Dear Congress: Don’t let initial PPP be final word on small-business aid

The coronavirus pandemic has shut down small businesses across the country, spreading faster than the economic relief that these businesses are now struggling to access.

Many small businesses are locked out of the $350 billion in stimulus loans that Congress recently authorized simply because the business owner banks with the “wrong” financial institution — a bank that does not make Small Business Administration loans or an SBA lender that opted not to participate in the new Paycheck Protection Program.

At the current rate of uptake, much of the $350 billion in funds has been claimed by the large banks. The current first-come, first-served solution lowered the incentive for smaller banks to participate because they could not build out a front-end application process before the funds were depleted by larger banks.

This strategy has effectively stranded millions of small businesses without access to the very program that was designed to save them simply because they are customers of a credit union, or a regional or community bank. Meanwhile, fintech lenders, which disproportionately serve smaller businesses, got a late start into the program.

Even for small businesses that have successfully applied for a PPP loan, there are still significant gaps in their ability to obtain SBA guarantees and receive the funding. To date, the SBA is reporting the number of applications received, but not the amount of dollars distributed.

In the program’s first week, the largest challenge was small businesses' difficulty gaining access to lenders’ online applications. The next key bottleneck was lenders’ ability to upload applications to the SBA’s E-Tran system, which was not built to scale to this volume. More challenges will emerge about how the SBA reviews applications, provides loan guarantees on the loan numbers and disburses the funds — steps that are largely a manual process.

While the horse is nearly out of the barn for the first $350 billion, it is not too late to make changes to the next relief package being contemplated by Congress. To expand PPP access to all small businesses and guarantee a fair distribution of funds (beyond the footprint of the major banks) regulators and lawmakers should consider the following changes in the next relief package:

First, lawmakers should move forward with proposals to allocate funds specifically to smaller lenders and vulnerable businesses. These lenders serve a high proportion of small enterprises and minority- or women- owned businesses in underserved geographies.

More specifically targeted allocations would incent smaller banks and community development financial institutions to participate.

Secondly, while the new law permits fintech lenders to apply for the PPP, only large ones have been approved for it so far. To expand access to more small businesses, every effort should be made to accelerate applications from fintechs. Many of these nonbanks specialize in loans to very small companies that banks rarely serve.

Thirdly, there should be a greater effort to facilitate bank partnerships with fintechs. The urgent distribution of PPP funds has been hampered by the technology limitations of smaller banks. Fintechs with agile tech development can help solve this.

Based on results from a three-day hackathon recently hosted by AIR (the Alliance for Innovative Regulation), fintechs showed they can already provide: a universal platform for onboarding community banks; automated payroll analysis for eligibility; know-your-customer authentication; document management and verification; and anti-money-laundering and fraud support. Separately, fintech lenders that are too small to apply for the PPP could act as "agents" for communty development institutions and smaller banks to ensure the full distribution of fund allocations.

Lastly, the SBA’s E-Tran loan processing system, despite enhancements last week, is still a bottleneck in getting urgently needed funds to small businesses.

Two possible remedies should be considered. First, the SBA could partner with fintechs that have ready-made inexpensive solutions, using emergency authority for sole-source contracting if needed. Second, the SBA could establish a bulk application process for major SBA lenders which are experienced with the program.

The SBA would preallocate these banks with a funding allotment and a set of associated loan guarantee numbers. The lenders would then submit the loans in batches timed to SBA capacity, to relieve pressure on the approval process.

Getting critical financial support to America’s small businesses has taken more time and been more complicated than anyone has hoped. The process is moving forward, but as one problem is solved, it exposes the next bottleneck.

While the path to get the program to work for some small businesses is blazing forward, there is an opportunity here to implement new policies that can radically expand access and fairness for small businesses across the country.