$350 billion in emergency loans and real estate for small businesses
Small business lending is crucial to support the economy, jobs and property markets over the coming months
- The economic impact of the coronavirus on the US economy is deepening
- 10 million Americans have filed for unemployment in the past two weeks
- Congress passed the CARES Act to provide tax incentives for small businesses and encourage employment
- The Small Business Administration is tasked with disbursing $350 billion in loans to banks and lenders to help small businesses
- Clear and simple regulatory guidance is crucial to ensure funds reach small businesses and payrolls stay in place
- Insufficient financing can have a strong and lasting impact on real estate markets
The coronavirus pandemic continues to spread across the world, with reported cases numbering one million. Over 216,000 cases were reported in the United States as of April 2, and the number of newly confirmed patients remained on an upward trend.
The economic consequences of the pandemic are dramatic and far-reaching worldwide. The Asian and European economies – which faced the early waves of infection – are in a slowdown that is likely to be classified as a recession. In the US, most states have imposed lockdowns, effectively bringing economic activity to a standstill. The impact was immediate on the restaurant, hotel, tourism and entertainment industries. However, with the largest component of gross domestic product – consumer spending – being put on hold, companies across all industries are scrambling to cut costs.
The fallout is reflected in the unemployment data. In the past two weeks, nearly 10 million Americans have filed claims for unemployment insurance. The pace of layoffs even surpassed that during the last recession in 2008-09, when it took 16 weeks to reach 10 million jobless claims.
New Small Business Administration loan programs aim to help businesses avoid layoffs
Congress followed the Federal Reserve’s early and strong monetary policy moves with a major fiscal stimulus in the form of a $2.0 trillion package, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. This bill includes funds for many things, including direct payments to households, unemployment insurance and extended tax deadlines. A key piece of legislation was a provision aimed at offering government-guaranteed, short-term loans to small businesses in need of financial support. The provision earmarks approximately $350 billion for the Small Business Administration, allowing the agency to offer funds through two newly created programs: the 7(a) Paycheck Protection Program and the Economic Injury Disaster Loans (EIDL). For comparison, $350 billion is roughly the small business share of gross domestic product for wholesale and retail, arts and entertainment, and restaurants and lodging for three months.
The primary objective of the PPP loans — which are weighted by a factor of 2.5 by a company’s monthly payroll costs and are capped at $10 million — is to provide financial relief for a period of 8 weeks during the period Feb Offer June 30, 2020. Small businesses can use these loans for payroll costs, mortgage interest, utilities, and rent. The government offered small businesses an enticing option by allowing these loans to be forgiven up to 100% if they retain a certain number of employees during the 8-week period. When a company lays off workers, the amount of the loans that can be forgiven is phased out.
Like the PPP loans, the EIDL grants are available to small businesses – defined as those operating with 500 employees or fewer – that have suffered economic damage during a declared disaster, such as the current COVID-19 pandemic. The EID loans have a limit of $2 million per loan, and applicant companies can receive a $10,000 advance from the lenders within three business days of the application date. Similar to PPP loans, EIDL loans focus on providing liquidity for a company’s payroll, mortgage or rent payments, debt, and employee-paid sick leave.
The newly created SBA (Small Business Association) emergency loan programs will be open to qualifying small business owners beginning Friday, April 3, 2020. Applications must be submitted by June 30 or until available funds are disbursed. Given the sheer scale of the program, the complex network of lenders involved, and the potentially large number of eligible small businesses, the first week of the program is critical to ensuring the funding helps businesses avoid costly layoffs and ensures their continued profitability in the future unprecedented economic conditions will slow down.
Wednesday, April 1st, marked the start of a new tax period for most businesses when rent and mortgage payments were due. With the program scheduled to open two days later and the funds not available to lenders until Thursday, April 9, many small businesses are unlikely to see relief for another week.
Regulatory concerns cast a shadow over the speed of funding
The primary concern surrounding the SBA programs stems from the agency’s speed in providing lenders with regulatory guidance on the required documentation and criteria. Many banks and lenders, which are at the forefront of the program, accepting corporate applications and documenting eligibility criteria, need clear guidelines from the SBA and the US Treasury Department so that they, in turn, can provide the SBA with the information it needs to complete the funding. Lenders will want to know how much due diligence is expected of a company. In addition, lenders also want details on how to sell these loans to maintain liquidity. Federal banking regulators last week offered banks more flexibility over lender reserve requirements, loan modification standards and access to the Fed’s discount window to support small business lending.
Currently, a borrower has to fill out a form SBA Loan Application, as well as an application for a disaster relief program, and provide documentation describing business losses due to the coronavirus pandemic. Some of these numbers will not be easy to quantify right away. Business owners are also required to provide a “credit memorandum” documenting operating expenses so banks can certify that the funds are being used for “eligible purposes.”
Given the speed of the employment impact and the looming financial deadlines for many small business owners, the regulatory bottleneck could be significant. Banks and lenders remain constrained by a regulatory framework that requires prudence and discipline, and are less likely to take unwarranted risks in lending, especially without clear safeguards. In addition, the number of banks that have historically participated in traditional SBA lending, such as the CDC/504 and 7(a) programs, has been relatively small. The SBA provided approximately $23 billion through its 7(a) program in 2019, less than 10 percent of the currently planned disaster relief package. Providing simple and clear criteria will be critical to ensuring that the SBA effectively reaches the thousands of small businesses across the United States and the millions of workers who depend on those jobs to provide for their families.
Impacts on housing construction could be pronounced
The topic is particularly important for the real estate market. April 1st marked the start of a new accounting month, when many homeowners had to make their mortgage payments and renters were expected to pay their rent. For many Americans, their paycheck is their only source of income to cover expenses. And just as important, job security allows for longer-term planning.
Looking at the experiences of Asian and European countries, we can expect the US economy to struggle through this limbo for a few more months. As economic activity, as measured by gross domestic product, is primarily driven by consumer spending, stay-at-home orders are reducing revenue for businesses across the spectrum.
As Americans quarantine in their homes, foot traffic has been halted for open houses. While real estate companies have used technological solutions to offer alternatives, the specter of high unemployment is worrisome for both buyers and sellers. Based on realtor.com Inventory release in Marchthe number of new registrations in the last week of the month fell by 34 percent compared to the previous year.
We started 2020 full of hope. The millennial generation – the largest in US history – is about to enter the home-buying age 5.0 million young people will be turning 30 this year. Mortgage rates are near historic lows and are likely to remain below 4.0 percent over the medium term. In addition, the housing market was almost 3.8 million new apartments, which offers developers and construction companies plenty of runway to boost production and increase revenue. From a demographic perspective, the US has tremendous potential for economic and housing growth.
However, this pandemic is unprecedented in its scale and the speed with which it has shut down the country’s economy. It is important to ensure that American small businesses can access CARES Act assistance funds quickly and efficiently. Historically, small businesses have been responsible for most of the job creation and have also tended to be more affected by downturns.
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