Photograph by AP Photo/Matt Rourke

Leveling the field for small companies in PPP 2.0

Leveraging existing banking relationships was critical the first time around

Navigating payroll data aggregation and the application process was challenging for smaller SMEs. So was finding a lender to partner with.

Giving smaller companies more time and matching them with avid fintech partners will be crucial in the next iteration. We offer a few proposals.

The first round of the Payment Protection Program is in the books. Merely two weeks after eligible lenders began receiving applications, almost $350 billion had been approved and committed ─disbursing the funds is another story.

It’s now essential to take a step back and understand what we learned and how we can do better the next time, as a second iteration of the program is being negotiated in Congress.

Making and implementing policy is incredibly hard. It’s a complex undertaking that requires careful planning and testing. Even then, many programs fail spectacularly. It requires time, and time is the thing we didn’t have.

For that reason, we will refrain from making any strong criticism and focus on what we learned and what can be improved the next time around. Data is still limited (albeit continuously emerging), but we can shed some light on this round based on public information provided by the Small Business Administration.

What did we learn during the first iteration?

The bottom line: based on a first-come, first-served format, businesses with existing banking relationships benefited the most.

In particular, SMEs faced two critical challenges:

• Aggregating payroll data and navigating the application requirements/guidelines.
• Finding an eligible lender to partner with; 50K+ eligible lenders are listed by the SBA, but no information is provided as to which of these lenders are receiving applications.

While the SBA reported that ~5,000 lenders had approved 1.6 million loans as of April 16th, the three most active lenders accounted for ~10% of total funds, while the top-ten banks accounted for 1 out of every 5 dollars. Consequently, leveraging an existing banking relationship, particularly with big banks, offered massive advantages.

These large financial institutions had announced that they would prioritize their existing customers, which tend to be somewhat larger businesses. A class-action lawsuit on behalf of small businesses is making headlines after reports emerged of big companies accessing PPP funds.

Table 1. Breakdown of Top-10 PPP Lenders Approvals:

1) Based on: Average loan size / 2.5 = Average Monthly Payroll * 12 = Average Annual Payroll; 2) Based on average annual payroll costs for SMEs of $45,000 p/employee as per JP Morgan.

Nevertheless, we must recognize the incredible role of fintech players, as well as many smaller community banks. Fintechs will play an even bigger part in leveling the field for smaller businesses during the extension round(s), as only between 2% — 7%¹ of SMEs have had access to funding.

Let’s illustrate the importance of fintechs with a few data points. The overall average loan size for the first round of the program was $206,000, while the average for the ten largest lenders was $340,000. In contrast, the average loan size for Kabbage was $50,00², and Lendio’s average stood at $110,000.

Unfortunately, the likes of PayPal, Intuit, and Square, among other fintechs operating at scale, were approved only a few days before funds ran out. We will see them in the starting lineup as the program evolves.

What can we do better the next time around?

Here are just a few ideas on how we could help smaller folks get access to critical funding. By all means, feel free to disagree, improve upon, propose new thoughts.

1. Open a pre-registration/sign-up window exclusively for smaller businesses: putting them at the top of the list and giving them a several-day head start to prepare the application, with final approval dependent on fulfilling all requirements. Once the official application period begins, instead of withdrawing the application, we could buy them extra time if they start going down the queue as completed applications are received, until funds are exhausted.
2. Obtaining conditional approvals: similarly, an extension of the above is a conditional approval up until funds are ready to be disbursed, at which point any incomplete applications would be discarded. For once, we could use the incredibly slow disbursement process to the advantage of SMEs.
3. Create a centralized landing page that matches SMEs with lenders: matching would be based on relevant criteria, and the application/validation workflow would be redirected to lenders with additional bandwidth. Lenders can update their status so as to keep matching efficiently.
4. Extend Open Banking tools for smaller businesses/self-employed: navigating ERP systems -including payroll- is challenging for businesses of all sizes; it’s even more critical for smaller businesses lacking sophisticated tools to access and aggregate the data required for the application. Yet, the UK experience rolling out “Covid Credit” offers a valuable lesson.

Creating funding buckets has also been floated as a potential quick-fix, but we believe that doing that right is much trickier than it appears.

Thus, we focus on giving small businesses time, connecting them with a partner (likely a fintech player), and helping them streamline their data gathering and application process.

Time will continue to be of the essence: SMEs have, on average, only 27 days of cash-at-hand. The smaller the business, the more critical it gets, with cash reserves running lower than ten days.

Let’s do better this time.

[1] Estimates vary according to the source and estimates, but importantly remain in the single digits. There is still much to do.

https://www.bankingdive.com/news/paycheck-protection-program-round-2-lawmakers-banks-fintech/576371/

https://www.linkedin.com/posts/11-fs_thebreakfastshowus-covid19-smes-activity-6658008947846373376-rY6

[2] Go to minute 16:00 for the discussion on Kabbage’s average loan size, although the whole interview with Sam Taussig, Director of Policy at Kabbage, is worth watching.