As the coronavirus outbreak widens, large-scale quarantines and social-distancing measures are driving sharp declines in business revenue across many sectors. Around the globe, companies have been forced to shift business priorities.
In these uncharted times, what can you expect from small business lenders?
How Banks Are Responding
Banks across the United States are responding to the coronavirus in different ways. Some are implementing changes across the board, while others are evaluating specific customer situations. Depending on the bank, fee waivers, payment deferrals or loan modifications may be available.
Here are some ways specific banks are helping:
- In response to COVID-19, JP Morgan Chase has committed an initial $5 million to aid small businesses in the U.S. in addition to dedicating millions more for global humanitarian relief, economic growth and public health assistance. The bank’s focus will be on helping Black-, Hispanic- and Asian Pacific Islander-owned businesses that are finding it difficult to access financing and stay afloat.
- Peter Scher, head of corporate responsibility and chairman of the Mid-Atlantic region, indicated that the bank is “…mobilizing the firm’s resources to support customers, employees and communities—especially the most vulnerable—in this time of crisis.” He goes on to say, “We are making immediate investments to help those most affected by humanitarian challenges and looking into sustainable and innovative solutions to help small businesses and underserved communities recover when the crisis subsides.”
- On a similar note, Wells Fargo has committed resources to helping entrepreneurs. It will partner with the Opportunity Fund, a leading nonprofit business lender, to provide $2 million in funds to small business owners. CEO Charlie Scharf commented, “We will continue to evaluate this fluid situation and take additional action as necessary.”
How the Government Is Responding
The federal government’s Small Business Administration (SBA) has responded to the coronavirus pandemic by providing various forms of relief.
SBA Economic Injury Disaster Loans
The government is bolstering impacted businesses with low-interest disaster loans of up to $2 million per applicant. The SBA’s Economic Injury Disaster Loans will be available to companies located in declared disaster areas. Funds are intended to cover ordinary operating expenses that are necessary to run business, such as payroll, fixed debt and accounts receivables. The interest rate for these loans will be capped at 4%, and repayment terms can extend to 30 years.
SBA-Backed Paycheck Protection Loans
Additionally, the federal government’s historic $2 trillion stimulus bill has $349 billion designated for guaranteeing small business loans, which can be eligible for forgiveness. All small businesses that have been impacted by COVID-19 and have 500 employees or less can apply, as well as nonprofits and veterans organizations. Sole proprietors and independent contractors are also eligible. Additionally, businesses with more than 500 employees can apply in some cases, depending on the industry.
Applicants can request loans for up to 2.5 times their 2019 average monthly expenses for payroll, benefits, state and local taxes and employer compensation for retirement, not to exceed $10 million. If your business is new or seasonal, different time periods will be used for your calculation. Funding is available through banks, credit unions, fintech companies and lenders that partner with the SBA.
Companies can apply for loan forgiveness to cover qualifying loan funds they used in the 8 weeks following approval. The amount of the loan eligible for forgiveness will be contingent on the use of loan proceeds and the number of employees a company keeps or rehires at their salary levels. Payments on loans that are not forgiven can be deferred for up to 6 months.
Emergency Business Grants
Emergency grants are also available, to the tune of $10,000 per qualifying business, to assist with immediate operating costs.
While the U.S. government has promptly responded to these unprecedented times by providing such sweeping initiatives to mitigate the coronavirus crisis, the process to funding could take some time. This is time many small business owners are running out of.
In fact, Goldman Sachs’ recent 10,000 Small Businesses survey of 1,500+ companies indicated that 51% of business owners would not be able to operate for more than 3 months.
How Online Lenders Are Responding
As banks are varying in how they respond to this pandemic, so are online lenders, known for providing streamlined applications and speedy access to financing.
Some online lenders have not changed their underwriting criteria. Instead, they’re looking more closely at each business on a case-by-case basis.
They also may be evaluating such factors as location and industry, being more scrutinous of those applicants in highly impacted regions and sectors (e.g., food service, travel).
Lenders might also weigh whether the business is essential, non-essential or non-essential but still able to operate, such as through online platforms or teleservices.
Additionally, online loan providers may review a company’s month-to-date revenue to evaluate drops in sales since the coronavirus outbreak became rampant in the U.S.
Some have modified their guidelines for credit score and annual revenue requirements.
Still, other online funders have stopped lending all together because they’re unable to assess the current risk in lending. Headway Capital and Business Backer, for instance, have added notices to their websites indicating that they aren’t accepting new customer applications at this time.
To hedge against the risk of potential nonpayment and missed payments in these precarious times, other lenders’ may need to adjust interest rates. Additionally, loans will likely have shorter repayment terms. That said, in a March 23, 2020, New York Times article, Kathryn Petralia, president of Kabbage, was summarized as saying that while some of their customers will have less access to credit, Kabbage’s interest rates would not be going up.
What It Means If You Already Have a Loan
What should you expect if you already have a loan and are having trouble keeping up with payments? Contact your lender immediately to see how they can help. They may be able to reduce or pause your payments. Keep in mind, lenders don’t want you to default. And given the current economic climate, some lenders may be willing to work out a reasonable agreement with you.
If you have an existing SBA loan, you’ll be eligible for immediate relief under the new stimulus bill.
Specifically, the SBA will extend forgiveness on portions of existing 7(a) loans used to cover certain costs such as payroll, rent and utilities for 6 months.
What’s more, an SBA loan holder can apply for additional government-backed funding to help cover payroll expenses, as laid out by the government’s stimulus package.
Additionally, under government provisions, banks will be able to extend the repayment periods of current loans.
The Bottom Line
Everything seems to be changing daily and rapidly. And you can expect they’ll continue to evolve as the situation unfolds. In times like these, however, it’s important to keep in mind that this too shall pass. In the meantime, lending programs are available to promote resilience and perseverance among small business owners throughout the nation.