Most of my days this week are filled with calls from lenders and borrowers who do not know what to do about their business and what help is available. I am sure this is common thing that takes up most of the time throughout your days now. One borrower I spoke with today said that a few months ago, if you would have said what we were facing in the world today, he would have said it was a good science fiction story! I am sure we can all relate to this.
Today in your credit union you are probably facing the following: new auto requests are going away as no one is looking at cars today, Mortgage refinances may dry up as many people who could qualify now have no job. You have multiple businesses and individuals who need help as they cannot make their payments with no job or a closed business. The good loans you have on the books now, want a lower interest rate since all the rates have fallen so far. Your net interest margin is squeezed, and your overall income is slashed from what you expected this at the beginning of the year.
Now is the time, for the betterment of your shop and also to help your communities with the new options in government guaranteed lending that have opened up with the new CARES Act. Much of this lies with the options with the SBA. First, the SBA Express loans have increased from $350,000 as a top to $1,000,000 till the end of this year. This is a relatively easy way to provide important lending capital for your borrowers.
The SBA 7a loan has increased its ceiling from $5,000,000 to $10,000,000 until the end of the year. Also, the size requirements of all affiliated businesses have been stopped, this increases the number of businesses that you can do loans for with borrowers who have ownership in other entities.
The guarantee on SBA loans has risen to 100% this year, then drops to 85% for loans up to $350,000 and 75% for loans over that amount in 2021.
A new loan that will be backed by the SBA is the Paycheck Protection Program (PPP). This was just created last Friday and Treasury Secretary Steven Mnuchin, is indicating the rules for implementation should be ready this Friday. This program also waives the business affiliation rule that was in place with SBA qualification. The PPP applies to small businesses (under 501 employees), sole proprietors, independent contractors, and self-employed individuals, which have been operational as of 2/15/20.
The PPP is designed to pay for payroll expenses, utilities, rent and leases, and the interest portion of business loans. To figure out how much a business can qualify for uses the following formula:
Included Costs: Sum of all wages, salaries, commissions, tips, vacation pay, sick leave, payment for group health benefits, payment for retirement benefits, payment of state or local taxes on the employee compensation. Now if there are some guidelines for businesses that are seasonal or those which had no payroll in 2019 but have payroll starting January 1, 2020.
Excluded Costs: Take out any compensation for employees with over $100,000 of income annually, payroll taxes, income taxes, compensation for employees living outside the U.S. and any qualified sick leave wages which you have received a credit under the Families First Coronavirus Response Act.
Maximum loan is lesser of (included costs – excluded costs) divided by 12 multiplied by 2.5 or $10MM
The part that is very interesting is that a portion or all of the loan may be forgiven. The amount spent on payroll using the same definition to determine loan eligibility, interest on mortgage obligations, rent, leases, payments on utilities that are spent over the 8 weeks after the loan has closed may be forgiven and the business owner will have not have to declare the loan forgiveness as income. Some of the loan forgiveness will be reduced if there is a reduction in employees or payroll of 25% of more. Any part that is not forgiven is amortized over up to 10 years at a rate of 4%.
Why go through all this trouble to do these loans? Other than the fact that you are helping your membership, which should be enough, the SBA is also going to pay you for it. Loans up to $350K will be paid 5%, $350K to $2MM is 3%, over $2MM is 1%. Not a bad rate of return for having money mostly outstanding for two months.
We can help you with providing you support on your SBA lending needs. Let us know how we can help. Also check out the video blog we did on Strategies to Manage Through the Current Credit Crisis. In it we discuss the current economic condition, business climate, impact on borrowers, lenders, ideas on modifying loans, impact of SBA, USDA B&I loans and the new CARES Act. You can find it at https://pactola.com/informational-videos