Committed late, online lenders still have to wait to help accelerate recovery

WASHINGTON — When the federal government opened its $349 billion small business loan program last Friday, startups that specialize in making such loans were eager to accept applications and send money to restaurants, gyms and hair salons hit hard by the coronavirus shutdown.

Yet these online lenders were shut out of the program for the first six days, even as small businesses complained of difficulties in obtaining loans from traditional banks.

Treasury Secretary Steven Mnuchin had said on Fox News on March 29 that online lenders could be part of what is called the Paycheck Protection Program to give small businesses more and potentially more options. quick to get the loans.

But it wasn’t until Wednesday night that the Treasury Department offered online lenders a way to apply to participate in the program. The start-ups said they were given no indication of how long it would take before they could start lending.

Difficulties with online lenders are another example of the dysfunction and disorganization that has slowed the flow of small business loans, even as President Trump has insisted the program is going well, with just a few small glitches.

Fintech companies like PayPal and Square, and smaller companies that focus on lending to small businesses, like Kabbage and OnDeck, have specialized in lending to businesses that fall under the government program – those which have less than 500 employees – and do it faster than the banks. Many lenders expressed frustration at being shut out when they thought they could be most helpful.

“Every five minutes I refreshed the Treasury page like a maniac,” said Sam Taussig, head of global policy at Kabbage, one of the largest online small business lenders. “The businesses we serve on Main Street, they only have about 10 to 12 days of cash, and we’re well over that in many places.”

The Small Business Administration and the Treasury Department, which oversee the lending program, did not respond to requests for comment about online lenders. SBA officials said they are working to address any issues slowing the flow of money to business owners.

Lenders want to help distribute the $349 billion in loans the government is giving to small businesses to help payroll and cover other costs during the pandemic. The loans have generous terms, including a low interest rate and a discount for portions spent on fixed costs like rent and paychecks for non-working employees.

The government has so far relied on traditional banks, like Wells Fargo and Bank of America, to distribute loans alongside smaller community institutions. The banks won approval for $95 billion in loans, leading lawmakers to discuss adding more money to the program.

But these large financial institutions have for the most part been willing to work only with existing customers, making it difficult for smaller businesses that previously did not have accounts with banks. Banks also tend to rely on manual documents and processes that can take days.

Partly because of the cost of using these loans, banks have retreated from lending to small businesses over the past decade, according to data from S&P Global Market Intelligence.

This provided an opening for online lenders, who focused on automating documentation and approval processes to reduce costs and make them faster. More than 25 of those companies have secured funding from venture capitalists, according to Pitchbook. These numbers don’t include big fintech companies like PayPal, Square and Stripe, which have also pushed to lend to small businesses.

Online lenders represent only a small part of the financial industry. But last year they were the biggest source of loans for small businesses with medium and low credit profiles, according to data released this week by the Federal Reserve.

Brock Blake, managing director of Lendio, a website that works with online lenders and traditional banks, said where traditional banks typically take at least a week to approve loans, online lenders almost always can. do in an hour.

Lawmakers have noticed the absence of start-ups. Sen. Marco Rubio, the Florida Republican who serves as chairman of the Senate Small Business Subcommittee, expressed concern about their slowness to participate in the program.

“To ensure that underserved communities and those whose banks won’t help them are not left out, we need to bring non-bank lenders, including fintechs, into the program as soon as possible,” Rubio said in a statement. Thursday. He said he was glad the Treasury Department released the request for the companies and was “pushing for it to be expedited.”

Online lenders are desperate to participate in the program as their business has largely dried up during the pandemic. Plus, with attractive loans available from the government, few small businesses want any other type.

The chief executive of Toast, which focuses on restaurant loans, said in a letter this week that it was laying off or laying off half of its employees. Kabbage made even bigger cuts last month, according to Bloomberg. The stock price of OnDeck, a publicly traded competitor, fell more than 50%.

Government loans are unlikely to be big moneymakers. Small businesses will pay almost no interest and lenders will receive a 5% commission from the government for any loan they make.

Companies aggressively lobbied to participate, asking Congress to allow them to participate, then pushing agencies to issue guidelines that made it clear they would be included.

While waiting for approval, some of the tech companies tried to find workarounds. Kabbage and PayPal have partnered with banks to process loans for them.

Kabbage said it has already received 40,000 applications asking for $4 billion in loans. This allowed him to bring back some of his furloughed workers, but company executives said they would be able to do more solid business with their full approval.

If they start handing out money on their own, online lenders may encounter the same difficulties as their traditional competitors. While startups can approve loans quickly, they must process applications with the Small Business Administration, and an SBA processing system has slowed under the weight of applications.

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