April 16, 2020 - The Small Business Administration (SBA) has indicated that the initial $350B of Paycheck Protection Program (PPP) funding is now exhausted. Congress is considering authorizing additional funds, but as of this time, the PPP is currently shut down.

The PPP was an unprecedented program designed to very quickly get needed funds into the hands of small businesses affected by COVID-19. Congress and the SBA primarily enlisted the help of the banking industry to distribute these funds. While the rollout of the program was challenging, the banking industry did an exceptional job of getting this money out the door smoothly and efficiently.

Everyone associated with this program knew that this initial round of funding would not meet all the demand for the PPP. The need is so great, and even a seemingly huge number like $350 billion was not enough to fund all the small businesses who want PPP loans.

Frequently Asked Questions:

The government chose to distribute this money through the banks. Why were the banks involved? The federal government is the only entity that could make this much money available to small businesses. While the federal government is good at funding this type of program, it is not necessarily the best at distributing the money. So, Congress chose to partner with the banking industry because the banks have a lending relationship with so many small businesses.

Are other lenders involved, too? Yes. Banks were the first lenders processing PPP applications. By the second week of the program, certain non-bank lenders were also authorized to make PPP loans. 

Why did banks focus first on getting money to their own customers? There were two major reasons. First, banks are subject to federal anti-money laundering rules, anti-terrorist financing rules and “Know Your Customer” rules. When the federal government created the PPP, they decided that all these rules would apply to PPP loans. Because banks are already in compliance with all these rules for existing customers, they can process PPP loan applications more quickly, and with a lot less compliance risk, for their own customers. Second, the program terms and requirements work best for existing customers, who are well known to the bank.

Why do the program terms favor existing relationships? When setting the terms of the PPP, the federal government made several important decisions about how to structure the loans. Those decisions strongly favor banks making loans to existing customers.

First, most people think of the PPP as a loan funded by the government because the program was created by the federal government. In fact, the government set up the PPP to be a loan made by the banks. The loans are written by the individual banks, and the banks carry the risk of non-payment. Yes, the government will forgive up to 100% of the loan if the borrower follows all the rules. However, “up to 100%” includes 0% if the SBA determines the borrower did not follow the rules. The bank is on the hook for the residual part of every loan that is not forgiven. Banks know their own customers, so they are in a better position to verify information provided by their customers, especially information on loan forgiveness.

Second, the loan terms that are favorable to borrowers are not so great for the lenders. Small business borrowers benefit from the fact that the PPP loans have a 1% interest rate, no underwriting qualifications, no collateral requirements and no personal guarantees from the business owners. Banks had to make business decisions about the extent to which they wanted to participate in this program, given those loan terms. Many banks determined that helping their own customers first was their priority.

Third, because the loans are written by the banks, individual banks had to manage their liquidity, and devise a plan for making these loans. Banks fund their loans through local deposits and borrowings from the Federal Reserve or advances from the Federal Home Loan Bank. They cannot make loans if they do not have the liquidity to do so. Based on their own liquidity constraints, some banks chose to focus on their customers first.

Did some banks actively market these loans to non-customers? Absolutely. Some banks actively solicited applications from non-customers, mostly from their local trade areas. A few banks did actively solicit these applications more broadly. 

I understand the current funding has been exhausted. Can banks continue to process PPP applications, in case there is additional funding? No. The SBA has determined that banks cannot continue to process applications. The lending portal banks use to send applications to the SBA is closed. If there is additional funding, the SBA will reopen the lending portal.

Why can’t banks make PPP loans without going through the SBA? The loan terms for PPP loans are so generous that banks cannot make PPP loans with the backing of the government. There are lots of other ways banks are currently helping their customers, though. Small businesses should talk to their banker about all available options.

If there is additional funding, will banks increase the number of PPP loans they make to non-customers? Each individual bank will continue to make business decisions about the extent to which they will participate in the PPP. Some banks will continue to actively serve non-customers. 

How much of the $350B went to Minnesota small businesses? Minnesota businesses received 46,383 loans, totaling more than $9.014 billion. This puts Minnesota twelfth in the nation in total dollars lent and second in the upper Midwest, behind only Michigan. Minnesota banks played a huge role in making these loans, proving their commitment to helping local businesses succeed and supporting our state’s economy.