Fintechs OK'd to make emergency small-business loans

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They wanted in. Now they're in.

Online lenders had lobbied federal officials hard to participate in emergency lending to small businesses hurt by the economic fallout from the novel coronavirus outbreak. Three fintech companies — PayPal, Intuit QuickBooks Capital and Square Capital — said that in recent days the federal government has approved them to make loans under the $349 billion Paycheck Protection Program.

Other prominent fintechs, including Funding Circle, are awaiting approval to be direct lenders in the program. Applications were first taken from fintechs last Wednesday, though banks and credit unions have been involved since the program's inception on April 3.

PPP total loans April 8, 2020-April 13, 2020

Some online lenders — including Square, PayPal and Kabbage — have participated indirectly in conjunction with bank partners that were already active in the program. OnDeck Capital said Monday that it would process applications on behalf of Celtic Bank, a Utah industrial bank, and that it had applied last week to become a direct lender in the program, too.

As of Monday afternoon, the Small Business Administration said it had approved more than 941,000 loan applications for the program, totaling about $228 billion. Many banks have prioritized existing customers ahead of noncustomers, leaving smaller businesses lacking core banking relationships looking frantically for help.

According to several industry experts, fintechs are the most likely vehicles for loans to smaller concerns that have had a hard time accessing the emergency loan program.

"Having another outlet has to help," said Steven Busby, CEO of Greenwich Associates, a data analytics firm in Stamford, Conn. "There are all these stories of businesses that didn't have a bank relationship, and they're going to anyone who'll listen" to obtain funding.

Viral Acharya, a former deputy governor of the Reserve Bank of India who teaches finance at New York University’s Stern School of Business, said the program is approving loans brought to it by lenders on a first-come, first-served basis.

As a result, “there are likely to be deserving businesses that aren't getting money,” Acharya said. “Attempts have to be made to broaden the program; otherwise you could get a very adverse crowding out.”

Fintechs can be “particularly helpful” in that regard, Acharya said. “We need to keep the universe of eligible lenders very broad.”

John Pitts, policy lead at Plaid, a San Francisco data and technology firm that serves hundreds of fintechs, said the median size of program loans made to date is about $79,000 — substantially more than what is needed by the small businesses fintech lenders typically serve.

Most fintech borrowers need $25,000 or less, and “banks aren’t making those kinds of loans,” Pitts said. “Across the fintech ecosystem, we’re seeing unmet demand for loans.”

The Paycheck Protection Program was included in the so-called third-round stimulus package Congress passed and President Trump signed on March 31. It offers small businesses with 500 or fewer employees loans of up to $10 million. Much of the money firms borrow can be forgiven if they spend it on payroll and basic operating expenses during the first few months after receiving funding.

The law allowed fintechs to participate, but the Treasury Department and the SBA — which are running the program — created a separate approval process for nondepository lenders.

PayPal declined to discuss the response it has seen since it began lending Friday but said any borrowers eligible under the program can apply through PayPal, spokesman Joseph Gallo said Monday.

“We believe it is necessary to help the smallest of small businesses in this unprecedented time,” Gallo said.

Jackie Reses, head of Square Capital, said it is trying to avoid making borrowers endure long waits for approvals by sending invitations to merchant customers that it thinks could get quick and easy approvals. All Square Capital loans are made to merchants that use the Square payments platform.

"Our goal is ... to take the most automated first so that we could get them through and get approved and hopefully disbursed," Reses said after tweeting Monday that Square Capital had been named a direct lender in the program. "We're only sending out applications as we could expediently get them to the SBA."

This should help a lot of very small businesses, especially ones owned by women and minorities, avoid "the Catch-22 where they need to have a pre-existing lending relationship with a bank."

Intuit QuickBooks Capital, which joined the program as a direct lender Friday, did not provide an executive for an interview before the deadline for this story.

Funding Circle submitted its application to the federal government on Wednesday, “just a couple of hours after the application form was released,” Ryan Metcalf, its head of public policy, said Monday.

“We're ready to begin lending as soon as we're approved. We’re also ready to support borrowers in multiple languages,” Metcalf said.

The SBA did a good job in approving fintech lenders as quickly as it did, given that they did not participate in 7(a) lending prior to the coronavirus crisis, Plaid's Pitts said. He estimated that more than 20 fintech lenders would probably apply to participate in the program.

Still, the weeklong head start that banks and credit unions received means much of the program’s initial $349 billion funding authority has already been allocated. Given that, Pitts and other industry observers are hopeful Congress and the Trump administration will reach an understanding that allows for an additional infusion of cash into the program.

“The demand is clear,” Pitts said. “It won’t be met in full by the first $349 billion.”

Likewise, Jack Heath, president and CEO of the $7.2 billion-asset WTB Financial in Spokane, Wash., the parent of Washington Trust Bank, said additional funding was “critical.”

“We truly need to get more funds,” Heath said Monday. “We don’t want the program to run out.”

Heath added that he had no objection to fintech lenders' joining the program.

“I see no reason not to push hard to get money into more people's hands,” Heath said.

The Trump administration has called for an additional $250 billion in funding for the Paycheck Protection Program, but negotiations about broader stimulus measures are in the early stages in Congress.

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Small business lending Commercial lending Fintech Paycheck Protection Program Coronavirus Marketplace lending PayPal Square QuickBooks