The CARES Act – What it Means for Main Street

Commercial Credit, Small Business Credit

Recently, Equifax Vice President of Government Relations Blake Hanlon and I presented a webinar hosted by the Consumer Bankers Association (CBA) focused on the Coronavirus Aid, Relief, and Economic Security (CARES) Act. We focused on the Paycheck Protection Program (PPP) and its implications for small businesses and small business lenders. This article delves into our discussion.

The CARES Act, PPP and Small Business Lending

The first phase of the CARES Act provided more than $2 Trillion in funding to state and local governments, and with $350 billion in first phase funding and an additional $310 billion in the second phase, the PPP was a significant part of the emergency legislation. Established to provide relief to small businesses and help them keep their workforces employed, the PPP delivers critical capital to small businesses for payroll and other operating expenses, all with a 100% guarantee from the SBA. Most important, the SBA forgives the portion of loan proceeds that are used to cover the first eight weeks of payroll, cost, rent, utilities and mortgage interest.

Why is there a keen interest in small business lending right now? First, Main Street has historically faced a credit gap. Normally, it takes a small business longer to secure a loan (45-120 days) and making a loan to a small business can cost upwards of $15,000 per transaction due to the cost of underwriting. As a result, prior to the global health crisis, loans of less than $1 million to small, local merchants were down 33% since 2008, the same period during which GDP rose 23%. This despite the fact that 99.7% of paid-employee firms in the U.S. are small businesses, accounting for two-thirds of net job creation since 1995.

There are a number of reasons that small businesses need capital now. First, they normally only have 30-60 days of cash on hand. Second, the small and mid-sized business (SMB) economy is diverse – from farms and medical practices to construction and professional services. Finally, without readily available and reliable credit information, it’s difficult to distribute capital to this diverse and private segment of the economy.

PPP Snapshot

In the first phase of PPP funding, which was depleted in two weeks, more than 1.7 million loans totaling $342.3 billion were distributed by almost 5,000 institutions. Striking was the dollar size of the loans – 90% were less than $350,000, and 74% were less than $150,000. Lenders originating loans under the PPP receive processing fees that will be paid by the U.S. Small Business Administration (SBA). And, smaller size loans are eligible for a higher transaction fee (around 5%).

After the first round of funds was distributed, Congress added another $310 billion to the PPP. As of May 3, more 2.2 million additional loans totaling more than $175 billion were already spoken for in the second phase of funding. The average loan size in the second round is $79,000, another sign that the smallest of small businesses is receiving these loans.

While it was historic in nature and passed by Congress at record speed, the CARES Act’s PPP has not come without challenges for lenders.

Loan Forgiveness – a Concern for Lenders

Over the past several weeks, I’ve spoken with many bank executives and professionals, and a top concern for most is PPP loan forgiveness, which could pose a major hurdle due to manual processing requirements.

Under the PPP rules, lenders can rely on borrowers’ documents and must provide a good faith review of those documents. The idea that businesses and banks are in contact during the forgiveness process is a key step, as it enables the lender to go directly to the small business prior to requesting forgiveness from the SBA.

Automating the Loan Forgiveness Process

In the meantime, PayNet, an Equifax company, has been working with banks to automate the process using existing technology to alleviate many of the challenges surrounding loan forgiveness, reduce the burden of manual processing and higher operating costs, and deliver a higher degree of certainty around gaining loan forgiveness. Automation could be used to compile from multiple sources information such as payroll, rent, mortgage, and utilities; business background and general ledgers; and the date of funding of the loan.

Equifax and PayNet, an Equifax Company, have developed a sample loan forgiveness report that would be generated through such technology. The goal of the report is to assist lenders so they can move with the speed needed to be ready for loan forgiveness requests that are likely to come shortly. Preparation must start now.

Just as Small Business Economy Drive the Country, Lenders Drive Small Businesses

Main Street is a cornerstone of the U.S. economy, and small business dollars are critical to keeping the economy moving. Small businesses account for approximately $10 trillion of the U.S. GDP, and the payroll portion of the small business economy also is measured in trillions. We’ve seen and developed estimates that indicate replacing 12 weeks of revenues in the services sector of small business would cost about $1.5 trillion. With a multiplier effect of $2.50 across the economy, every small business dollar matters. The impacts of the CARES Act and PPP on the U.S. economy are substantial.

For lenders playing the crucial role of getting dollars into the hands of small businesses, starting now to ensure a more efficient and accurate loan forgiveness process will be a key next step. For more information, please reach out to me directly at