Life After PPP for the Small-Business Economy

The nearly $750 million in Paycheck Protection Program loans disbursed over the last year provided an essential lifeline to millions of businesses and delivered an enormous benefit to the economy by preserving economic stability within the small business sector – the segment of our economy that employs more Americans than any other. This enormous infusion of capital into small businesses is helping to accelerate the impending economic recovery and has preserved the livelihoods of millions of Americans.

For those that participated, the execution of the PPP taught countless lessons for small businesses, banks, private lenders, government agencies and legislators. While effectively a grant program delivered through forgivable loans, checks could not simply be issued by the Internal Revenue Service. The PPP was deployed through the lending infrastructure of thousands of banks and civic and private lenders, in collaboration with the U.S. Small Business Administration. These are the institutions that are most accustomed to the extreme diversity of the small and midsize business economy.

This network is also uniquely familiar with the complexities of obtaining and synthesizing reliable data on these businesses in an efficient and timely manner to combat fraud and perform business underwriting. Every lender — and borrower, for that matter — that participated knows how challenging this was and it highlighted the opportunities to modernize the way capital is delivered to this vital segment of the economy.

It is time for federal and state agencies to partner with the private sector to create a more harmonized and modernized data infrastructure for the SMB sector, the benefits of which will accrue to small businesses, the public and private sector alike through combating fraud, reducing operational inefficiencies and simplifying access to financial and business products.

But a more pressing near-term matter is what comes next for small businesses to rehabilitate. The PPP, although extended for a few months, will end soon. Unfortunately, conventional lending programs may not be ready to lend when small businesses are ready to borrow again at the scale they did pre-pandemic. A recent survey of Federal Reserve loan officers indicated that lenders tightened underwriting standards for small businesses to a degree unseen since the last financial crisis.

So, it begs the question: What and who will step in to fill the void after PPP at the scale necessary?

SBA programs will play their important role as they always have, but they are designed to facilitate lending of last resort. Andy Kessler’s recent article, “Small-Business Loans Are MIA,” laid out a thoughtful approach using the blockchain and a capital markets solution; however, the main shortcoming of a capital markets driven approach is that most small businesses need credit in a form that provides them with maximum flexibility to meet the constant cash flow fluctuations they face and the varied investments they need to make. The majority of small businesses identify lines of credit and credit cards as their preferred products – both revolving forms of credit.

The most optimal strategy to fill the void is one that encourages banks to use their conventional credit products that give businesses the simplicity of accessing capital that they want, with the products that give them the flexibility that they need. It would also allow banks to use their existing systems and processes, enabling capital to be delivered immediately and at scale.

To accomplish these objectives, the Federal Reserve should launch a new public-private partnership that aligns the economic interests of small businesses with the public sector and lenders. The proposal that we recently submitted to the Fed is designed to have maximum impact in a short time frame, while providing for a longer window of access to credit for the small business community than offered under the PPP, and far less proscriptive in terms of how businesses can use the capital.

The proposal is simple: Use conventional bank lending programs combined with a limited guarantee facilitated by the Federal Reserve on new loans and lines of credit extended to small businesses. In exchange for this limited guarantee, banks would pay a monthly guarantee fee to the Federal Reserve on their outstanding portfolio. Because the guarantee is limited, banks would rely on their own credit policies as opposed to any overly prescriptive criteria that might otherwise be forced on them with a full government backstop.

Small businesses gain access to great credit products that are easy to access immediately through the very same loan application and loan processing systems that exist today. Taxpayers benefit from the resulting economic growth and a program that is unlikely to add to the federal debt through motivating banks to make prudent lending decisions given the existence of a limited guarantee rather than full backstops or grants.

The small-business sector is the cornerstone of the American economy. Accelerating its pathway from economic survival to economic prosperity is possible with further partnership between the public and private sector which need not compromise the economic interests of either.

Sam Graziano is the chief executive officer of Linear Financial Technologies. Todd McCracken is the president and CEO of the National Small Business Association.

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