- As the application period for the paycheck-protection program for small businesses closes, attention is shifting to what needs to be done for the loans to be forgiven.
- Insiders said the loan forgiveness process is far more complex than applying was, including a significant amount of documents to be filed by the lender.
- The issue is compounded by a lack of clear guidance from regulators about what is needed, including several rule revisions in recent months.
- Fintechs such as BlueVine, Plaid, and PayPal have all stepped up to help streamline the process, as was the case during application.
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The launch of the paycheck-protection program for small businesses in April was anything but easy. Standing up a multi-billion dollar program from scratch in the midst of a pandemic provided its fair share of hiccups.
From the first round of funding running out in just two weeks, to publicly traded companies receiving money ahead of small business, applying for a loan wasn’t seamless.
But as the application period comes to a close at the end of June, a more challenging issue has arisen: ensuring the loans are forgiven.
“There’s just a lot of complexity, a multiple of the complexity, on the forgiveness side as compared to the origination side,” Peter Davis, EY Americas financial services advisory leader, told Business Insider. He added that the industry put forward a “tremendous amount of effort to get the program stood up, and that was the easy part. The forgiveness is now definitively the hard part.”
On the surface, the concept of loan forgiveness might seem fairly straightforward. In order to ensure a loan is forgiven by the government, borrowers have 24 weeks — an extension of the eight weeks originally offered — after receiving a loan to provide lenders proof the funds were spent appropriately.
One main caveat is that at least 60% of the funds were spent on payroll. Lenders then send that information to the Small Business Administration, the government agency running the program.
However, thanks to guidelines that have continued to shift, the significant amount of paperwork required and lack of clarity of who is to blame if the information isn’t filed properly, the entire process will be much more cumbersome than applying was, insiders said.
During the initial wave of PPP loans, incumbent banks struggled to process large volumes of loan applications, leaving many small businesses unable to access funds. Fintechs like PayPal and Square then became approved SBA lenders, giving small businesses another option when it came to applying for the second wave of PPP funding.
Once again fintechs are looking to step up to the plate to help lenders and borrowers manage an intricate process.
“As people started getting closer to actually having to operationalize forgiveness, it became immediately apparent that there were going to be some real problems,” John Pitts, head of policy at Plaid, told Business Insider.
“I would view the fact that there are still so many changes happening right now as good evidence of the underlying structural problems,” Pitts said regarding the rule revisions. “A lot of those rely around the complexity and difficulty of meeting that complexity with the appropriate data.”
Forgiveness is full of complications
One of the biggest challenges navigating the program has been the constant updates, insiders said. Since the start of the program, 19 interim final rules have been filed and 48 FAQs released by the SBA, according to Davis, who added that EY has built out a platform to help both lenders and borrowers.
The most recent update, which was published June 19, likely won’t be the last. Davis said more changes can be expected in the months ahead. As a result, the paperwork one borrower submits for forgiveness might end up being entirely different from another who submits it a few weeks later.
While borrowers have 24 weeks from the time they received the funds to file for forgiveness, insiders said submissions should pick up in the coming weeks as the PPP loan application process officially closes at the end of the month. And while questions remain about loans under a certain threshold being automatically forgiven, everyone is expected to apply for forgiveness lest they have to pay back the loan with interest, albeit only at a 1% interest rate.
But even as forgiveness filings ramp up, other concur much remains up in the air.
“With the latest guidance by the SBA, we are pleased that they are working to make the PPP loan forgiveness application as simple as possible for borrowers, but there are still gaps when it comes to guidance for lenders/servicers to operationalize the forgiveness processes,” Doug Bland, PayPal’s senior vice president of global credit, told Business Insider via email.
Uncertainty around what is, or isn’t, needed when applying is also compounded by not having the ability to make changes after the submission is made, Rohit Arora, CEO and cofounder of online small business lender Biz2Credit, told Business Insider.
Not being able to revise what has been submitted is likely to further complicate things. The inability to add more documents after filing was a common problem that cropped up during the application process, and is likely to be an issue as submissions for forgiveness begin rolling in.
“Once they’ve applied and they’ve done their documentation and then they want to go back, especially if they want to increase their forgiveness amount, that would be very tough,” said Arora, whose company is rolling out a platform this week to help with filing for forgiveness. “Unwinding something like this is very tough.”
Digitally-savvy fintechs are trying to automate the forgiveness process
While the small business lending process can typically be very manual, fintechs were able to leverage their tech to process PPP applications online, which became crucial in handling high volumes.
And as the focus shifts to forgiveness, many are looking to do the same once again.
Online bank for small businesses BlueVine, which was able to digitize application documents and automate the application review process, is working on an automated platform to help its customers secure forgiveness.
“This laborious and complex process will be helped by fintech companies like BlueVine to create an easy-to-understand online application that makes the process faster, easier, and more efficient,” Brad Brodigan, BlueVine’s chief commercial officer, told Business Insider, “which is really important for small business owners who don’t necessarily have a CPA or an accounting department.”
Buzzy data fintech Plaid, which is set to be acquired by Visa in a deal valued at $5.3 billion, has also been working on new products specifically to help small businesses get the appropriate payroll data in order, both for initial applications and forgiveness.
PPP loan size depends on average monthly payroll expenses, so in the initial application small businesses needed to source payroll data. As a result, proving a majority of the funds were spent on paying employees is crucial to the entire forgiveness process.
Plaid’s Pitts said the fintech tried to simplify the PPP origination process as much as possible, limiting the number of data fields borrowers had to deal with. For forgiveness, it’ll look to take the same approach.
“What we are hearing is a desire for that same prioritization and ease of use in the forgiveness process as there was in the application process,” Pitts said.
“On forgiveness, you have a much more complicated job of actually tracking whether you appropriately spent the money in the appropriate period of time on qualified expenses,” he added. “That takes what was already a hard data problem for a small business and makes it just exponentially harder.”
Small businesses are giving fintechs a shot, and fintechs are setting new table stakes
The entire process has served as a way for fintechs to prove their value to small businesses they previously might not have dealt with. Fintechs and smaller community banks have shown they can offer the same services as incumbents.
“People’s relationship with their financial service provider is very sticky, and for very good reason,” Pitts said. “Usually there is not a clearly compelling case to change that relationship.”
But the PPP process proved an opportunity for fintechs to win over small businesses that weren’t prioritized by incumbent banks.
“Many small businesses viewed fintech as an option they had to try,” Pitts said.
Roughly 90% of Kabbage’s PPP loan applications and nearly 97% of BlueVine’s have come from new customers.
“I think it has really brought to the attention of small business owners, in particular, that their banks are really not providing them the level of service that they would need or expect,” said Brodigan.
And that’s due to a few reasons, Brodigan said. Incumbent banks have, by nature, larger customer bases and serve a wide array of small businesses. Many rely on manual processes made more difficult with coronavirus-related branch closures.
Fintech lenders like BlueVine and Kabbage, which target small businesses and operate fully online, were well-positioned to help small businesses who were left behind by incumbents.
“Once you’ve demonstrated that level of performance to a broader audience that didn’t necessarily think of themselves as a fintech customer,” Pitts said. “I think you’re going to start seeing the key features that were offered to them by fintechs as table stakes for their financial services going forward.”
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