Banks and credit unions are at the center of efforts to keep organizations afloat during the coronavirus pandemic.
Staff at Rogue Credit Union, a lender in Medford, have worked around the clock to process applications for the federal government’s $349 billion in loans to help small businesses pay staff for eight weeks.
The credit union typically would process between half a dozen and a dozen applications for business loans a month. It received more than 100 loan requests in the four days following the program’s launch on April 3.
It is a tall order to implement a financial aid program, known as the Paycheck Protection Program, in a matter of days that would typically take months to stand up, says Gene Pelham, CEO of Rogue Credit Union.
“Our biggest challenge was that there wasn’t good guidance on the program” in the beginning, says Pelham.
“Businesses felt they needed to apply now, before the money goes away. Our team has been working 24/7 over the past several days to work out how we can help our members.”
Banks and credit unions have become pivotal in helping to support companies financially through the downturn, while dealing with their own challenges of operating through a lockdown.
The Paycheck Protection Program, which is funded under the Small Business Administration’s Business Loans Program Account, provides small businesses with fewer than 500 employees up to $10 million to pay staff for two months.
Businesses have to show they have been negatively impacted by the coronavirus, a requirement that should not be hard to prove for many.
The loans, which have a 1% interest rate set by the Department of Treasury, are forgivable as long as organizations keep all employees on payroll — or rehire them by June 30, 2020. Forgivable loans can also be used to pay for mortgage interest, rent and utility costs over eight weeks.
The program ran out of money on April 16.
A separate financial aid program — economic injury disaster loans — provides organizations with up to $2 million to compensate for loss of revenue. Borrowers can apply for a $10,000 grant that is automatically forgiven.
Umpqua Bank received around 6,500 applications for Paycheck Protection Program loans in the first 24 hours of launch, says Tory Nixon, chief banking officer at Umpqua.
The main difference characterizing the economic impact of today’s crisis compared with past ones is that it happened abruptly, with businesses open one day and then forced to shut the next.
“The pandemic has left no industry untouched, and small businesses of all types are in need of emergency relief capital,” says Nixon. He describes the abrupt shutdown as a result of social-distancing measures having a “domino effect” from one sector to another. “We’re seeing this widespread impact reflected in the broad range of small businesses applying for relief.”
Umpqua Bank invested $750,000 in the Small Business Relief Fund set up by City of Portland, Prosper Portland and a group of businesses represented by the Portland Business Alliance. The fund provides grants and zero-interest loans of up to $50,000 to businesses with less than $5 million in revenue.
Lance Rudge, Portland market leader for consumer and business banking at U.S. Bank, says small businesses across a wide spectrum of industries are applying for Paycheck Protection Program loans. Service-related businesses impacted most by stay-at-home orders are most prevalent, such as restaurants, child care centers, chiropractors, dentists and non-grocery retailers, he says.
U.S. Bank is redeploying bankers from across its company to speed up loan processing. It is seeking to have hundreds of additional bankers dedicated to the Paycheck Protection Program in the coming days, says Rudge.
One important difference with this crisis compared to the financial fallout of the housing crisis in 2008 is that banks are less leveraged than they used to be. Higher capital standards introduced since 2008 mean that financial institutions are in a better position to lend this time.
Nixon describes today’s upheaval as a “health crisis” that has created economic strain rather than a financial crisis. He says banks are in a strong position to help. “This is partly why the federal government has chosen banks as the vehicle through which to deliver the relief that’s needed.”
Pelham at Rogue Credit Union echoes that financial institutions have good liquidity. “We have plenty of money to lend,” says Pelham. He adds the credit union has not received a lot of requests yet for new money outside of the Paycheck Protection Program. The credit union’s members have been trying to understand their short-term cash needs rather than seeking longer-term financing, he says.
How long the pandemic and the resulting shutdown will last is the million-dollar question everyone is grappling with. And that is what makes for a truly unprecedented lending environment. “There are no past models to rely on and there’s no guarantee,” says Nixon.