Local SMEs Await Second Round Emergency SBA Loans
Banks Issue About $700 Million in Financing Before Program Funding Was Exhausted
SAN JUAN – Many small and midsize enterprises (SMEs) in Puerto Rico seeking Paycheck Protection Program (PPP) loans to help them survive the Covid-19 crisis were left hanging this week when the U.S. Small Business Administration (SBA) program’s $349 billion in funding ran out by Friday —barely two weeks after it was launched.
Local SMEs, imperiled by a month-long curfew/lockdown order that has been extended into May, are now waiting for Congress to approve a second allotment of $250 billion for the program, enacted as part of the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act (Cares Act).
This time, local business groups are lobbying for a more equitable treatment of Puerto Rico in the program, which disburses funding on a first come, first served basis, or according to how quickly authorized banks and credit unions can process the loans.
As of midday Thursday, financial institutions in Puerto Rico had approved 2,856 PPP loans in the amount of $658.6 million, according to partial data provided by the SBA. In all of the United States, some 4,975 lenders approved 1.7 million loans, for a combined $342.3 billion. California, Texas, New York and Florida, the four largest states, led the nation in approved loan amounts, with $33 billion, $28 billion, $20.4 billion and $17.9 billion, respectively
In fact, relative to its population, Puerto Rico seems to have received a smaller share of loan amounts compared with some states and territories.
Financial institutions approved 11,553 PPP loans in the amount of $2.1 billion in Hawaii, which has less than half the population of Puerto Rico. Banks in the neighboring U.S. Virgin Islands, which have about 3.4 percent of the population of Puerto Rico, approved 240 PPP loans amounting to $62.2 million, or almost 10 percent of the loan amount approved for local SMEs. And the 508 PPP loans approved in Guam, which has 5.4 percent of Puerto Rico’s population, amounted to $102.4 million, or 16 percent of the local PPP loan amount.
Puerto Rico Chamber of Commerce (PRCC) President José E. Ledesma Fuentes told Caribbean Business that his organization plans to meet with U.S. lawmakers, specifically with Rep. Nydia Velázquez, who chairs the House Small Business Committee, to push for SME rescue legislation that ensures an increase in funding for states and territories that received a relatively small amount of PPP loan money in the first round.
“In Puerto Rico, we just got a fraction of what other states received. We will be consulting members of Congress to make sure there is more balance in the new funding that takes into account the population or the fact that there were states or territories that received almost nothing,” Ledesma said.
“Puerto Rico was under lockdown two weeks before the rest of the United States, so many business owners could not go back to their offices to look for the documents required for loan applications,” he said, noting that such businesses must provide information on payroll going back three years.
Adalberto Quijada, acting district director of the SBA in Puerto Rico and the USVI, told a local news outlet that setting up the program in 14 days was unprecedented for the agency.
“SBA responded to this crisis without precedent the best it could and we are satisfied,” he said.
In a press release issued Saturday, Resident Commissioner Jenniffer González Colón said that lawmakers in Washington, D.C., are still in negotiations over a proposed $250 billion for a second round of PPP funding. She acknowledged that the program faced initial problems involving SBA guideline changes and electronic platform system breakdowns, although she added that changes were instituted this week to make it simpler and quicker for banks and businesses.
“Congressional leadership continues to negotiate to add $250 billion to the program,” she said in a statement. “The Republican Party wants to approve a measure that only contains these funds to expedite application approvals, but the Democratic Party wants to add other things to the legislation and that is where we are at in the negotiations.”
Local banks report loan amounts
Two of the financial institutions in Puerto Rico authorized by the SBA to issue the PPP loans reported Thursday that they had approved $608 million in PPP loans for local SMEs.
Popular Inc., which owns Banco Popular de Puerto Rico (BPPR), the island’s largest bank, approved $494 million in PPP loans, Popular Inc. CEO Ignacio Álvarez said in a press release. Local SMEs were issued $398 million in PPP loans through BPPR, while the other $96 million in loans was issued to stateside SMEs through Popular Bank, Popular’s stateside subsidiary, he said.
“The program has undoubtedly been very beneficial for small and medium businesses in these challenging times,” Álvarez said in a statement. “We know that, due to limited funds, many businesses in Puerto Rico and other parts of the United States did not have the opportunity to participate. We will closely follow developments in the U.S. Congress regarding another possible allocation of funds.”
