Major US banks have been preparing to resume lending to the influx of small businesses that have applied for Paycheck Protection Program (PPP) loans, which just got an additional $320 billion in funding passed by the House, Bloomberg reports.

The majority of small business loan applications in the US haven't received funds yet

The PPP is a Small Business Administration (SBA) coronavirus relief program which pays banks a fee for each small business loan they facilitate on the government’s behalf. The initial $350 billion allocation was exhausted within two weeks of being made available, leaving thousands of small businesses without access to desperately needed funds.

The pressure on big banks to fill the demand for these loans is going to mount — but they might be better prepared this time around.  

  • The initial round of PPP loans led to backlash against distribution procedures. Banks weren’t entirely prepared to handle the volume of applications they received — Bank of America (BofA), for example, has received 390,000 applications requesting a total of $50 billion — and were waiting on more clarity from the SBA as to how to determine who to lend to and what the process should be, which created friction. Beyond that, banks faced criticism on social media from frustrated small business owners, as well as lawsuits accusing them of prioritizing larger loan applicants to yield higher fees for themselves and preferential treatment in lending to their own customers first.
  • But major banks have been working on automating their processes. Banks need to interact with the SBA’s E-Tran platform to disburse the loans, which froze regularly during the first round of program and delayed processing — and that could happen again. But banks have been building systems to streamline the process on their end: Wells Fargo, for example, assigned thousands of people to process customer paperwork and set up software to speed up submissions to the SBA, and BofA has 8,000 people involved in handling applications. Having had more time to establish a system could mean that banks are better equipped to handle the significant volume of applicants the second time around.

Still, there are doubts that the replenishment of funds will be enough — banks will need to double down on communication and transparency in their lending practices to avoid raising further dissatisfaction among applicants. Banking executives are skeptical about how many applications they’ll be able to get through until the funding runs out again, per Bloomberg, with BofA CEO Brian Moynihan saying that “even if Congress completes the additional funding, it may not be enough to fill the demands.”

While the funding origination is out of their control, banks should ensure they streamline the aspects they can control — including making their own systems as robust as possible, keeping in frequent communication with applicants, and setting realistic expectations around processing times. This will help loan distribution run more smoothly and mitigate customer frustration during an already stressful time.

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