Hurry Up and Wait for SBA Help
The Small Business Administration shared its final guidance around the Paycheck Protection Program, and financial institutions are reeling. But as the banks, the SBA and the government figure things out, franchisees and franchisors that qualify should get in line.
The PPP is a key program designed to help small business in the sweeping, $2.2 trillion CARES Act, which was passed to help the country deal with widespread effects of the COVID-19 pandemic. At first blush, the program sounds like an incredible lifeline for businesses forced to shut down or drastically change their operating model. Businesses can borrow 2.5 times their average monthly payroll for the last year and spend it on common business expenses like employee compensation and some utilities and rent costs. And if businesses keep or rehire employees (reaching the same full-time equivalence they had prior to COVID-19) by June 30, the loans are forgiven. On top of all that, interest rates for the loans are capped at 1 percent (a last-minute bump up from 0.5 percent in prior guidance).
But there are some issues, namely in that interest rate limit. Many loan originators say that’s simply not enough to make ends meet. Small business owners facing bankruptcy or historic sales declines aren’t likely to shed many tears for the banks, but it could seriously affect the supply of such loans.
Chris Hurn, founder and CEO of Fountainhead, one of a handful of non-bank SBA lenders and loan originators, explained why. Namely, firms like his won’t be able to package loans like this and sell them to a larger capital source and sitting on them would eat up capital for other loans.
“First, there’s not going to be a long enough time on these loans, nine months perhaps. But more importantly, the economics are not there. If you cut the rate back, which should have been 6 percent, now it's 1 percent, there’s nothing left there for anyone to do anything with other than the federal government,” said Hurn. “The Treasury said they intend to purchase these loans, but we don’t have the mechanism for that.”
Typically, a bank would see SBA loans with 6 percent interest, a small margin but doable. At 4 percent seen in other emergency loans, it's tricky, but at 1 percent it's hard to find someone to take over the loan, Hurn said.
With little clarity, he said he’s joining other lenders and putting PPP loan work on hold even as a massive queue forms. And he’s not alone.
“We feel it would be inappropriate to launch without the necessary information that our customers need to provide in addition to what the bank needs to process these specific loan applications,” wrote Fifth-Third bank in a statement on the PPP loan program. “Most, if not all, of our peer banks will join us in delaying their programs tomorrow.”
The country’s largest bank, JPMorgan Chase, also said it would be delaying PPP loan processing until there was better clarity, both on what lenders need to provide and what borrowers need to do.
Citi has also said it would delay processing beyond the April 3 start date as it awaited rules. ApplePie Capital is allowing borrowers to pre-apply, but hasn’t given guidance on when processing will start. Bank of America announced those with existing relationships with the bank can apply online. And therein lies another issue: people who don’t have a good bank relationship may be waiting a while just to get in the queue, let alone get a check.
Mike Lamb, a longtime franchisee with Noodles & Company and an independent restaurant operator, said he’s in the mix already, having pre-applied.
“That’s what’s going to separate people,” said Lamb. "There are bankers out there like mine that were ahead of this. I got a text saying, ‘Get near your computer and get ready to send this information.’”
For folks that aren’t in a text-level relationship with their banker, things are tough. Sites are crashing, phone lines are failing and physical branches are closed. That’s adding incredible financial anxiety to small business owners as they ponder how to pay rent, pay employees, vendors and feed their family. Compounding that, there’s a real fear that even the final $377 billion won’t be enough.
Financial services and analysis company BTIG assumed every Papa John’s location, for instance, would seek between $45,000 and $50,000. But for a McDonald’s doing $2.5 million, it could seek more than $150,000. So just with the Top 200 brands in the franchise world (which is just 4 percent of small business) that adds up fast. If every Franchise Times Top 200 location sought $150,000, that’s already $77 billion of the allocation in the CARES Act. While another round of help is likely at this point, who knows when that will come and what sort of complications it will bring.
The advice A&W CEO Kevin Bazner is giving franchisees wondering what to do next is just get in line, even if they’re not yet in dire straights.
"There is money available, it depends on individual circumstances, but some of the normal rules have been removed and we've been encouraged by our conversations with the SBA,” said Bazner. “But we’re telling folks to apply for these loans if you do need it. Most importantly, get into the queue, get a case worker, which they will assign you.”