He added: “We will be ready to continue supporting our clients, working with them to submit completed applications or obtain missing documentation if additional funds are approved.”
Caribbean Business requested the number of PPP loan applications that remained pending after the funding cutoff, but Popular Inc. spokeswoman Elaine Martínez said such information was unavailable as of Thursday.
For its part, FirstBank approved some $210 million in PPP loans for 921 customers, Executive Vice President & Strategic Management Director Ginoris López Lay said in a statement issued to Caribbean Business, adding that many PPP loan applications remain pending.
FirstBank stopped processing 20 percent of the requested loan money given that the SBA-assigned funds were exhausted, López said. The number of such loan applications was not available because they are at different stages of the process, she said.
“We are waiting for the approval of more funds to continue processing applications,” she said.
Businesses face obstacles
Moreover, PRCC’s Ledesma expressed doubts over the effectiveness of the program in helping local businesses, saying that banks were rejecting many of the applications made before the funding limit. He said the organization has not only requested information from local banks on the number of PPP loans that were left out of first-round funding, but also how many were rejected and why they were rejected.
“We want to know the performance of the program in Puerto Rico,” he said. “We have [PRCC] members who are certified public accountants, and one of them submitted 40 [PPP] loan applications and just one of these was approved. We are very concerned about this.”
Ledesma said local banks must ramp up their preparedness to quickly process loan applications in the event a second round of funding is approved. Bank of America, the largest retail bank in the United States, processed 10 percent of the loan money allocation because “they were very prepared and moved quickly to submit applications from their clients,” he said.
Bureaucratic glitches slow loan processing
The Puerto Rico Society of Certified Public Accountants’ (PRSCPA) president, David E. González, said the PPP loan application processing by local banks has been interrupted by changes and clarifications in federal guidelines for the program. The bureaucratic mishap involving the already complex program has hampered the goal of the SBA to have PPP loan money disbursed no later than 24 hours to 48 hours after the loans are approved, he said.
“The main reason for this program is to get the money to affected people and businesses as quickly as possible,” he said, noting that these loans can be repaid within two years at 1 percent interest. “The idea is to inject money into the economy so that businesses may subsist. This has not been the final result.”
González added: “We are only seeing uncertainty. And it is not only our clients, but across the board, with other CPA colleagues saying the same thing. Bank instructions [concerning the application process and forms to be filled out] changed three times during the first week of the program. The banks keep requesting information from clients but do not say when they will receive the money.”
Ricardo Guzmán López, director of the CPA Society’s board, said he had clients who filled out PPP loan paperwork issued by the bank and submitted them, only to have the bank tell them to fill out another set of forms a week later.
“I don’t think banks are to blame for the delays, but that the process at a national level is a complicated one. Banks also have the same doubts that we do,” he told Caribbean Business, adding that the program is geared toward companies with 500 employees or less, with the exception of some industries.
Businesses will not benefit equally
Guzmán said that one clarification that was made during the application process involved what he called a “vague” program guideline on what can be included as SME payroll expenses. While it seemed to suggest that the costs of hiring professional services could be included as payroll costs, the SBA clarified that this was not the case, explaining that only self-employed business owners can include their own professional services charges as part of payroll, he said.
“The communication has to be clearer. As you clear up a lot of doubts, the processing of these applications will quicken,” he said, adding that due to this misunderstanding banks requested that many of his clients resubmit applications.
“This program is designed to protect a company’s payroll,” González said. “It does not protect entities with an owner who hires independent contractors; these are the ones who will be most affected now.”
Moreover, SMEs that had to close because of the lockdown or lack of working capital will miss out on the loan-forgiveness provision included in the PPP, Guzmán said. He said the PPP loan amounts are equivalent to 2.5 percent of the average monthly payroll or up to $10 million, whichever is greater. As soon as the loan is made, there is an eight-week period since the origination of the loan in which costs incurred will be forgiven, as long as 75 percent of what is condoned is redirected to payroll costs, he said.
“There are industries that are being affected negatively and the PPP will not help in any big way,” he said. “For example, with a restaurant that is currently closed, the PPP forgiveness is no good because this applies to ongoing costs which this restaurant does not have because it is closed. What you will be forgiven is the loan money you will use to keep the business operating, including payroll and rent. If you closed your business because of the lockdown or lack of capital, you lose the loan forgiveness benefit.”
