SBA and small business disaster loans have never faced test like coronavirus

President Donald Trump and Capitol Hill are working on multiple fronts to make sure the U.S. Small Business Administration has the ability to offer small business owners across the U.S. as much as $50 billion in loans to stay afloat during the widening economic shutdown caused by the coronavirus. One huge issue goes beyond the money: The SBA has never faced a challenge of this magnitude in working with lenders to grant loans.

Marilyn Landis, who in a 30-year career as a commercial lender worked for three of the largest SBA lenders in the country, noted that the SBA has faced budget cuts in recent years. "I am critical because I love my child, but the SBA is being asked to take care of a lot, without being given funding to do it, and not as many resources to do it well." Landis is currently president and CEO of consulting firm Basic Business Concepts which works with many small businesses on financial management.

"It is unprecedented," said Chris Hurn, CEO and founder of Fountainhead, one of 14 nonbank SBA lenders in the country. While he believes the SBA will do everything it can as public servant to "step up," he remains concerned that they don't have the ability or infrastructure "to get the funds out."

A look at a few of the numbers are daunting.

A 2016 Congressional review covering a 15-year period of the SBA's disaster-relief loan program completed in 2016 shows that the SBA's disaster authority has never dealt with anywhere near this level of what are called "economic injury" loans to businesses.

The vast majority (83%) of disaster loans the SBA made were to individuals for property damage caused by weather incidents. Only 11% were to businesses and even less (6%) for what is defined as "economic injury disaster loans (EIDL)" as opposed to property damage. In the decade between 2005 and 2015, the SBA handled a total of $4 billion in disaster loans, though catastrophic hurricanes have caused short-term spikes in volume. 

In its more general lending program, known as 7(a) loans, the SBA has averaged 50,000 loans a year and $30 billion. 

Now if it's to keep America's small businesses from ruin, the SBA and its private-sector lending partners will be tasked with getting out to entrepreneurs almost double that annual loan amount, and in a fraction of the time. 

"Almost twice the number of dollars in half the time," Hurn said.

And even $50 billion may fall far short of what is truly needed.

There are roughly 7 million business within the small and mid-sized sector in the country with employees (meaning not sole proprietorships). If the SBA and its lending partners provided $1 million loans on average up to $50 billion, that would help 50,000 companies.

The first coronavirus relief package approved on Capitol Hill included $7 billion in disaster loan authority for small businesses, and there are expected to be multiple pieces of legislation across which more loan relief is made available through the SBA.

In the House of Representatives, Small Business Committee Chairwoman and New York State Democratic Congresswoman Nydia M. Velazquez introduced legislation last week for up to $25 billion in small business direct loans. Florida Republican Senator Marco Rubio is sponsoring Senate legislation to match President Trump's $50 billion call, through the SBA's traditional 7(a) loan (non-disaster) program.

On Monday, Senate Minority Leader Chuck Schumer will put forth a proposal with at least $750 billion in spending, including more relief for small businesses. 

Karen Kerrigan, president and CEO of the entrepreneur trade group SBE Council, said the SBA has proved it has the ability to scale up for disasters; however, she noted it does depend on the scale of the disaster and magnitude of loan volume in this case. And she said she can't recall a supplemental appropriation to the SBA of that magnitude now being talked about.

The average annual appropriation to the SBA Disaster Loan Program was $120 million from 2005–2015. The average supplemental appropriation for the same time period was $623 million — a yearly average of $408 million.

"SBA should have the capacity to pivot to a greater number of EIDL loans," Kerrigan said. "Of course, this all depends on volume, which will be driven by the extent of the economic damage and loan operations. They will have to evaluate their capabilities as the need for loans evolves and grows."

"This is not like a hurricane that flattens a town," Hurn said of the SBA's historical disaster definition. "What should probably have been the realm of FEMA is the realm of the SBA."

Landis of Basic Business Concepts, who has worked as a financial services liaison for the SBA in the past, said it has never faced coming up with a definition of disaster that looks like this.

