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Stimulus bill's boost to small business lending may not come in time

While a massive coronavirus relief package has passed the Senate, some analysts are skeptical that a provision in the bill to increase lending to small businesses will be able to deliver funds quickly enough to prevent layoffs or closures.

The bill provides for $350 billion in small business loans. In 2019, banks issued $21.06 billion small business loans to corporations, individuals and partnerships, with about 73.6% of these loans guaranteed by the SBA.

"That isn't within a country mile of the scope we're talking about with the current need today," said Isaac Boltansky, director of policy research at Compass Point Research and Trading LLC, in an interview. "We need to be realistic about the bandwidth at the lending institutions and the future viability of many of these businesses."

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With the relief package headed to the House of Representatives and many small businesses already in shutdown mode, it is unclear the funds will arrive in time.

"The big question now is: 'How fast can they get the money out the door?'" said Stephen Keen, vice president of congressional relations at the Independent Community Bankers of America, a trade group supporting community banks. "If the program doesn't move quick enough, then small businesses won't get the funds they need in a timely manner and then you could see potential layoffs or even closures of struggling small businesses."

Cash buffers at small businesses tend to be relatively slim. A report from 2016 by JPMorgan Chase, which examined 600,000 small businesses showed "the median small restaurant holds 16 cash buffer days in reserve," while the median retailer holds 19 days.

"There's an argument to be made that we're already too late," said Boltansky.

The relief bill includes an increase in lending to small businesses under the Small Business Administration 7(a) lending program to cover payroll expenses, employee salaries, mortgage payments, rent, utilities and other debt obligations in order to stay in business through the downturn created by the virus.

"If the small business borrowers use the money for the set criteria that they've outlined in the bill, then the loan essentially turns into a grant, and the lender then would recoup the money from the SBA," said Keen.

In an interview, Keen described the proposal as splitting the 7(a) program into two groups — the current program and the new "payroll protection plan."

Banks have already taken some measures to help customers, including expediting SBA applications and offering loan payment deferrals.

The proposed bill also includes approximately $425 billion in funding to the Treasury Department, which can be used in joint facilities with the Federal Reserve or direct lending programs, Boltansky wrote in a note.

The Federal Reserve also announced a Main Street Lending Program, although no details on the plan have been released yet. Unlike the other proposed Federal Reserve facilities, which were narrow in scope and were enacted during the 2008 recession, facilities to small businesses would require a very large scope, said Boltansky.

"Both the SBA and the Fed have scalability concerns when it comes to small businesses, especially when it comes to the context of businesses needing these loans now," Boltansky said in a March 24 interview.

But even with these concerns, Boltansky was positive on the deal overall. "This package should be viewed as an unambiguous positive for markets," he wrote in his March 25 note on the proposal after details of the plan became public.

Senate passed the bill on March 25 by a 96-0 vote. The House of Representatives still needs to vote on the bill before it goes to President Donald Trump.

Boltansky warned that passing the bill is only the first step. "The real work for the Fed, and Treasury and lenders through the SBA 7(a) program begins right after enactment," he said in the interview.

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