money to meet the demand?
It’s not clear. It is very possible that $ 349 billion will not meet the demand.
George Washington University economics professor Steven Hamilton ran through some math deep in the envelope on Twitter last week, noting that 2.5 times the total payroll of all companies with fewer than 500 workers is $ 2.76 trillion (compared to that paycheck protection plan’s $ 349 billion). While not all small businesses can apply for loans of course, it certainly shows that there is a possibility that the pot of money will run out quickly.
“One of the things I’ve heard is that this small business program is going to be so popular that we’re going to run out of our $ 350 billion,” Mnuchin said. told CNBC this week. “If it does, I can assure you this will be high on the list for me to come back to Congress. It has huge bipartisan support and we want to protect small businesses.”