Red sign hanging at the glass door of a shop saying “Closed due to coronavirus”.
OBSERVATIONS FROM THE FINTECH SNARK TANK
The Wall Street Journal reported:
“The House is expected to approve an additional $320 billion for the Paycheck Protection Program (PPP), amid concerns by lenders and small-business advocates that the funding still won’t be enough to meet demand for the coronavirus aid.”
This begs the question: How much would be enough?
Pulling Numbers Out of Thin Air
The new tranche of funds—$310 billion at signing—puts the PPP total at about $660 billion. The original allotment of $350 billion was loaned out within a week, leaving many applicants (and would-be applicants) empty-handed.
In addition to the $14 billion in PPP loans it’s already submitted and disbursed, JPMorgan Chase has an additional $7.3 billion in processed, but not submitted, applications.
If Bank of America—which accepted $43 billion in PPP loan applications—is in a similar situation, then it’s sitting on more than $20 billion in unsubmitted loans.
Add in KeyBank—which lent $9 billion—and total processed but unsubmitted loan apps could already exceed 10% of the new allotment. From just three banks.
It makes you wonder if the House just pulls numbers like $310 billion out of thin air. They could look at actual payroll data to estimate loan demand, but there’s no talk of anybody looking at that.
Is there any way to determine how much small businesses need?
Small Business Demand for Loans
The study focused on small- and medium-sized enterprises (SMEs) with $100,000 to $5 million in revenue, and who employ more than one person—in other words, the types of companies the PPP is supposed to support.
That last point is often misunderstood, as evidenced by one senator who commented:
“You big banks out there: You get that money out to those mom-and-pop shops, those one-person businesses.”
Of the nearly 31 million small businesses in the US, roughly 25 million have no employees—and as such, not the type of companies the Paycheck Protection Program was designed to support.
Small Businesses Expect to Borrow Nearly $2.6 Trillion
According to the study—conducted at the beginning of March—the six million small businesses with employees borrowed slightly more than $1.9 trillion in the past two years and expect to borrow nearly $2.6 trillion over the next two.
Small business borrowing
Source: Cornerstone Advisors, Autobooks
That was the outlook before the shutdown of the economy.
With the first round of PPP funding, small businesses have already borrowed 13% of what they had expected to borrow over the next two years.
A few segments stand out—services companies (including restaurants) have borrowed a third of what they anticipated, and manufacturing and wholesale trade companies have borrowed about a fifth of their expected loan needs for the next two years.
With the new round of funding, loans provided by the Paycheck Protection Program will account for roughly half of what small businesses were planning to borrow in 2020 (assuming equal borrowing over the next two years).
Who Small Businesses Expect to Borrow From
As of an April 8 filing, Bank of America had received applications for $43 billion in PPP loans and JPMorgan Chase had received $14 billion as of an April 14 filing. Wells Fargo—which I haven’t found a filing for—said it would lend up to $10 billion.
Together—assuming Wells lent $10 billion—the three banks accounted for about one-fifth of the total PPP pot.
This shouldn’t be surprising.
According to the Cornerstone/Autobooks study, 57% of small businesses with revenue between $100k and $50 million consider a megabank—BofA, Chase, and Wells—their primary bank.
Over the past two years, SMEs have turned to the three megabanks for roughly a third of their borrowing needs. Regional banks picked up about a quarter of the total, with community banks getting 11% and credit unions 2%. Non-bank and digital lenders accounted for nearly 30% of small business lending.
Small Business Loan Originations by Type of Institution
Source: Cornerstone Advisors, Autobooks
Looking ahead, small businesses anticipate borrowing a larger percentage from regional banks and other lenders (non-bank and digital) at the expense of megabanks and community banks.
This shift will be dampened by the $60 billion in the second round of PPP funding earmarked for Community Development Financial Institutions (CDFIs), community banks, and credit unions.
The PPP Will Alter Small Business Banking Relationships
According to Politico:
“Bank of America, JPMorgan Chase, US Bank and Wells Fargo are being sued by small business owners, who claim the lenders unfairly favored companies seeking higher loan amounts under the Paycheck Protection Program.”
Combined, the four institutions are the primary banks to 55% of small business owners according to the Cornerstone/Autobooks study.
It’s impossible to estimate what portion of small businesses submitted PPP applications that were either denied or de-prioritized by those banks in favor of larger loan applications.
But for those that did experience it, the banks’ may find their relationships with those businesses in jeopardy.
With the earmarking of $60 billion of the second PPP round to community-based institutions, many community banks and credit unions are going to get a shot at lending to small businesses they don’t serve today.
This will give community banks (and credit unions) a chance to shine and be heroes to many small businesses, and turn the tide of the small business lending decline.
Small businesses’ PPP experiences come on top of an already volatile bank relationship situation. According to the Cornerstone/Autobooks’ study, nearly six in ten small businesses said they were somewhat or very likely to look for a new banking relationship in the next 12 months.
And that was before their PPP experiences.
Winning SMEs Dissatisfied With Big Bank PPP Experiences
Community banks should be ready with marketing programs to capitalize on the opportunities the PPP will give them.
But it will take more than just marketing programs. Community-based financial institutions will need to demonstrate three things: 1) Strong small business digital banking capabilities; 2) An on-going commitment to a business’s funding needs; and 3) An ability to help small business owners run their business.
That last point will the make or break point for many smaller institutions. Deep experience they have in certain industry verticals will play a big role.
Community banks and credit unions will also need to develop new services for small businesses—like accounting, financial management, or payment-related services—to differentiate themselves and be able to compete with the megabanks.
Played right, we may see the revenge of the community banking nerds.