With the President signing into law the CARES Act on Friday, business owners around the country can see some short term relief in sight. The 2.2 trillion dollar emergency relief package that congress approved will go towards several aspects of the economy to help people all over the country and much of it will help businesses. Business loan broker, online lending companies and other stakeholders have an opportunity to take part in this massive economic aid.
When looking at the total impact this pandemic is having, it is unlike any other crisis in most of our lifetimes.
It's not like the 2008 financial crisis. That was market driven and businesses were not forced to close.
After 9/11 some businesses in certain areas had to close or shut down temporarily but that wasn’t nationally.
The Dot Com bubble, the 1987 stock market crash and other economic recessions weren’t on this scale.
The 2.2 Trillion dollar price tag put in the CARES Act law all but proves that.
Most of the focus today will be on the business side but I must mention the money being sent to everyone regardless of employment, though with income restrictions. You may have heard that this law will provide for each person to receive $1200(or less). Sure, this $1200 plus $500 per child doesn't seem like much for the average worker, but this amount is intended for emergency relief, not money to buy non-essential items. However that's only the start of potential money available.
A small business owner(500 employees or less) has a couple of options to discuss with their financial institution(or broker). They can apply for the Paycheck Protection Program through any SBA lender or an Economic Injury Disaster Loan (EIDL) , to cover costs and pay workers or recently laid off staff. There are a few variables to determine the amount you would qualify for these types of small business loans but it will be mainly based on the 2019 average monthly payroll and other compensation which could lead to a loan amount equivalent of 2.5 times that average. This loan would turn into a grant as long as its used for appropriate payroll expenses.
With that amount plus the $1200 that worker would then be in a better position to make it through this tough stretch. It may not be enough(it never is) for some but it should help with meeting needs.
The clear goal of the Senate Committee on Small Business and Entrepreneurship regarding what the bill would include was getting aid to business owners the fastest way possible. This will be directed in many different ways as one key part of this bill demonstrates:
"Loans would be available immediately through more than 800 existing SBA-certified lenders, including banks, credit unions, and other financial institutions, and SBA would be required to streamline the process to bring additional lenders into the program. The Treasury Secretary would be authorized to expedite the addition of new lenders and make further enhancements to quickly expedite delivery of capital to small employers."
Most of congress seemed to agree with the money allocated to small business owners although some thought this package, even as big as it is, still wouldn’t be enough. They were of the mindset that senators were underestimating the revenue lost due to closures, the lasting damage to the customer base and the recovery period.
Other than the small business aspects of this bill the main disagreements were about big corporations, a $500 billion ‘slush fund’, and extended unemployment benefits, which the Cares Act chart below identifies.
Here are some other details of the Law:
The bill would expand eligibility for entities suffering economic harm due to COVID19 to access SBA’s Economic Injury Disaster Loans (EIDL), while also giving SBA more flexibility to process and disperse small dollar loans.
During the covered period, individuals who operate under a sole proprietorship or as an independent contractor and eligible self-employed individuals shall be eligible to receive a covered loan.
The bill would allow businesses that apply for an EIDL expedited access to capital through an Emergency Grant—an advance of $10,000 within three days to maintain payroll, provide paid sick leave, and to service other debt obligations.
$10 billion would be provided to support the expanded EIDL program.
The bill would require SBA to pay all principal, interest, and fees on all existing SBA loan products, including 7(a), Community Advantage, 504, and Microloan programs, for six months to provide relief to businesses negatively affected by COVID19.
The cost of participation in the program would be reduced for both borrowers and lenders by providing fee waivers, an automatic deferment of payments for one year, and no prepayment penalties.
There are several things I believe will happen in the short term for funders and ISOs in the alternative finance space.
As you see now several funders have ceased operations temporarily but there will be a few that won't be able to recover due to not being properly capitalized. The larger players will be ok and those that have merchants processing accounts like Paypal or Shopify will further solidify there place in the market, even though revenues for millions of merchants will drop meaning offer amounts will be reduced.
As many business loan brokers have been following closely and discussing what actions to take next, the shift in product offerings is what most have decided to be their focus. This is because most MCA funding companies are not funding or those that are funding have very strict underwriting guidelines and rightfully so.
There are loan brokers who have experience with SBA loans, equipment financing, invoice factoring and other asset based loans. These companies are the ones primed to do well right now. Some brokers are also pushing credit repair and other ancillary services. Those with little to no experience are going to have to learn on the fly not just to offer these products but to beat the experienced broker in closing the deal.
ISOs who struggle to cover operating costs will turn into smaller shops, at least for a period of months. They might have to make salary and commission adjustments or other benefits to reduce overhead until qualified deal flow picks back up. A statistic that is really striking is that the Median small business doesn’t have enough capital set aside to cover 27 days, per a report by JPMorgan Chase. That would include loan brokers and many of the businesses that are normally their clients.
Those ISOs that make it through will rethink how they invest in lead generation, other marketing and sales efforts in order to reflect the current state of the market.
Can an ISO depend on the same sources as before, or will they invest more in areas other than buying aged lists to cold call?
Cold calling will always be available, at least for the foreseeable future, but with new robocalling laws and restrictions and 50 other brokers calling it's becoming harder and harder to reach the target audience via this channel.
Funders have different obligations financially on the back end whether it be a line of credit from a big investment bank, hedge fund or other investors that have to be repaid. So if they aren’t funding much or at all then what will they do? They are already seeking arrangements for this downturn somewhat like merchants.
For many of the companies there will be a reorganization of sorts. Funding companies of all sizes will rethink how many staff members they need for the remainder of the year or if they can move them around to fill multiple roles that they weren’t doing before.
If they are ok with a small amount of deals in the short term they can sustain. However, they will look to other ways to generate submissions including onboarding new ISOs, new strategic partners and increasing their inside sales team or forming one if they don’t currently have one.
I suspect by about August funders will be able to get back to more normal underwriting policies and pricing structures. Certainly they would still need prior years bank statements in addition to other documents and stipulations like site inspections for deals that wouldn’t typically require it.
I haven’t even mentioned yet maybe the most important thing which is ongoing collections for current accounts. If a funder has too high a default or loss ratio they will have to further tighten requirements, not fund at all until fully recovered, fold their business or get bailed out.
One other thing you might see are more mergers or acquisitions. There has been some consolidation in the last 6 months but this situation could lead to several more as companies look for opportunities to increase their books and market share.
The way forward is different for each depending on your circumstances but determination and work ethic will help you get through this difficult time.
Feel grateful if you and your family are healthy because many others don't have the same fortunate as the numbers of Covid19 infected and related deaths still increase. Our work is the way we make a living but our health is everything.
Hopefully with this new law our industry can rise up to help businesses across America get the economic aid they need to battle their way back to an even more prosperous position than they were in prior. If we all do our part I have no doubt they will.
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