Lenders are raising serious concerns about the Payroll Protection Program, which was scheduled to launch Friday, citing a lack of information from the government on how and if the emergency loan program will even work.
The Payroll Protection Program is the centerpiece of the three small business lending programs outlined in the CARES Act, which was passed last Friday and promises $350 billion in financial relief to small businesses hurt by the coronavirus pandemic. On Tuesday, the U.S. Treasury said it plans to be able to fund the loans by today, but lenders are worried they won't have enough capital to fund the demand and are asking how they'll be able to replenish capital — and how quickly.
"We need this release valve in place where lenders of all types can sell the paper off to recycle the funds. It is such a vital piece," Chris Hurn, CEO of non-bank SBA lender Fountainhead, said Thursday. "We've heard virtually nothing — no guidance on what's going to happen there."
Under normal circumstances, for example, a community bank might hold $100 million on its balance sheet that allows them to make loans to small businesses; a larger bank, $20 billion. But in today's emergency environment they could deploy that much in a single day. And if or when the PPP loan application becomes available, bankers are sure to hold still and wait until the Treasury and SBA clarify how to manage these capacity constraints.
"Small lenders, community banks, regional lenders, non-bank lenders like myself, and even the biggest banks are not going to have the capacity to make these loans and keep it on their balance sheet for any period of time," Hurn said.
"You think it's chaotic now? It's about to be absolute insanity."
Brock Blake, CEO of small business loan marketplace Lendio, said about 70 percent of its lending partners will participate in the program. Some institutions, like Chase and First Republic Bank we're not in a position to accept applications immediately, although both had made the program available by Friday afternoon.
"They don't have the process in place, they don't have the capital, they don't have the right way to help their customers, but they are looking to refer their customers to other financial institutions that will be participating," Blake said.
Lenders are also concerned about the small amount of interest they'll be able to earn from the PPP loans: 1 percent with maturity at two years. The Treasury increased that rate on Thursday night from 0.5 percent, which is what the SBA had advertised all week.
However, lenders typically charge between 4 and 8 percent on small business loans, and the CARES Act caps the interest at 4 percent. It's not about profitability — small business loans tend to comprise a very small amount of banks' balance sheets — but they worry it won't allow them to make the economics work to service the loans.
"Small business lending, in general, is not really a money-making enterprise. It's more of a retention game," said Ian Benton, a senior analyst at Javelin Strategy & Research that specializes in small business banking. "It's about attracting and retaining clients, keeping them happy and selling them on other services."
The SBA is going to compensate lenders, but according to estimates by industry experts, based on lender compensation rates, that could come out to some $10 billion — for the deployment of $350 billion. It'll pay lenders 5 percent for loans under $350,000; 3 percent for loans greater than $350,000; and 1 percent for loans greater than $2 million. 
"You have to remember: the cost of origination for a bank is so high," said Ryan Metcalf, head of U.S. regulatory affairs and social impact at online lender Funding Circle. "A $100,000 loan and a $1 million dollar loan can cost a bank the same amount of money to originate."
PPP loans are based on 2.5 times the business' monthly average payroll cost in 2019. The maximum possible loan amount is $10 million.
They're also first come, first served and combined with lenders' having to manage capital constraints and the high cost of loan origination, they're likely to prioritize existing customers that have established long-term value to them. 
"I suspect banks have already developed lists of clients that they know are going to be interested in this and they've probably started prepping applications," Benton said.
That could make it difficult for banks to meet the demand of PPP loans. 
Borrowers can still look to non-bank direct lenders, like Fountainhead, which is an SBA lender; as well as fintech companies like Funding Circle and Kabbage, which specialize in small business loans but aren't approved SBA lenders. A provision of the CARES Act allows them — as well as other lenders that want to participate in the distribution of capital — to apply for approval, but the SBA hasn't provided clear guidelines on how to do that, Blake said. On Thursday it said it would release an application form for non-SBA lenders.
"Every lender I'm aware of — and we have 2,000 lending institutions on our platform — reached out if they weren't already an SBA lender to the email address [provided by the SBA] saying they wanted to get approved. Now, the day before [the launch], they're saying: actually that's not the way you get approved, we're going to release a new document that allows non-SBA lenders to expedite the approval process."
The situation has been similar for borrower applications, whose requirements, forms and application processes are caught in a power struggle between the Treasury and SBA, according to Blake. 
Earlier this week the Treasury posted a practice application for borrowers to download so they could "begin preparing" and "see the information that will be requested." Borrowers have been using it all week and some lenders have posted digital applications on their websites based on it and were building automated experiences for their customers.
"The day before it's supposed to go live, we're receiving guidance that that's not the real application; that there are additional documents and data that need to be gathered from the business owner, and if you don't gather them it's not going to be a guaranteed loan."
Updated April 4 to reflect that by Friday afternoon, First Republic and Chase had both made the program available.