PPP a year later: Lending lessons learned

April will mark one year of bankers supporting small businesses impacted by the pandemic through the Paycheck Protection Program (PPP), and in this latest round of funding under a new administration, the rules continue to change. One thing is certain: There is still a tremendous amount that can be done to help small businesses regain their financial health.

Most notably, there’s an opportunity to help businesses that were not able to secure loans earlier in the process. This is great news for more farmers and ranchers, smaller businesses, minority-owned businesses and sole proprietors.

To be successful in this new market, bankers need to assist these smaller business owners with their questions and even encourage them to apply. It’s critical to help those that may not know they are a candidate for PPP loans – some that may have been turned down or unable to access earlier rounds make good candidates today. The government made this program to assist struggling businesses, and it is the responsibility of bankers to help them access the funds. If they didn’t get a first draw loan, start there. If they may benefit from a second draw, consider helping them meet the specifications.

This awareness building approach is different from the first round of PPP, which came with a rush, massive media attention, fear of running out of funding and confusion over some of the guidelines. Today, bankers are managing PPP loans with the benefit of experience, so they can refine the process to make it more efficient and more user friendly.

Many banks are shifting to automated solutions to execute PPP loans and forgiveness. An automated system can help alleviate the burden on bank staff, and adding forgiveness automations at the beginning of the process can help small businesses make informed decisions and gain peace of mind. Banks that automate the forgiveness process now are saving time and redirecting their staff back to normal day-to-day operations sooner rather than later.

Small business health indicators

Certain indicators in the PPP forgiveness process can help bankers prepare for future lending opportunities. Maintaining a close pulse on a business’s forgiveness status can be an indicator to the future health of that business. If a company cannot meet the safe harbor requirements or has unforgiven balances, it may mean they were struggling before the pandemic or its business structure is not conducive to the “new normal.”

Most businesses only received two and a half months of operating capital from PPP, leaving five months of 2020 where they had no operational assistance. So banks must carefully consider what small businesses did for the second round. Did they not apply because they didn’t qualify? Did they not qualify because they don’t meet wage reduction requirements, or because they no longer have employees? The wage reduction requirement is 25 percent, but a 19 percent wage reduction can be catastrophic for a very small, gross margin business. Some businesses that do not qualify for the second round are still hurting badly.

To help the struggling businesses, banks should consider their other accounts with that business and ways to proactively address upcoming needs. There are some hard truths that need to be accounted for. Why are they struggling? Were they struggling before the pandemic and there’s not a great path to recovery? Or are they struggling because of the pandemic, which is typically the case for travel and hospitality industries, and do they just need help getting over the hump until regular travel resumes?

It’s a community banker’s job to be a partner that can help, but banks need to wisely evaluate the position of each business in today’s market and not throw money at a bad situation. Some businesses simply are not designed to operate in the new normal. Bankers shouldn’t put a small business further into debt if there’s no way out. However, if there is a way to future profitability, the banker should do what they can to chart that course.

Bankers that make the effort to invest in small businesses will not only be saving their local economies, but they will also form a strong, meaningful relationship that could last a lifetime. The responsibility to bring back Main Street is not an easy one, but it may be one of the most important roles of our lifetime.

Joe Ehrhardt is CEO and founder of Teslar Software.