Calls to simplify process
Ledesma called for a simplification of the PPP loan application process and clearer guidelines to speed up loan approvals.
“We want loan applications to be standardized because now you have separate applications for corporations, the self-employed and nonprofits,” the PRCC head said. “There were a lot of changes in the guidelines and many banks had to reprocess applications. With 40,000, 50,000 or 100,000 applications, or God knows how many, there not enough resources for this human process of having to write an email or call a person to inform them of changes.”
Many businesses also found it difficult to get the emergency financing because they had no existing accounts at the banks and credit unions authorized to issue PPP loans, Ledesma said, noting that this part of the federal “know your customer” due diligence requirement for banks to issue loans.
He said former Santander customers could not get loans from FirstBank, which acquired local Santander operations last year, because their old Santander accounts had yet to be migrated.
“We call on all banks to be transparent with the number of loan applications and approvals and rejections,” he said, adding that such data will greatly help lobbying efforts to get Congress to address Puerto Rico’s specific needs.
Credit unions allowed in at last minute
Meanwhile, credit unions and financial cooperatives were practically left out of the PPP loan process because the SBA started giving them complete access to the system Thursday. Of the 113 credit unions on the island, the only ones authorized to issue PPP loans are Arecibo Savings & Loan Credit Union (CooPACA), Zeno Gandía Credit Union, Jesús Obrero Credit Union, Camuy Coop, MaunaCoop, Oriental Credit Union, VegaCoop, and Caribe Federal Credit Union.
CooPACA, the largest credit union on the island, was unable to issue any PPP loans despite having received 60 applications for more than $7 million in loans as of Friday, CooPACA President William Méndez Pagán told Caribbean Business. Only two credit unions managed to issue loans worth $42,000 under the program, he said.
“This is an access with certain levels. We reached a certain level but could not complete the loan transactions and could not close the loans,” he said. “Many institutions in the states did not have this access, either. To participate, credit unions had to have the SBA 7-A license. But now we are ready. We have seven officials with ready access to the system. As soon as the other funding is approved, we will be generating a good amount of loans to local commerce.”
PPP, launched on April 3, provides forgivable loans up to $10 million to small businesses left financially distressed by the Coronavirus (COVID-19) pandemic.
The loans, which are 100 percent backed by SBA, are being provided to small businesses without collateral requirements, personal guarantees, SBA fees or credit-elsewhere tests, the SBA said in a press release. Those eligible for the program include small businesses, certain non-profits, veterans’ organizations, self-employed individuals, independent contractors, and other businesses meeting size standards based on their North American Industry Classification System code.
The Paycheck Protection Program’s maximum loan amount is $10 million with a fixed 1 percent interest rate and maturity of two years.
The loans are available to cover up to eight weeks of average monthly payroll (based on 2019 figures) plus 25 percent and payments are deferred for six months (interest does accrue). The SBA will forgive the portion of loan proceeds used for payroll costs and other designated operating expenses for up to eight weeks, provided at least 75 percent of loan proceeds are used for payroll costs. Eligible expenses for the eight-week forgiveness include:
- Payroll costs (excluding the prorated portion of any compensation above $100,000 per year for any person. Payroll costs include salary, commissions, tips; certain employee benefits including sick leave and health care premiums, and state and local taxes;
- Mortgage interest (not prepayment or principal payments) and rent payments on mortgages and leases in existence after February 15, 2020;
- Utilities such as electricity, gas, water, transportation, phone and internet access for services that began before Feb. 15, 2020; and
- Additional wages paid to tipped employees.
During the first round of PPP funding that lasted barely two weeks, the average loan size came out to $206,000, according to SBA data. Most of the loans—74 percent—were of $150,000 or less. The other 26 percent of the loans were in the amounts between $150,000 and $5 million. However, most of the total loan amount, $283.9 billion, went to this 26 percent. About 60 percent of the borrowers had assets of less than $10 billion.
More than half of the loans, 58 percent, were issued to businesses in the following sectors: construction; professional, scientific & technical services; manufacturing, healthcare & social assistance; accommodation & food services; and retail and wholesale trade.