As they await guidance from the U.S. Small Business Administration, community banks are preparing for the disbursement of $349 billion worth of loans to help businesses affected by the COVID-19 pandemic.
But banking officials in New Orleans and around the state say it could be challenging to disburse the funds immediately.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law March 27. It includes two loan programs: traditional SBA loans of up to $2 million, with increased eligibility for businesses and nonprofits with fewer than 500 employees; and a new Paycheck Protection Program which New Orleans-area financial professionals have predicted will be popular among businesses due to its loan forgiveness portion.
Local banks will be the initial point of contact for small businesses, particularly for the Paycheck Protection Program. Banks will oversee submissions to the SBA for clients, make lending decisions and funnel much-needed funds to business owners.
The Paycheck Protection Program provides eight weeks of cash flow assistance through 100% federally guaranteed loans to cover payroll, salaries, rent, utilities and other debt obligations. This loan does not require SBA approval, making it easier for local banks to make credit decisions. Traditional fees would be waived as well as testing to determine if the borrower is getting credit somewhere else.
The interest rate on this loan is 4%, and repayment terms can be extended out 10 years with an automatic deferral of six months. The program allows businesses to request forgiveness if they maintain their payroll from Feb. 5 through June 20. There also is a payroll tax deferral..
Loans can be up to 2.5 times the borrower’s average monthly payroll costs, not to exceed $10 million.
Banks need guidelines to be issued by the SBA before the Paycheck Protection Program can begin. Those will hopefully come this week, said Ron Samford, Metairie Bank president and CEO.
“There likely will then be some time required to familiarize ourselves with details of the information required of the borrowers,” Samford said. “We’re already seeing a high level of interest among our customers, and we’re not sure if the SBA is staffed up appropriately to support what is likely to be an initial surge in loan requests, including responding to questions and issuing loan numbers when applications are submitted by the banks.”
Samford said it will be a challenge to make these funds available promptly, but they’re aware of the sense of urgency and preparing to make sure all systems are ready. The SBA has 15 days to issue guidelines.
“There are still a lot of questions that bankers can’t yet answer, so it will take some time to get the program up and running and actually get the funds in the hands of those affected,” Samford said. “Right now we have more questions than answers.”
Robert Taylor, president and CEO of the Louisiana Bankers Association, said many banks in Louisiana will need to become qualified SBA lenders. He hopes that will be an easy process.
“Bankers are also working under conditions imposed on them by the virus,” Taylor said. “Some banks have different sets of employees in specific areas of responsibility in the office alternately, so it one becomes sick it doesn’t potentially infect all the employees in that area of the bank.”
He said bankers generally are working from home now and have skeletal staffs.
“Given the significant publicity the SBA offers, bankers are hearing from all their customers almost simultaneously,” he said. “I have confidence that bankers are anxious to serve their customers as expeditiously as possible.”
Trisha Voltz Carlson, executive vice president and investor relations manager at Hancock Whitney Corporation, said their intention is to participate in the SBA program to help small business owners.
“Soon Hancock Whitney will be providing more information to our clients with information about how to apply and what is involved,” Carlson said.
Mike Townsend, senior director of public relations at the American Bankers Association, said the ABA sent a joint letter to SBA last week asking for clear guidance on the program. He expects more details by the end of the week.