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The Small-Business Loan Program Is Already Hitting 4 Big Snags

Small businesses are looking for a bailout from the Paycheck Protection Program, but many say the safety net has too many holes. 

Major lenders are finding that legislation, as written, may be too risky. Last week, banks said they may accept applications, but would not process them immediately. The lenders are still concerned that the expedited review process, which allows borrowers to claim eligibility without the government approval, will have a high risk for fraud. As a response to complaints from banks, the Small Business Administration (SBA) increased the program’s interest rate to 1% on Thursday so lenders would be more incentivized to put cash into the hands of business owners. 

The second major issue is that the $350 billion in federally backed loans is nowhere near what it will take to bailout the 30 million small businesses in the United States. According to New York Magazine, a quarter of small businesses have temporarily shuttered while 11 percent are on the verge of closing permanently. Experts estimate that to save businesses during the next three months, it would cost nearly $1 trillion. 

The third problem is that major lenders are already participating in the program, but only lending to small businesses that already have a “business-lending and a business-deposit relationship.” While most small businesses have a relationship with a lender, many small businesses operate on cash and are at the most risk. 

Finally, these stimulus loans can be forgiven for the first eight weeks if employers pay their expenses and keep salary levels constant but three-quarters of the loan must go toward payroll. This keeps workers working, but places severe limitations on the loan for businesses that don’t rely on laborers.