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Small Business Bailout Tiptoes Near Disaster As Banking System Scrambles To Supply Unprecedented Demand

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Tonight at midnight, the most critical – if hardly biggest – part of the Fed’s $2 trillion fiscal stimulus is expected to begin: that’s when small and medium business with 500 employees or less can request a loan of up to 2.5x the average monthly payroll (capped at $10 million), meant to buy cash-strapped companies just under 3 months in liquidity. As we discussed previously, the loans which are packaged under the SBA’s Paycheck Protection Program carry a 0.5% interest rate, and would be forgiven if their proceeds are used toward operational uses such as payrolls, utilities, and rent.

Needless to say, getting these loans into the hands of America’s 30 million small businesses is absolutely critical: they employ about half of U.S. private sector employees, according to the Small Business Administration website.

There is just one problem: with just hours to go until millions in small businesses across the nation scramble to apply for much needed funding, the program appears to be on the verge of collapse amid what appears to be sheer chaos between the Treasury, the Small Business Administration, and the various commercial banks that will be tasked to loan the action money.

One reason why the program is woefully unprepared for a Friday midnight rollout is that banks that haven’t underwritten SBA loans before will need to get onboarded in the system. However, as Politico reports, as of last night, there was no application available for banks to do this, and as CNBC’s Kayla Tausche adds, Treasury remains committed to originating these loans beginning tomorrow, despite hiccups.

Meanwhile, with the supply side choked off amid last minute rollout chaos, demand for the bailout cash is exploding with some estimates that as many as $1 trillion in loan requests will be available for the $350BN in “first come, first serve” loans. As Tausche adds, “industry sources say a “feeding frenzy” of small biz demand for limited resources will be problematic for the system, technically” and notes that “executives are preparing for a situation akin to the 2013 roll-out of

That, for those who may not recall, was an unmitigated disaster lasting for months.

But wait there’s more: as CNBC’s Kate Rogers reports, an “official familiar with the Paycheck Protection Program loans rolling out tomorrow says official guidance for banks is not yet finalized” with Kayla Tausche adding that in addition to general guidance, banks are asking Treasury for two specific changes to the small biz program:

  • Smaller banks want higher interest rate so they don’t lose money
  • Big banks want “know your customer” rules waived so they can lend to co’s they haven’t worked with

But while logistical issues will be overcome, a potential dealbreaker of a problem is that the physical source of new loans is getting cold feet. According to Reuters, thousands of U.S. banks, including some of the country’s largest lenders, have said they may not participate in the federal government’s small-business rescue program due to concerns about taking on too much legal and financial risk.

While the Trump administration has said it wants the loans disbursed within days, bank representatives, as well as thousands of community lenders, have expressed serious reservations about participating in the scheme in its current form and called that deadline totally unrealistic. READ MORE

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