From crisis to recovery to expansion, Congress should modify the existing SBA lending program to meet the needs of this critical moment
As Congress debates another stimulus bill, addressing the looming small business disaster requires a new approach immediately. Merely adding more money to the Paycheck Protection Program is not a small business recovery plan. PPP was designed to be a short-term crisis management tool, not a medium-term recovery plan, and certainly not a long-term expansion program. Make no mistake, if we continue to throw cash at small businesses that can only spend money on payroll and utilities, businesses will not have the operating capital they need to restock, pay rent, adjust to new realities and stay open.
This is especially true of small businesses that are primarily served by Community Development Finance Institutions. NDC’s Crain’s New York Business commentary showed how PPP, while necessary in the early phase of the Covid crisis and impactful in some important ways, did not reach many small businesses or nonprofits in low- and moderate-income communities (LMIs) and communities of color.
This problem was partially rectified when Community Development Finance Institutions (CDFIs) were included in the second round of PPP funding. While we do not have comprehensive data from all CDFIs, the numbers for us are clear: traditional banks made about 27% of their PPP loans in LMIs while 71% of NDC’s loans were in LMI communities—which are more likely to be truly small and minority-owned businesses. What’s more, despite being the third largest employment sector in the US, nonprofits received only 3.7% of all PPP loans; for us, that number is 20% of our portfolio, which constitutes 54% of the total amount disbursed through the PPP program.
These data points plus other lessons learned unquestionably demonstrate that PPP is not the answer for helping small businesses moving forward. For businesses that are still operational, in order to recover and expand they need patient, low-interest operating capital for all business-related expenses. And if CDFIs are to address these critical needs in LMIs and communities of color, they must be well-capitalized to reach the small businesses that continue to struggle with access to low-cost capital. In desperation, many small businesses are turning to high-interest online lenders, who may provide short term relief, but will almost inevitably result in a cycle of debt and long-term disaster for those impacted by the Covid crisis.
To this end, the National Development Council is proposing that Congress modify the current SBA 7(a) Program to meet the current needs of small businesses to prevent a massive catastrophe that could result in 15% unemployment or worse not just for the next six months but for the next five years.
NDC’s recommendations are based on our extensive history as an SBA-Certified Preferred Lender and more recently on our work raising and disbursing more than $70 million in PPP loans. In addition to the recommendations for how to modify SBA lending to meet the needs of small businesses at this critical moment, NDC also strongly recommends that SBA provide blanket forgiveness for PPP loans of $350,000 or less—as smaller businesses remain the most vulnerable to pandemic-related economic impacts and the least able to dedicate time and staff to perfecting forgiveness documentation.
Making the changes we recommend below will incentivize traditional banks to increase their lending capacity to small businesses of all types and hopefully crowd out high-interest lending that has proliferated online and trapped business owners in a cycle of debt. What’s more, high-performing, experienced CDFIs should be the primary vehicle used for delivering loan capital to borrowers of color and small businesses located in LMIs. Our industry’s performance with PPP is a testament to our operational efficiency and the connection we have to the communities where the most vulnerable businesses are located.
To meet the needs of more businesses in communities of color and high-distress neighborhoods, CDFIs need both lending capital, equity, and equity-like capital. Perhaps more importantly, utilizing the SBA 7(a) lending program as a vehicle to drive equity and transform the small business ecosystem in the United States is overdue.
How an SBA Small Business Recovery and Expansion Program would work:
- – Delivery of recovery and expansion loans will be through CDFIs and small community banks, which will need additional capital to meet the needs of small businesses. This will require an immediate and continuing expansion of appropriations to the CDFI Fund of at least $1 billion annually. To further facilitate the availability of capital to these mission-based lenders, the Fed window will remain open to CDFIs and small community banks for ten years.
- – SBA expands eligibility under the 7a program to include otherwise-eligible nonprofits.
- – CDFI’s and small community banks will receive processing fees similar to the current PPP program guidelines to cover intensive servicing expenses as well as the loss of interest spread and the ability to sell loans into the secondary market at a premium.
- – SBA will set the interest rate for the program at 250 basis points, and for the first three years, the lender will receive 100 basis points of interest subsidy from the SBA; without this small subsidy lenders have little incentive to make small business loans, and no ability to adequately service them through this crisis.
- – SBA takes immediate steps to demystify and expediate the SBA 7(a) approval process by shortening the application, and actively educate communities of color through online seminars and classroom instruction regarding the need and purpose of items requested in the application. As a public agency, the SBA must clearly define how it calculates its credit score (SLA score) and provide a score bump for women and minority-owned businesses.
- – To build capacity in historically underserved communities and under-represented organizations, the SBA would create a grant program to fund education and training opportunities targeted to the needs of African American and minority-owned businesses by partnering with qualified nonprofits and educational facilities. The SBA must continually evaluate the quality of this training to ensure it meets the needs of disadvantaged businesses.
- – While the allowable term of the loan will be identical to current regulation, to address the pressing need to re-capitalize businesses that have survived the economic crisis, loans for all machinery, equipment, and permanent working capital would be structured as interest-only paid for the first two years, followed by an amortization over the remaining eight years of a ten year loan. In addition, any loan made in the first year of the program will receive a 100% guarantee, loans made in year two receive a 95% guarantee, year three 90% and year four 85%. In year five, the guarantee will revert to current guarantee levels. Reduce equity requirements to 5% for small business startups and for loans $350k and under.
- – To drive equity and create sustained wealth for disadvantaged businesses and low-income communities, twenty-five percent of each loan (up to $1 million) made to either (a) a minority business owner or (b) a business located in a CDFI eligible Census Tract, will be forgiven after year five if the business meets the requirements outlined in the loan agreement (i.e., job retention, job expansion, growth in real property taxes, business taxes and a commitment to hire and train low-income workers for living-wage jobs).
- – In exchange for the origination fee and the capacity to borrow more cheaply, require lenders to provide bi-annual training targeted specifically to the African American and minority owned businesses in its portfolio and conduct site visits bi-annually.