Wine Country lenders tackle flood of small-business requests for new coronavirus relief loans, but questions remain
Three days after the official start date for banks to begin accepting the Small Business Administration's Paycheck Protection Program loan applications as part of the CARES Act relief package and coronavirus loan relief options for businesses, some banks have delayed implementing this process, while striving to set up internal handling procedures.
Others held back, attempting to seek clarifications on the guidelines and criteria associated with these loans. Here is a status report on what three SBA preferred loan providers are doing.
Summit State Bank
“We went live Friday afternoon, taking 30 applications from our customers after reading through a 31-page document outlining interim final rule guidelines received from the SBA on Thursday,” said Brian Reed, executive vice president and chief credit officer for Summit State Bank. “We received another 100 applications over the weekend.”
While the SBA document was helpful, it also left many questions unanswered, he said, such as specifics on what banks need to document and calculate the loan amount, uses of proceeds and ultimate debt forgiveness.
“There was an email string with dozens of bankers over the weekend, many of whom have different interpretations about the PPP rules," Reed said. "In the days ahead, we expect more information and clarifications will be coming from Washington. Right now, if you talk to five people, you may get five different viewpoints on what is required.”
He said these loans can be good for those small businesses financially impacted by the COVID-19 economic crisis and for banks administering them.
“If handled appropriately, small businesses can receive 2.5 months of payroll and potentially have the whole loan forgiven," Reed said. "The main advantage to banks is to help their small business customers reducing potential default rates and/or losses down the road. Is this program perfect? No. Are there risks for borrowers? Yes. This is a two-year loan so any part not forgiven must be paid back in a short period of time. Our role is to educate borrowers how this program works such that all or most of the loan they apply for will ultimately be forgiven.”
To illustrate how this could impact a borrower, Reed said assume that their average monthly eligible payroll is $100,000 so the maximum loan amount would be $250,000. If the company maintained the payroll numbers after receipt of the loan, the forgiveness amount would roughly be eight weeks of payroll or around $200,000. They would also be able to include costs associated with rent, interest on mortgage obligations and utilities to the amount requested for debt forgiveness.
However, 75% of the forgivable costs must come from payroll costs. So, if a company only hired back 50% of their previous payroll costs, then the eight weeks of payroll would only be $100,000 and the amounts forgivable from the other sources would be limited to about $33,000. Therefore, this company may have a loan after forgiveness of about $120,000.