In 30 Seconds or Less …

Community and Regional Banks are the Superheroes of Small Business! 

Large Banks once again have chosen fees over Doing the Right Thing ~ It’s unfortunate as large banks have squandered a golden opportunity to re-write their public narrative from the Go-To Political Whipping Post to Heroes of Main Street. All they had to do (no small task given the crazy large #s) was shepherd small business loan applications to the Small Business Administration’s (SBA’s) Payment Protection Program (PPP) created under the CAREs Act to fund $ 350B in Covid-19 life lines for Main Street. Instead, it appears that they chose to help facilitate the exploitation of legal loopholes and submitted loan packages for subsidiaries of publicly traded companies commandeering over 44% of the funds earmarked for small businesses. 

With the reallocation of PPP funds to Corporate America who were already allocated $500B in CAREs Act funding, 3/4s of the business funding has now gone to 50% of the employers and less than a quarter to the other half! We should all care. Why? Main Street is important to our economic recovery just as is Corporate America.

In The Weeds …

This weekend, the Community and Regional Bankers took their turn in the spot light of heroines and heroes! The $350MM Payment Protection Program (PPP) under the CARES Act was announced at the end of March to help fund payrolls and rent for Small Businesses under 500 employees, Independent Contractors, and Self-Employed Individuals who comprise almost 50% of private-sector employment (SBA website). The PPP was expressly intended to provide access to cash for those businesses who lack access to capital markets and credit elsewhere. (SBA flier) Community and Regional Bankers threw all available resources at the massive number of Small Business requests. Some consumer centric regional banks like Flagstar Bank, head quartered in Michigan, even began by taking any small business applicant only to find the volumes were too great so they had to pair back to only their existing customers. Since not all banks are approved to work with the SBA, it was a big deal! What they got right was the human side of the equation. They never lost sight of the fact that people were on the other side of these loan applications. These small and mid-sized institutions put all available human resources against the avalanche of requests. They worked day & night to prepare and process loan applications. Senior executives rolled up their sleeves contacting clients personally. They out-performed the bigger banks who focused on corporate compliance matters and automation for the majority of their applicants. The great news is that 1.6 million Small Businesses were funded across the banking system. Almost ¾ of the applicants received forgivable loans for $150,000 or less. (Bloomberg)  The 1.6 million equals only 6% of all Small Businesses. (Forbes) Regardless, 1.2M small businesses with their smaller loan sizes got the much needed relief intended for their community. Bulls Eye! Well Done!

Unfortunately, the numbers released by the Small Business Administration this past weekend also highlighted those that failed to Do-To-The-Right-Thing and continued the negative narrative left by the Financial Crisis. The newspapers are filled with stories and now class action lawsuits against Wells, Chase, and BofA for using their Commercial Banking teams to help facilitate and prioritize clean loan applications and documentation for subsidiaries of publicly traded companies over traditional small businesses. Across the entire banking system, subsidiaries of 70 publicly traded businesses received SBA forgivable loans. According to the SBA which was to cap loans at $10M per company, it said that only 4% of the applicants received 44% of the funds with some publicly traded firms getting multiple loans or $20M. Yes, many of the firms like the Auto Dealers are franchise structures but the fact remains their publicly traded corporate parents have access to other funding sources. They can raise cash for their franchises if they chose to assume the default risk. Harvard Business School reported last week 30% of Main Street didn’t even apply for the SBA loan as they believed it was rigged against them. (Can’t argue that point!)  Even worse, 28% of Main Street businesses don’t expect to make it another month (Forbes 4/20) which we all should care about given the implications to the economic recovery.   

What are the funding alternatives for a true Small Business? The reality is that most bank loans are underwritten to the owner’s personal financials and not to the business. In this economic shut down, there is no business. Even putting up family homes and personal assets as collateral will be tough to get a loan. Many small business owners are drawing down personal savings, asking family members for loans, or crowd sourcing to pay their employees. Most do not qualify for traditional SBA loans nor bank loans in this environment. The Economic Injury Disaster Loans (EIDL), the other SBA loan program under the CAREs Act which offered up to $10K in relief was also blown over by demand reaching only 1% of the applicants.  (Bloomberg) 

How did this happen?  Big banks and large regional banks break down commercial (non-consumer) relationships into 3 segments:

• Commercial Accounts with a “C” are considered the larger Middle Market Businesses (businesses with annual revenue of $5M to $1B) and Large Corporations. Their accounts are managed by senior bankers who have as few as a handful of clients or as many as 100 or so clients. They and their teams are structured to have routine (daily, weekly, or monthly) contact with their clients. They are liaisons for their clients to the rest of the banking units like lending, cash management, lock boxes, wires, etc. There is an entire infrastructure supporting their Commercial Clients’ banking needs.  
• Small Business Accounts are typical Small Business accounts who make less than $5M a year in revenue plus the lower end of the Middle Market segment. The exact size depends on the bank.  Small Business Bankers often have thousands of accounts assigned to them. They too support their clients by arranging cash management, lending, to newer automated banking services.  They connect far less frequently with their clients than Commercial Bankers.  They may not even check in annually with their client if the loans are performing.
• Branch Originated Small Business Accounts Finally, there are the 10s of thousands of small business clients that opened their basic business checking accounts or corporate cards in the branches. They call the bank if there is a problem. There is no outreach to them.  Many have seen their branches closed and given remote deposit machines which were free at the time of the branch closures and have subsequently become new revenue sources for the banks.     

For full transparency, my former employer, Capital One, only started accepting PPP apps as funds were running out. As of 4/20 their website says they will help customers through automated banking only.

Further, my husband’s Elder Care Business is a franchise business who’s franchisor or parent is a private company. My husband’s loan was not funded. We hit the same run around that so many have shared with major news outlets.  He reached out on Saturday the 28^th regarding the PPP. By Sunday morning, they had his documents. On Monday, he was told to sit tight until the 3^rd. He along with 10K other applications an hour, submitted everything to the bank in the first few days. He was then instructed to resubmit on the 7^th through the bank’s revised automated processing system. As a branch opened small business account, he was funneled through a Call Center for any questions. He called almost daily to confirm the status of his application which they could not do. Because of technical issues, he couldn’t get back into their automated system nor get through to technical support.  After funding for the program had run out, he was finally able to get through to technical support on Saturday the 18^th. While resetting his access, they were able to look at the application and told him the system loan package contained only 3 documents, not 4. His upload from the home WiFi had failed part way through. His application was not complete! Someone from bank finally notified him later that day, 11 days after submitting his application for the 3^rd time, that something was missing. Time to reassess his banking relationship!

As I’ve said from the beginning of my blogs, these stimulus packages must be careful to meet their targets and not advantage one group over the other. Of the $2T CAREs Act, $ 500B was set aside for large corporations. In actuality, $650B of the Act is now going to 50% of the employers and less than ¼ of the funding to the other 50%. That was not the INTENT.  I do not believe big banks broke any laws. They did the best they could for their biggest clients which is how they are compensated. The law was poorly written in haste given the unprecedented situation. What is missing from this equation and has been missing from our culture for a long time, is consideration of INTENT (who were these funds designed to help) and economic REWARD for businesses when they Do the Right Thing!  

As always, what can we do?

Stay healthy, reward those businesses that Do The Right Thing with your patronage, and support your local small businesses via their curbside service. Please help those in need within your community, and be your amazing selves!

We are making our way through this event!

#BeTheCalm #StrongLeadership!!!

Stay Healthy! Susie