If your bank or credit union was among the many that jumped in to help local small businesses receive Paycheck Protection Program (PPP) funding, your job is only half done. The most important phase of the program – loan forgiveness – now demands your institution’s full attention. Unfortunately, most financial institutions are not prepared for the communication and operational requirements that will be the difference between success and failure of this program, for both your organization and the small businesses that are counting on you for support.
Just as with the PPP loan application process, regulatory ambiguities about how a small business can receive forgiveness are creating confusion among borrowers and financial institutions. But rather than have this lack of clarity be a cause for inaction on the part of your institution, it provides a great opportunity to build stronger relationships with the small businesses that are relying on you.
By providing proactive support now, when clarification comes from the Small Business Administration (SBA), both you and your small business customers will be positioned to receive the maximum amount of forgiveness with the least amount of operational cost and stress. To achieve this goal, communication and collaboration must begin immediately.
According to Jill Castilla, President, CEO and Vice Chairman of Citizens Bank of Edmond, “The biggest challenge PPP applicants faced was communication, causing unnecessary anxiety, perceived inaccessibility and duplicate applications. For the forgiveness phase, we need to do better. To do better, utilize a CRM, develop a communication strategy and identify team leads for processing, decisioning and communication.”
The Scope of the SBA Paycheck Protection Plan is Massive
The unexpected impact of COVID-19 on small businesses nationwide prompted the government to act quickly to provide support in the form of two rounds of emergency funding. This support totaled $659 billion, including an initial round of $349 billion (where the funds were exhausted in less than two weeks), and a subsequent $310 billion round in late April.
The most unique feature of these government loans was that the loan could be 100% forgiven if certain criteria is met. To be eligible for loan forgiveness, small businesses must use the funds for payroll costs, interest on mortgages, rent, and utilities. In addition, at least 75% of the forgiven amount must go to payroll and the small business must maintain or reinstate employment and compensation to the levels that were in place before the pandemic to qualify for forgiveness.
While the amount of funds approved for small businesses sounds massive, the reality is that despite roughly 70% of small businesses trying to apply for the loans, many had difficulty in the application process and many more were not approved. Based on some early indications, less that 20% of small businesses may have received funds.
The Initial Loan Application Process Was Not Smooth
A great deal has been written about the struggles financial institutions faced when trying to assist small businesses with their loan application process. Not only was the program approved by the government late on a Friday evening, but the requirements of the program were far from clear at a time when almost all small businesses were struggling and needed funds … quickly.
With all of the interested parties having a vested interest in getting loan applications processed as quickly as possible, the process was far from smooth. Large institutions often required additional documentation than was required by the government or had other stipulations that made it difficult for small businesses to apply for loans.
Many smaller financial institutions did not have the digital systems in place to take applications easily or submit them in the manner required by the SBA. Many had large numbers of employees working overtime to manually complete forms, especially when the SBA systems crashed early in the program. In addition, several third parties saw this as an opportunity to provide software support to smaller banks that allowed them to digitize their loan processes. Finally, the government also opened up the program to fintech firms in round two such as PayPal, Square, Intuit and others.
It’s Time to Focus on the Forgiveness Phase
With billions of loans approved and processed in an historically short period of time, small businesses and financial institutions must now focus on the forgiveness phase of the program. Unfortunately, this part of the program could easily be much more complex than the loan approval program.
Making matters worse, because the loan distribution timeline was so compressed, all of these same small businesses will be knocking on the doors of financial institutions are the same time. The PPP program required small businesses to spend their money in eight weeks, with many not ready to open their doors to the public but still needing forgiveness.
“With insufficient guidance about PPP forgiveness from the SBA, and with conflicting announcements from Congress and the IRS concerning the tax implications of PPP loans, banks who participated in the program are about the get hammered with questions (and complaints) about the program,” states Ron Shevlin, Director of Research at Cornerstone Advisors and senior contributor to Forbes. “Banks need to get on the stick to automate the forgiveness process and gear up for a customer service onslaught.”
The clock is ticking and clarity around the program is still missing.
Several steps can be taken immediately to assist small businesses with the loan forgiveness process. Newgen Software, a provider of SBA PPP loan digital automation software, offers these guidelines:
- Provide Proactive Communication. Because the loan forgiveness process still lacks clarity, small businesses are looking to their financial institution for guidance. This is where proactive communication of updates is important. Even if a financial institution isn’t totally clear on all of the requirements, reach out to all of the small businesses you have provided loans to and let them know the status. This proactive process will reduce strain on call centers and other areas of your organization that may not have updated information.
- Give Real Time Updates. Information from the government will be forthcoming and may change without notice. Provide updates as soon as possible once information is received.
- Use a Multichannel Approach. Small business executives will not mind ‘over communication’. It is a stressful time for small business owners. Use email, text communication and phone calls to reach the intended parties.
- Help Small Businesses Collect Needed Paperwork. Most small businesses don’t know much about the next steps needed to get loan forgiveness. Many do not have a formal payroll system, a team of accountants or even advisors familiar with the PPP loan forgiveness process. You are their lifeline. Send them tips for preparation of needed forms, calculation sheets, thoughts on where to collect information that will be required.
- Define Your Review Process. Determine your process for helping small businesses with their forgiveness step. Even if the technology isn’t available yet, the process should be defined. Technology is only the enabler.
- Standardize Data Collection. While small businesses will get the needed data from various sources, you should require these businesses to submit their information in a standardized digital format. This will greatly speed the process and will allow flexibility if underlying requirements change.
- Digitize the Process. All components of the process should be digital, with forgiveness amount calculation, exception handling, status tracking, and document management being key components to enable ongoing communication with the borrower.
- Focus on the Audit Trail. As with any SBA lending operation, lenders are liable for due diligence during the application and forgiveness stage. Make sure there is adequate documentation and the ability to access historical data for audit purposes.
According to Joe Ganzelli, Sr., Senior Director at Cornerstone Advisors, “If [financial institutions] utilized a loan origination system (LOS) for their PPP application processing, they should already be discussing their vendor’s capabilities for forgiveness processing … ideally fully leveraging original PPP application data in forgiveness evaluation and submission electronically to the SBA via an E-Tran integration with their LOS.”