- President Donald Trump signed a new stimulus package Friday, meaning the paycheck-protection program for small businesses will be replenished with $320 billion.
- The first phase of the PPP sparked backlash as funds quickly ran out.
- The government allowed alternative lenders to participate this time and broadened the reach of the program, but those involved still point to a laundry list of concerns.
- Even after the application is received, banks are struggling to process and underwrite loans for companies they don’t have a banking relationship with.
- Experts warn that lenders and borrowers also need to consider how they will be be able to track the paperwork to ensure loans are forgiven.
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President Donald Trump signed a new stimulus package on Friday that replenishes funds for the paycheck-protection program for small businesses, but hiccups around distributing loans in such a large-scale operation may be far from solved.
The new package injects $320 billion into the PPP, which is aimed at helping small businesses with government-backed loans, after its initial $350 billion in funding ran out in just two weeks.
The program sparked criticism as publicly traded companies took loans and many small businesses were unable to secure funds.
To be sure, the government has looked to clarify guidance around who can get loans this time around. And in an effort to help streamline the process and cast a wider net, alternative lenders have been approved to distribute loans for the second round of funds.
And while the hope is the newest round will reach small businesses truly in need, there is a chance the problems that existed the first time around will only be exacerbated with these latest set of loans.
The PPP has been a confusing process for all
Ocrolus is one of many fintechs working with either lenders or small businesses to help facilitate the application process. The New York-based startup, which raised $24 million in a Series B led by Oak HC/FC in June, works with lenders by digitizing documents, including those that play a crucial role in the underwriting process.
“There seems to be a pain point in every step of the way,” said Ethan Schwarzbach, head of business development for Ocrolus. “And that’s not to criticize anything, it’s more just the way things are. When you have to spin up a program like this so quickly and with such an amount of capital and, I would say, lack of guidance, that’s a big problem.”
Schwarzbach told Business Insider the lack of guidance from the Small Business Administration is one of the reasons why the first round of funding mostly landed with businesses that were already customers of banks.
The fact the Fed wasn’t initially clear about buying back loans from lenders made banks hesitant to underwrite for customers they didn’t have a preexisting relationship, he added.
That lack of understanding also trickled down to the small businesses themselves.
Marwan Forzley, CEO and founder of Veem, told Business Insider, borrowers didn’t know where to start when it came to what documents to include or where to apply.
Veem, which Forzley described as ‘Venmo for business’ and is backed by Goldman Sachs and Silicon Valley Bank, is leaning on the banking relationships it already has in place to streamline the process of connecting small businesses to banks that can lend through the SBA program.
Forzley compared the situation to filing taxes, where entire industries are built around helping people file properly. Meanwhile, when it comes to the PPP, borrowers and lenders are adjusting on the fly.
“It’s not like this is a system that has been put in place that has seen a lot of time here to get ready,” he added. “Things are in flux. Whoever’s answering the phone is learning with you.”
The challenges of data
As a relief bill was going through congressional approval, buzzy fintech Plaid, which is being acquired by Visa for $5.3 billion, started building a product to help banks and small businesses link into payroll data from providers like ADP and Gusto.
Plaid serves as the data pipeline between consumers’ bank accounts and fintechs like Venmo. And it’s been an advocate for data control and transparency across financial services.
Small businesses can collect their payroll data in several ways, from printing out records or sending in PDFs, John Pitts, head of policy at Plaid, told Business Insider. But efficiency is key, and time spent manually tracking down data could mean a business doesn’t complete their application in time.
“As you can see from how quickly funds were drawn down out of the initial pool — and I expect them to go even faster this time — speed is incredibly important to make sure that your small business gets access to the funds it needs,” said Pitts.
PayNet, a small business credit-score provider that was acquired by Equifax last year, rolled out a data platform that lenders can use to validate applicants’ credit information.
The ongoing PPP process has shed light on the lack of technology and data availability in the small business sector, Bill Phelan, cofounder and president of PayNet, told Business Insider.
