At Brooklyn Cooperative Federal Credit Union, CEO Samira Rajan reasons that the typical retailer she sees at the credit union pays around $5,000 a month in payroll.
With a rough but conservative estimate of 40 hours a week for a full-time employee, at a NY state minimum wage of $15 an hour, $5,000 in payroll a month means about two full-time employees, or maybe one full-time and two part-time employees. That’s right in line with the women’s clothing stores, beauty salons, bodegas, and mini-grocers that are among the credit union’s more frequent small business borrowers. (The credit union’s restaurant borrowers, slammed by social distancing closures, are typically bigger — with around a dozen or so employees.)
Under the new $349 billion Paycheck Protection Program that the U.S. Small Business Administration is now rolling out as part of the $2.2 trillion CARES Act passed in response to the COVID-19 pandemic, a business with $5,000 a month in payroll would be eligible for a maximum loan amount of $12,500 plus the amount of any SBA disaster loan the business may have taken out previously — if it wants to refinance the disaster loan into a paycheck protection program loan. The paycheck protection program loans are at least partially forgivable — but it’s first come, first served.
The intent of the new Paycheck Protection Program is to help small businesses retain and pay employees while they are temporarily shut down or suffering severe revenue losses due to the COVID-19 pandemic. The SBA defines a small business as having 500 or fewer employees, and the agency estimates those businesses employ 47.5 percent of the private workforce in the U.S. — nearly 60 million people.
(Have questions about how your business or nonprofit can access the Paycheck Protection Program? Check out our FAQ here.)
In addition to small businesses, independent contractors and self-employed individuals (such as artists or performers) can apply for a paycheck protection program loan to basically pay themselves — provided they can provide some form of documentation like tax returns, 1099 forms, or bank statements to establish a monthly “payroll” amount for themselves. Nonprofits are also eligible, as are corporate chain or franchise locations in food and accommodation with fewer than 500 employees onsite.
Paycheck protection program loans can cover payroll, rent, mortgage interest payments or utilities. In addition to salaries, wages or commissions, payroll can include health insurance, retirement benefits, severance pay, state and local payroll taxes paid on behalf of employees, and also cash tips — requiring at a minimum, “a reasonable, good-faith employer estimate of such tips.” Paycheck protection program borrowers can take out a loan for up to two and a half times their average monthly payroll costs, up to a $10 million maximum per loan. Borrowers currently can only get one paycheck protection program loan.
Small businesses and nonprofits cannot count independent contractors as employees for the purpose of calculating loan amounts, nor for the purpose of calculating loan forgiveness.
Calculated separately, loan forgiveness depends generally upon whether the business has maintained its employee headcount at whatever it was on February 15, 2020. Businesses have until June 30 to rehire employees they previously laid off, or they can hire new ones.
The maximum loan forgiveness is equal to eight weeks of payroll costs plus rent, mortgage interest payments, and utilities over the first eight weeks after receiving a loan — although the Treasury has decided in its interim final rule that only 25 percent of loan forgiveness amounts may count toward non-payroll expenses, “in light of the Act’s overarching focus on keeping workers paid and employed.” If a business has not maintained its February 15, 2020 employee headcount over the first eight weeks after receiving its paycheck protection program loan, its loan forgiveness amount will be reduced based on how much its employee headcount has dropped.
Typically, SBA loans are issued through certified lenders in the SBA’s 7(a) program, but SBA’s 7(a) lending partners only make around $25 billion in SBA-guaranteed loans in an average year. Since the SBA now needs to make $349 billion in the next three months, the Treasury has decided that it’s all hands on deck — it’s temporarily authorized any federally-insured bank, credit union or farm credit institution (for rural areas) to process applications for paycheck protection program loans.
To help speed up the process, the CARES Act also directed SBA to extend “delegated authority” to 7(a) lenders for the paycheck protection program, which means lenders will be approving the loans in-house as opposed to checking with SBA first. The Treasury has also extended delegated authority to all paycheck protection program lenders.
Also, to help speed things up, the SBA is guaranteeing 100 percent of paycheck protection program loans — as opposed to the 7(a) program’s usual 50 – 85 percent. The intent of the temporary 100 percent guarantee is to encourage lenders to relax their usual underwriting standards in the hope of getting the loans out faster.
Since they have already been working with the agency, the SBA’s network of 1,800 existing 7(a) lenders across the country will be first out the gate with application processes. That network includes big banks, community banks, credit unions, non-bank lenders, and nonprofit lenders. One of them, a community bank located in the South Bronx and Harlem, already had its application available as of Thursday.
Brooklyn Cooperative Federal Credit Union is one of the more active 7(a) lenders in New York City. “We had four [paycheck protection program] inquiries by 10 a.m. Monday morning,” Rajan says.
“We’re going to try to bust out whatever we can do,” Rajan says. “Under normal conditions we do about $1 million a year in SBA loans. Based on demand for the new loans in our neighborhoods, I anticipate doing another $1 million on top of that with these new loans.”
It’s easiest for lenders to work with the borrowers they already know. Brooklyn Cooperative made 296 7(a) loans to 220 businesses from 2009-2019, for a total of $7.7 million in SBA-guaranteed loans. Those and other existing borrowers would be the easiest to process. Brooklyn Cooperative also provides banking services tailored to independent contractors and self-employed individuals — for instance, it offers them affordable tax prep services. New borrowers would require more onboarding in addition to the paycheck protection program loan application itself.
Each existing 7(a) lender’s existing client network looks a little different. National Cooperative Bank specializes in lending to cooperatives. The Business Center for New Americans specializes in lending to immigrants and refugees. Hope Credit Union focuses on communities of color in the Mississippi Delta and New Orleans.
