The Paycheck protection program is one of the most popular loan programs under the CARES Act passed by congress in the early stages of Coronavirus pandemic.
PPP loans critical role was to help small business retain workers even amid a global health crisis. In essence, 75 percent was dedicated to payroll, and the remaining portion could cover utilities or any other expenses.
The program targeted a variety of enterprises from the self-employed to nonprofits and so on. So far, a whopping $669 billion has been released. The Small Business Administration is spearheading the operation, but business can get access through various banks dedicated to disbursing PPP loans.
However, PPP loans are not as perfect as they sound; they were rolled out with haste and rules and regulations keep changing.
The Good
It’s difficult to deny the importance of a large relief funding package during tough economic times. Both banks and business involved with PPP loans have a chance to thrive.
And for the cherry on top, it has a 5 percent origination fee, which may offer an edge. It’s also the perfect chance for financial firms to onboard new clients for future business.
Nevertheless, even the best motives can be plagued with hidden challenges. PPP features more than its share, and banks must tread with caution to avoid problems.
As the forgiveness phase starts in August, banks must be ready to respond to all questions and gather all the documents that matter.
Why Banks Must Tread Carefully
Banks must proceed with caution keeping in mind the SBA’s head of scrutiny has mentioned that over 40 percent of the loans disbursed were “unsupported or inappropriate loan approvals.”
Next, the US maintains an annual average of $30 billion in loans. This time, however, it has already given out a staggering $521 billion in just four months.
Again, these loans aren’t as traditional as they seem. In a normal situation, underwriting procedures involve checking creditworthiness by tracking credit history.
With PPP loans, however, a creditworthy company may suffer repayment for reasons outside bank practices like poor record keeping. In the meantime, a firm with poor credit may qualify as long as they meet PPP underwriting standards.
Such an arrangement strips the banking sector of its dignity— as they intentionally or unintentionally stray from traditional best practices.
And lastly, the government has not disbursed any finances yet. Banks have been funding from their reservoirs. That may mean trouble and liability for a bank in the event acceptance or leniency is denied.
With so many loans already out, even a few defaults could eat into profits gathered from the 5% origination fee.
Final Words
All the above are signs that PPP loans may not be as good as they seem. Financial institutions who never considered these factors may suffer in the future.
Author Bio: Michael Hollis is a Detroit native who now lives in Los Angeles. He is an account executive who has helped hundreds of business owners with their merchant loan solutions. He’s experimented with various occupations: computer programming, dog-training, scientificating… But his favorite job is the one he’s now doing full time — providing business funding for hard working business owners across the country.