Fintechs hope PPP performance will lead to expanded role with SBA

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Many fintechs have struggled to gain traction in the Paycheck Protection Program.

Most were shut out of the $669 billion emergency loan program’s initial round, instead acting as agents for lenders that were approved to participate.

Those that are now cleared to participate are trying to make up for lost time, hopeful that a strong finish will bolster their case for inclusion in traditional programs managed by the Small Business Administration.

The delay represented a “missed opportunity” for fintech, said Eric Corrigan, a managing director in the financial institutions group at Commerce Street Capital in Dallas.

“Fintechs genuinely wanted to help,” Corrigan added. “They should have been the solution for smaller, less financially sophisticated borrowers from day one.”

Early exclusion still leaves a sting for some executives.

Funding Circle’s team spent long days and nights processing loans for other lenders during the first phase. Since becoming a direct participant on May 1, the London fintech has been playing catch-up by processing thousands of applications.

“We were at the end of the line,” said Ryan Metcalf, Funding Circle’s head of public policy. “That’s left us where we are today, which is helping the smallest of small businesses. … I’d definitely say they’re on the small end of the spectrum.”

Other fintechs have found meaningful participation in the program elusive.

OnDeck Capital’s initial participation was “de minimus,” with involvement restricted to helping approved lenders, Noah Breslow, the New York lender’s chairman and CEO, said during an April 30 conference call. The company was approved as a direct participant a day after the initial funding ran out.

OnDeck’s direct involvement with the program’s current iteration had been limited to “a handful” of applications because it lacked access to the Federal Reserve's Paycheck Protection Liquidity Facility, Breslow said. (The Fed opened the facility to all PPP lenders on May 1.)

Despite a bumpy integration, many fintech executives are optimistic that they can generate meaningful volume from now until the current allocation dries up.

“We’re not seeing the mad rush or panic that money will run out,” said Rohit Arora, CEO of Biz2Credit, which has been approved as a direct lender. “That will help [phase two] last longer than people were expecting.”

Fintechs are also pointing to their inclusion as a factor in the substantial decline in the program’s average loan size.

The average Paycheck Protection loan in the second phase was $79,000 on May 1, or roughly a third the size of the average loan in the initial round, which ran from April 3 to April 16.

When Funding Circle began direct lending, less than two-thirds of its applications were for less than $50,000. That share has risen to almost 80%. Applicants, on average, employ 17 people, Metcalf said.

Ready Capital in New York has reported an average loan size of $73,000. The average at PayPal has been $35,000, while Square Capital’s average is $12,000.

Biz2Credit has received several thousand applications, mainly from small-dollar borrowers, Arora said.

“We believe we’ve played an impactful role helping ensure that these funds reach the smallest businesses who create the vibrancy in our communities,” said Jackie Reses, head of Square Capital. “This comparatively small amount makes a massive difference to real small businesses.”

Square has submitted 54,000 applications to the SBA for more than $850 million in loans.

The program, which is being run by the SBA and the Treasury Department, was created too quickly to get money to employees of small businesses. Under the terms of the coronavirus stimulus package, loan proceeds spent on payroll and benefits, along with some basic operating expenses, will be forgiven.

In its scramble to implement Paycheck Protection, the SBA was unable to draft the guidelines necessary for fintechs to begin lending until late in phase one.

An SBA spokeswoman said she was unable to respond to a request for comment.

Delayed entry may have saved fintechs one issue plaguing banks.

The larger phase-one loans have become a political headache. Media critics and officials from both political parties homed in on loans approved for large, publicly traded companies and well-funded private schools, while decrying the lack of access for smaller firms.

Fintechs are also hopeful that their late-stage role will help them make a case for becoming a participant in traditional SBA initiatives such as the flagship 7(a) guarantee program. No fintechs are currently approved to serve as 7(a) lenders.

While 7(a) lending is down substantially as lenders focus on PPP, small businesses will need those loans to restructure, buy new inventory and pursue growth opportunities when the coronavirus-induced crisis ends, Metcalf said, adding that Funding Circle is seeking to enter the regular 7(a) program.

The 7(a) program “will be the main conduit for small-business capital for the foreseeable future,” Metcalf said.

Funding Circle also wants the SBA to allow it to lend nationally, something the agency has been unwilling to consider since most fintechs lack a national regulator.

“We don’t want to be restricted to making loans in just one state,” Metcalf said. “We should be able to operate in all 50.”

The Federal Deposit Insurance Corp.’s recent approval of an industrial loan company charter for Square would likely facilitate the company’s inclusion into 7(a) — a move Reses did not rule out.

“In addition to expanding our abilities to offer small-business loans, we look forward to bringing other key banking tools to underserved small businesses,” Reses said.

While Biz2Credit hasn’t disclosed any plans to seek admission to 7(a), Arora said that, over time, the smallest businesses could benefit more from increased access to general working capital than special-purpose loans earmarked for employee compensation.

Arora said he wouldn’t be surprised if small-business advocates start pushing for changes to make PPP loans more like regular 7(a) loans, with longer maturities and the ability to spend proceeds on replenishing inventory and other non-payroll purposes.

“Making it look more like 7(a) might make the program more successful,” Arora said.

Paul Davis contributed to this report.

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