The challenge of getting all that Paycheck Protection Program (PPP) money out to businesses is the inverse of what’s going on with the pandemic itself. At the same time that the U.S. is trying to avoid a spike in demand for its healthcare infrastructure, it is actually invoking for its small-and-midsize-business (SMB) lending infrastructure a 100-year storm in lending demand. Unsurprisingly, the outcomes are mixed. And the longer the lending infrastructure takes to come up with the not-so-easy improvisations and adaptations to pipe out all that PPP money, the more businesses will suffer, the more payrolls won’t get met, and the more financial pain individuals will feel.
So the question is really legit: Why can’t the U.S. get the money out faster? Well, first there’s the truly spiky nature of the demand placed on the SMB-lending rails over which this money will be piped into the economy. This—and the attenuating outcomes of the demand spike—are conveyed by the following handful of phenomena, anecdotes, and statistics:
- Volume: The PPP comprises US$350 billion in loans. To put this into perspective at the bank level, I heard about a small bank in the Midwest that typically closes 2,800 SMB loans a year but has closed 3,100 PPP loans since the program launched five business days ago. Not a curve—an exponential spike. Such phenomena always trigger unanticipated and sometimes cascading problems at financial institutions, and it doesn’t matter how big or automated they are.
- Novelty: A PPP is a riff on an SBA Express loan; it has customized terms and requires banks to perform little or no underwriting because the risk is borne by the SBA. Ergo, none of the existing product configurations, workflows, or onboarding processes at lending financial institutions—big or small—properly accommodate the PPP. New ones are required, and that takes time.
- Errors and omissions: The PPP had to be launched, and fast. On the line was the solvency of millions of businesses, their ability to make payroll, and their employees’ ability to pay their rent or buy groceries. The valid need to proceed with haste made the PPP more like an agile software development project than the launch of a new government program, which it actually was. As a result, things got missed. Guidance about how to calculate payroll was flawed in more than a few areas of the application process. For example, confusion abounded about whether to include contract employees or those based outside of the U.S. when calculating payroll, a critical value needed to determine the maximum permissible loan amount.
- PPP = process, process, process: To fund an SBA loan, a loan number from the SBA is required. Well, the folks at the SBA have been flattened under a spike, not a curve, so those numbers are very delayed.
- Liquidity: Banks’ loans are generally funded with deposits. Peculiar about the PPP is that it creates a huge spike in loan demand and funding in the complete absence of an accommodating increase in deposits. As a result, they’ll be able to fund them only by selling the loans at par to the federal government under a program launched only several days ago.
- Preexisting conditions: It’s yet to be determined why, but there is a lot of anecdotal evidence that banks are extending PPP loans to businesses only if there is an existing credit relationship. And “existing” can be narrowly defined. I heard about a small-business borrower that sought a PPP loan at its primary bank, where it had a deposit relationship and had repaid a loan during 2019, but was unable to seek a PPP loan because of the absence of an existing lending relationship.
- Social-distancing compliance: As if the above bullet points are insufficient to invoke empathy for the folks trying to pipe out all this money to businesses, there is also the need to book these loans without face-to-face interactions. Here, the challenge is twofold. First, my data tells me that small businesses are accustomed to interacting—and tend to prefer to interact—with their bankers in person; that’s not happening anymore. Second, socially distanced lending requires digitalization, something at which large banks excel more than small banks, which are the primary source of capital for small businesses and are being relied upon disproportionately by the government in the distribution of PPP funds.
In the problems currently encountered by the PPP, I see the implications of a wise choice made by the government facing two truly unappealing choices. Launch slowly and methodically with lots of efficacy, perfection, and few public-relations black eyes over the span of several weeks or months. Or get the program to market quickly, effectively, but with flaws–some of them big. The former makes for good politics, but the delay causes business bankruptcies, (even more) layoffs, and societal damage in the form of suicides among the bankrupt and the laid off. I much prefer the government’s agile approach of getting the money out quickly, but with flaws that will nonetheless get worked out. Our infrastructure for SMB lending was built by smart, innovative, and hard-working people—some of whom are working around the clock right now to accommodate the PPP. Give them a little time, and we’ll get where we need to be.
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