When Barbara Webber heard on Friday about the $349 billion program in the federal coronavirus relief bill aimed at helping small businesses retain their employees, the executive director of Health Action New Mexico was prepared to apply first thing the following week.
Unfortunately, the start of the week proved to be too late.
On Sunday, Webber, whose nonprofit employs four people including herself, received a note from Wells Fargo, the bank she had chosen to seek the forgivable loan, that it would no longer be accepting new applications for the Paycheck Protection Program, leaving Webber’s company waiting for more information as the economic impact from the COVID-19 pandemic worsens.
“That was kind of surprising from such a big organization,” said Webber, who went to Wells Fargo because it handled Health Action’s accounts.
Webber said she then checked with dozens of local and regional banks for a replacement, but found most were only serving current customers, leaving her in the lurch. As of Wednesday, she had not laid off any employees, but might have to consider it down the line.
Webber isn’t alone. The federal program, a cornerstone of the $2.2 trillion CARES Act, has been plagued by overuse and confusion, to the frustration of small businesses, lenders and state economic development officials alike.
“It’s disturbing that the banks just tapped out,” said Alicia Keyes, Cabinet secretary for the state Economic Development Department, during a webinar on the program hosted by the New Mexico Association of Commerce and Industry this week.
Wells Fargo ended up receiving permission from the Federal Reserve to expand its participation earlier this week, which means more of its customers should be able to apply through it.
But the situation has left businesses throughout New Mexico – like Health Action New Mexico and Santa Fe Door Store – in limbo, or scrambling to find a lender that can process their application before the economic downturn prompts more layoffs.
Jerry White, co-owner and CFO of Santa Fe Door Store, said she has about 25 employees at her Albuquerque shop, and is hoping to avoid furloughs and layoffs.
“I have no idea what’s going to happen at this point,” she said.
The program was introduced as a way to incentivize employers to retain employees even in the midst of a pandemic. It provides cash-flow assistance through 100% federally backed loans for businesses. Under the program, companies with fewer than 500 employees can seek loans for up to 250% of their average monthly payroll costs – with that amount being forgiven if they maintain their payroll through the emergency, according to a federal guide on the new programs for small business owners.
However, the program had challenges from the start after its launch on April 3. Businesses were urged to file quickly before money ran out, which fed an onslaught of organizations seeking entrance. Russell Wyrick, executive state director of New Mexico’s Small Business Development Center network, said the website responsible for pushing the claims through the system has failed several times from overuse since the program’s inception, frustrating both participating banks and small businesses.
“That’s a real bottleneck for the lenders,” Wyrick said.
While there are lenders all over the state, Wyrick said they aren’t distributed evenly. In rural areas, a shortage of participating banks and credit unions means small businesses in those areas have to travel a long way to find a participating lender.
Making matters worse, Wells Fargo and some other participating banks hit a cap on lending quickly. Wells Fargo was under lending restraints because of past misbehavior, and maxed out its participation the first weekend the program was in place.
This forced organizations like Webber’s, which have worked with Wells Fargo for years, to scramble and search for other lenders.
However, John Garcia, district director for New Mexico’s Small Business Administration office, said many lenders aren’t accepting new customers, and instead choosing to focus on businesses they had a preexisting relationship with.
Jerry Walker, president and CEO of the Independent Bankers Association of New Mexico, said during the webinar that this made sense – that it’s unreasonable to expect banks to drop customers they’ve worked with for years in favor of unfamiliar companies.
“When you’ve had a relationship with a bank and a banker … you expect that banker to give you the attention that you need,” Walker said.
Walker added that confusion over official forms has proven challenging. He said there’s concern among banks he works with that the SBA could moot the guarantee if the loan form isn’t written correctly, effectively leaving lenders with unsecured loans.
“That’s why you’re seeing some reluctance from the banks,” Walker said.
Still, banks not accepting loans from new customers opens up opportunities for those that are. George Guarini, founder, president and CEO of United Business Bank, said the bank is accepting applications from outside clients as well as from its own existing customers.
Across the bank’s branches, Guarini said around a quarter of the nearly 300 applications the bank has received have come from customers of other banks.
“We’re hoping they’ll see value in that,” he said.
The path forward
Garcia said the federal government is working on fixes to the problems identified. On Thursday, the Federal Reserve unveiled its own $2 trillion aid package that includes some funding to back the SBA’s Paycheck Protection Program.
And on Wednesday, the Federal Reserve gave Wells Fargo – which has thousands of customers in New Mexico – permission to expand its participation after previously capping its involvement at $10 billion.
Garcia added the SBA has worked to standardize its form as a way to cut down on confusion from the borrowers and lenders.
“This is unprecedented,” Garcia said. “We’ve never gone through this before.”
In the meantime, there are other state and federal programs small businesses can take advantage of. Wyrick said he encourages companies his office works with to consider the SBA’s Economic Injury Disaster Loans, which offer small businesses an emergency advance of up to $10,000 toward payroll, sick leave and other expenses.
Keyes added the state offers a loan-guarantee program for loans up to 80% of principal or $50,000, along with zero-interest loans for companies that qualify under the state Local Economic Development Act. More information on those programs may be found at www.nmsbdc.org.