"The easiest ones to spot are hospitality and restaurants, events and lodging," she said. "But what about the caterers and the ancillary services like laundry, as well as businesses where workers need to stay home with kids. How do we identify who is harmed? The issue with the SBA is if you overload it with $50 billion in loan requests, do they have manpower to do it, and if not, are they given the authority to delegate the underwriting to partners in communities?"

The SBA referred questions to its statement released on last Thursday outlining its disaster-relief loan program. The press contact for the release did not respond to multiple requests for comment.

The U.S. Chamber of Commerce Chief Policy Officer Neil Bradley said on CNBC's "The Exchange" on Monday that basic blocking and tackling of the SBA disaster loan program is among its top three legislative priorities. He said the loans should immediately be made available nationwide, "eliminating the complex and time-consuming local certification processes."

Bradley also said the SBA should be given the authority to streamline its disaster-loan approval process for amounts below $350,000 to provide emergency capital more quickly and remove the requirement that small businesses demonstrate that they cannot access credit elsewhere before turning to the SBA.

The panic among entrepreneurs and fears of a cash crunch are accelerating. Hurn said his lending company has had 280 loan inquiries since Friday night, which he said is unprecedented for his business. He's hosting a webinar later this afternoon for entrepreneurs; 450 already signed up. He is getting complete loan submissions from business owners, something that usually requires month of nagging.

"People are freaking out and they are panicking, and if we are not already at martial law beyond a few states, it will sweep through the rest of country," Hurn said. "No one will be doing much business except SBA lenders."

According to a National Small Business Association survey of its members conducted last week, 3 in 4 small business owners say they are very concerned about the economic impact of COVID-19, and nearly half have already experienced reduced customer demand for their products and services. More than half are now anticipating a recession in the coming 12 months compared with just 14% in January. Thirty-eight percent say they are not confident in the financial future of their business compared with just 15% in January.

"We've got to triage this," Hurn said. "If the business was thriving until mid-February and it's fallen off a cliff, and there are a lot of them, with 20-30-40-50 employees, they won't have the reserves to make payroll," Hurn said. "Those are the people we can help."

There also is the issue of enough lenders being up to the task, institutions which know these small businesses around the country well enough to assist the SBA. Hurn said only 14% of all banks, nonbank lenders and credit unions have made SBA loans in the past 12 months. While these lenders have worked with the SBA to make up to $30 billion in standard SBA loans, the 7(a) loans annually, Hurn said, "I don't know the last time a private lender made a disaster loan."

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"During the [financial crisis] recession I watched businesses doing all the right things to preserve their business unable to get loans and companies that should never have gotten loans but looked good on paper got funding," Landis said. "Someone has to set the parameters and that will be the hardest part. How do we define the damage? The lenders who already work with these clients know them best." 

Kerrigan said the big bank CEOs who met with Trump on March 11 pledged to keep the capital flowing to small businesses. "It would be nice to hear specifically how they are going to help," she said.

The congressional review of the SBA disaster loan history showed the average loan approval and disbursement was four weeks. That may be too long in this situation, and the SBA has not yet laid out rules for how loans will be evaluated and made in this scenario.

"The time is my absolute biggest fear," Hurn said. "The primary mechanism to get relief and recovery for businesses is going to be the SBA and it can't take weeks or months, that will be catastrophic and a real risk of running into a depression if they can't move quickly." 

Even if Congress passes legislation tomorrow, the SBA has to promulgate rules and regulations for the lenders. He said if that takes weeks rather than days, "God help us." 

"Having access to that capital as quickly as possible will be critical to the survival of many of these businesses," Kerrigan said. "As well as their ability to hold onto employees or bring back workers that they have had to lay off." 

Dr. Deborah Osgood, a workforce development and small business coach, said it's critical for small business owners to remember amid the panic they may be experiencing as sales plummet that this is the time to be looking to the SBA and lenders to take action. 

"Everyone is panicking and it is 100% tunnel vision on what they need to do today to minimize the impact," Osgood said. "They are not recognizing that need to simultaneously look outside at what is happening with the SBA and keeping their customers confident. I encourage them to look beyond the tunnel vision and pay attention to opportunities starting to happen in economic development." 

She said the SBA has only one option when it comes to being ready with the infrastructure to handle this crisis: "They better be."

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