Spending time tracking down documents, then scanning, faxing, and emailing them around, won’t work, Phelan said.
“It has to be automated. You’ve got to have an API link set up, you’ve got to be able to ping databases in sub-seconds or seconds,” Phelan said.
Processing applications also proved tricky —and left a backlog
But getting the application in is only half the battle. Once received, there is still plenty of legwork the lender needs to do.
Biz2Credit, which traditionally works with small businesses to get lending online, has built out a platform that helps its partner banks with onboarding, origination and underwriting. Thus far, it’s processed over $1.5 billion in loans, Rohit Arora, CEO and cofounder of Biz2Credit, told Business Insider.
Naturally, a major part of the process is doing the proper due diligence on businesses, commonly referred to as know-your-customer or know-your-business. However, with some banks lending to new customers, or ones they don’t have a lending relationship with, that can be complicated.
With a majority of small businesses banking with the top 20 banks in the country, he added, this problem is exacerbated during the process as borrowers look for relief beyond the major banks that have been inundated with requests.
“There’s somewhat of a back-up demand from customers, especially at large banks who didn’t get money in the first round. And I think for a lot of the large banks trying to accommodate anybody who is new to the bank, to me it looks impossible,” Arora said. “And for a lot of smaller banks … if they don’t have the technology stack then they won’t be able to do that.”
Rho, an upstart digital bank aimed at startups, has also been working to automate PPP loan applications.
“Most financial institutions and by proxy us as well, are using the second tranche of funding to make sure that everybody that was in the queue for the first one that did not get it is able to get served,” said Everett Cook, co-founder and CEO of Rho.
With larger banks being overwhelmed by applicants, Rho saw a surge in interest from its existing and prospective clients. It’s been providing assistance getting the applications together and submitting them to its network of partnering community banks.
“It’ll be a big challenging for people that are moving late because there are people that have been waiting basically since the day the program opened for funding,” Cook told Business Insider. “Nobody was able to get 100% of applications through, so there’s a pretty large backlog.”
Filing for loan forgiveness, too, may be a challenge
Even once a small business secures a loan, it’s not completely free and clear. To ensure the loan is forgiven, it’s required to prove it spends the funds appropriately.
Some say the focus should be on getting the loans distributed to those in need. Small businesses won’t need submit documents to guarantee loan forgiveness until the end of June. That should be enough time to build out the necessary framework to collect and send the necessary documents.
But others view it as a much bigger problem.
“If you think the getting the money out was tough, imagine trying to forgive them all, and do it accurately and consistently,” said PayNet’s Phelan.
Plaid is also working on a data tool for when small businesses will need to file for forgiveness, Pitts said.
Arora also warned that it will be difficult. While banks might be able to manage it now via a patchwork process, to do so efficiently at scale is a different story.
“I think that’s going to be a big, big piece because that’s where the real compliance piece also comes in,” he added. “There will be a huge flood of work the banks will have to do at that point in time.”
Fintechs acting like banks, and banks acting like fintechs
While fintech lenders like Kabbage and PayPal have been approved to issue PPP loans, many weren’t given the green light before the first wave of funding ran out. In the interim, Plaid has seen increased interest from banks and fintechs.
“We’ve actually had as many banks as fintechs come to us and express interest in this product for helping them with round two of the funds,” Pitts said.
And with the second wave of PPP funding coming, Plaid’s fintech and banking partners are ready to go on day one, Pitts said.
“This is accelerating the move from banks to act more like fintechs, and for fintechs to look more like banks in a lot of their core offerings,” Pitts said.
The silver lining to the entire experience could be increase collaboration and data-sharing between the two sides, Pitts added. Being able to share know-your-client data, for example, could be embraced.
“I expect some of those street-wide solutions to be much more easily adopted, not only by the businesses but by the regulators,” Pitts said, “because even the little pieces of them that were adopted in this crisis were so essential to making things work more efficiently.”