The fintech industry has been working with the U.S. government to ensure America’s 30 million small businesses receive their relief funds as quickly as possible.
Online lenders like Kabbage, Funding Circle and OnDeck as well as other fintech companies including Plaid, Stripe and FIS have been in close talks with the White House, National Economic Council, Treasury Department and Small Business Administration to help distribute $349 billion of emergency small business capital allocated in the CARES Act (aka the coronavirus relief package and largest ever stimulus bill), Cheddar has learned.
“We’re trying to help them come up with a technology solution, almost like a technology sprint,” said Sam Taussig, the head of global policy at Kabbage.
Treasury and SBA-approved banks, the traditional funding sources, aren’t set up to move with speed. They lack the digital-first financial, technology, and fraud and risk assessment infrastructure to be able to verify the borrower’s identity, approve the loan application, and then deploy the capital fast enough for it to be most meaningful to business owners. Millions of small businesses are likely to fail in the next few weeks and won’t be well-served by guaranteed loans that take weeks to be funded.
“We went to Congress and said, ‘Looking at the magnitude of the situation, any federal or state program that relies on the 2008 playbook of rescuing small businesses by relying solely on banks, credit unions is not going to be enough,’” said Ryan Metcalf, Funding Circle’s head of U.S. regulatory affairs and social impact.
On Tuesday the Treasury said it plans to be able to fund loans to small businesses as early as this Friday.
How traditional banks fall short
Banks can take up to four months to approve and fund a loan, while online lenders can do the same in a fraction of the time. Funding Circle, for example, can approve a loan in less than 24 hours and fund it within three days. Online lenders typically have more streamlined applications that borrowers can complete relatively quickly. By linking an application with a bank account they can see a business’ cash flow and pull the information they need to make a decision in real-time.
Businesses also rely on software platforms like Square, Stripe, Xero, QuickBooks, Netsuite, Toast, Mindbody and others to manage their sales, expenses, customers and orders. With permission to access, lenders can get even more visibility into the life of a business.
By contrast, traditional banks still require borrowers to manually verify their identity, collect documentation and payroll information among other things. It can be a particularly arduous process if you aren’t an existing customer of the lending institution. And the underwriting process on the other side is similarly dragging; slower and more manual.
“The SBA has a fairly outdated system,” Taussig said. “They don’t have the capacity today to receive requests for what would be a government-guaranteed loan — they don’t have the capacity to respond to every single depository in the U.S.”
About half of small businesses have 14 or fewer cash buffer days, according to a JPMorgan research report on small business financial health in urban communities. In black or Hispanic communities, most small businesses have fewer than 21 cash buffer days. That’s in a normal scenario.
Small business’ total dollar sales are down 26.9% since the beginning of March and more than a quarter, 26.1 percent, of small businesses have closed, posting no new sales since the beginning of the coronavirus shutdown, according to data from CardFlight. That accounts for 14.2 percent of these closures which have occurred since the beginning of last week.
Because online lenders don’t already work with the SBA, they aren’t already integrated in the SBA system. So fintech is also working with the government on how to make that integration happen without crashing the system, bracing themselves for the onslaught of loan applications about to come through.
All lenders on deck
And while lenders – banks and fintechs alike – are having to open up loans to businesses who need it right now, they also have to tighten their credit models in response to the economic fallout of COVID-19. Funding Circle would have dropped 90 percent of its lending without any government intervention, Metcalf said.
“No lenders really know how to underwrite in this environment, especially because we don't know where the end of the virus is or when revenues will come back,” Metcalf said.
Online lenders are relying on the Federal Reserve to provide the credit facility for them to be able to fund loans; while they’re well-positioned to meet small businesses’ needs on the underwriting and disbursement side, they don’t necessarily have the balance sheet to do it.
“We're looking to the Fed and we'll look to Wall Street as well,” Metcalf said. “We'll do whatever we have to do, but it's going to be a combination of having a loan guarantee program, having liquidity, and making sure that we can still keep loans going out the door.”
“Everybody — every bank, every credit union, every fintech company — has a role to play, and we will still not be able to get enough needed funding out in the time it needs to get out,” he added. “It’s kind of like a call to arms for us; GM is making respirators and clothing companies are making masks and gowns. This is ours.”