But overall as a group, 7(a) lenders are reflective of the broader banking system — in other words, even they are not as a group the most connected to historically marginalized communities. In Fiscal Year 2019, just 31.9 percent of SBA-guaranteed 7(a) loans went to businesses owned by people of color (21.7 percent Asian, 6.3 percent Hispanic, 3.3 percent African-American, and 0.6 percent American Indian). Just 14.2 percent went to women-owned businesses.
Nonprofits are not eligible for conventional 7(a) loans, but they are eligible for paycheck protection program loans, and some lenders are more connected to nonprofits than others.
Headquartered in the South Bronx, Spring Bank is already open for paycheck protection program applications — and they had received 75 responses as of Thursday. Spring Bank also already has an existing nonprofit borrower base, and they tell Next City they will be prioritizing existing borrowers, then new borrowers among Certified B Corporations and nonprofits.
Halfway across the country, Sunrise Banks is a family-owned bank based in the Twin Cities that has existing borrower networks among business owners in vulnerable communities and nonprofits.
Brooklyn Cooperative, Spring Bank, and Sunrise Banks are all federally certified community development financial institutions, meaning they have received certification from the U.S. Treasury for providing at least 60 percent of their services to low- and moderate-income communities and other marginalized groups.
Sunrise gets small business client referrals from nonprofits who serve immigrant and refugee communities around the Twin Cities, and it made 439 7(a) loans to 281 businesses, for a total of $112 million in SBA-guaranteed loans from 2009-2019. As of December 31, 2020, it also had around $100 million in loans to around 200 nonprofits on its books.
Since details of the paycheck protection program started emerging, Sunrise Banks CEO and board chair David Reiling has been fielding calls from other banks and fintech companies from at least seven states across the country who aren’t 7(a) lenders themselves but wanted to refer small business and nonprofit clients to his bank. As of Tuesday, an online inquiry form Sunrise created had gotten more than 600 responses from businesses and nonprofits hoping to take advantage of the loans.
Suddenly ramping up small business lending is still a huge challenge, and every lender is going to be handling it a little differently. Staff, technology, available deposits, internal policies and external regulations are all factors.
Sunrise Banks has about $1.1 billion in assets (about a third of the average bank size), with a broad deposit base across the country from its prepaid debit card business and partnerships with fintech companies. For the past week or so, as more details kept trickling out, Sunrise Banks CEO and board chair David Reiling and his team have been figuring out how to triage requests so they can approve easy loans quickly while putting more effort into the more difficult loans.
“I’m thinking more like a manufacturer rather than a banker, how can we set up a lean process, quality control it, refine it, and get as many widgets out as we can in the least amount of time,” Reiling says. “The forgivable part [of the new loans] requires the least amount of documentation, the least amount of underwriting.”
Meanwhile, Brooklyn Cooperative has just $30 million in assets, 15 employees including 7 tellers, and just six company laptops to share between them all. Rajan anticipates that as her credit union’s four loan officers go on overdrive over the next few months for the paycheck protection program, the credit union’s members will need to draw down their savings to get through the economic disruption from COVID-19.
“In a usual time of crisis, you see deposits fall,” Rajan says. “We do have options. As a little bank we can go to a bigger bank for a line of credit. We could also go around and ask for deposits from local institutions who want to support the community through the credit union, because what am I going to do with those deposits? I’m going to turn right around and lend it out through this new program.”
The CARES Act does direct federal banking and credit union regulators to count the loans as risk-free (since they’re 100 percent guaranteed anyway), which is also intended to maximize flexibility in order for banks and credit unions to get paycheck protection program loans out the door.
Based on internal policies and external regulations, Reiling estimates his bank could do between $100 million to $200 million in paycheck protection program loans over the next three months.
“We’ll hit some limit first at our board-set level and then maybe later have to have a conversation with our regulators,” Reiling says. “You’ve got to break some rules. Or write new ones.”
Rajan, at Brooklyn Cooperative, says she actually has room right now to go from $30 million to $42 million in assets — if by some miracle Brooklyn Cooperative processes $12 million in paycheck protection program loans by the June 30 deadline. She’s more worried at the moment about her deposit base eroding as the economic disruption drags on.
Meanwhile, other lenders continue to assess their borrower needs and their capacity to meet them. In New York, the Business Center for New Americans says at current capacity they could probably do a dozen paycheck protection program loans between now and the end of the year. Renaissance Economic Development Corporation, which is already wiring its own emergency loans to borrowers in New York City’s nine Chinatowns and elsewhere, is almost certain it will have to hire and train additional staff to process any new paycheck protection program loans.
More is likely needed as the economic disruption drags on. A study by JPMorgan Chase Institute of 600,000 businesses across the country found that less than half had enough cash on hand to stay afloat for 27 days without revenue. One economist estimated two and half months of payroll for all small businesses in the U.S. would equal $2.5 trillion — more than seven times the loan forgiveness currently promised under the paycheck protection program.
At Sunrise Banks, with nearly all of his employees already working remotely, Reiling has instituted all-staff calls every weekday at noon. On last Friday’s call, he compared the SBA’s challenge to rapidly disburse $349 billion for small business aid to previous generations’ being called to serve in wartime.
“I said to them last Friday, like our parents and grandparents were called to serve our country for a war, for bankers this is as close as it will ever come to being called to serve our country to make sure people get their paychecks and insurance on time,” Reiling says. “We’re going to stress the system to make sure we get this money in businesses in people’s hands so they can function.”
EDITOR’S NOTE: We have updated this story to reflect further guidance from the Treasury Department as it continues to roll out. Independent contractors do not count as employees for the purposes of calculating loan amounts or loan forgivness. Legal sex workers are not eligible for paycheck protection program loans. We will continue to update this story based on additional guidance on the program as it comes out.
This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter. The Bottom Line is made possible with support from Citi Community Development.
Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.