Fintech To Play Central Role In Small Biz Lending Efficiency

By Philip Rosenstein
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Law360 (April 21, 2020, 8:05 PM EDT) -- The federal government is now leveraging fintech in its effort to support small businesses as they reel from the economic impacts of COVID-19, with attorneys and industry insiders saying that existing relationships and technological efficiencies will be a boon to the Small Business Administration in the current crisis as well as in those to come.

Well-established fintech companies Intuit Inc., Square Inc. and PayPal Holdings Inc. were approved as nonbank lenders in the Paycheck Protection Program, or PPP, by April 13. By bringing these companies into the fold, the Small Business Administration has created new opportunities for government-backed loans to reach small businesses beyond where legacy lenders have previously been able to reach, experts told Law360.

Authorized by the $2 trillion federal coronavirus relief legislation enacted in late March and launched on April 3 through the SBA, the Paycheck Protection Program guarantees private two-year loans of up to $10 million at 1% interest to cover payroll costs, health care benefits, mortgage interest payments, rent and more. The loans will be forgiven if businesses hold up their end of the deal by keeping employees on the payroll through the crisis.

Fintech lenders could play an outsized role in the next lending phase, Moorari Shah, a partner at Buckley LLP, told Law360, "given the focus from some in Congress to make sure the money gets to minority communities and smaller businesses."

"Fintechs have focused on the small business space and can play a big role in meeting the needs of those communities," Shah said. He explained that a number of established fintech companies have been able to develop good relationships with small businesses that larger banks have had less success serving profitably.

Congressional leaders reached an agreement on Tuesday to replenish PPP with another $310 billion after the SBA announced last week that the $349 billion initially authorized for the program had been drained. Previous efforts to restock PPP were held up by Democrats who demanded changes that would ensure access for small businesses that don't have established banking relationships. Attorneys who spoke with Law360 see fintech as well-positioned to help fill the demand from businesses underserved by legacy banks.

The Senate passed legislation that included more funds for PPP on Tuesday afternoon, and the House is expected to take up the measure Thursday. While the program gets $250 billion added without limits, the other $60 billion is reserved for small and midsize banks, credit unions and community development finance institutions.

President Donald Trump called for quick passage, which is likely to solidify House Republican support.

According to a report published April 14 by the Brookings Institution's Metropolitan Policy Program, the impact of COVID-19 is likely to be felt particularly hard by minority- and women-owned business enterprises, or MWBEs.

"After a decade of business ownership gains, the COVID-19 recession has the potential to be disproportionately devastating to MWBEs," the report said. "Whereas the Great Recession hit manufacturing and construction hard, COVID-19 is putting the food services, retail, and accommodation industries at immediate risk."

The report outlines that with PPP relying "on mainstream financial institutions to deliver loans to small businesses," the first iteration of the program ends up favoring customers of large banks "and may be less relevant to underbanked and unbanked MWBEs."

Fintech lenders like Square, through its subsidiary Square Capital, and Intuit, through Quickbooks Capital, are particularly well positioned to address the needs of MWBEs given their existing relationships with smaller retail businesses.

It remains to be seen if more fintechs will join the ranks of PPP lenders. Prospective lenders in PPP are required to have made $50 million in eligible loans during a consecutive 12-month period over the past three years, and questions remain regarding KYC, or know your customer, requirements and the ability of lenders to offload loans onto secondary markets.

"The goal of including fintechs as lenders was to broaden the aperture in the system — ensuring as many small businesses as possible get access to the funds they need now," Luke Voiles, Intuit vice president and business leader of QuickBooks Capital, told Law360.

"The type of small businesses that fintechs like us serve have a different profile as opposed to more traditional lenders," he added. "These businesses tend to be underserved by traditional lending markets, as they are newer and often do not have the revenue or credit history to gain access to the capital they need."

Rick Giovannelli, a partner with K&L Gates LLP, said that, depending on their business models, fintechs can also play different crucial roles in the SBA's lending initiatives.

"Fintech is a broad term that can cover a lot of different types of businesses," Giovannelli said. Beyond being approved as outright lenders, fintech companies can partner with banks to provide the technology to facilitate the processing of applications for PPP funds, he added.

A notable example is the fintech company Kabbage Inc., which said in early April that it had partnered with a bank to help deliver loans to PPP applicants. The company said on April 7 that it had received over 37,000 applications for PPP funds, representing a total of over $3.5 billion. Other fintechs including OnDeck are partnering with banks to facilitate PPP loans. 

Giovannelli added that beyond the presence of fintech lenders in the PPP initiative, the impact of fintech on the entire lending ecosystem is undeniable.

"I think that the fintechs are really playing a role in expediting that process," Giovannelli said. "Even though they might not be approved as PPP lenders in volume, the innovations that the fintechs put through will have enabled the $349 billion allocated for this program to get into the hands of small businesses and into the hands of their employees in less than two weeks."

"There is no way without the fintech innovation that has happened over the past five to 10 years that the banking system could have processed that volume of loans to that many small businesses," he said.

The SBA said Thursday that more than 1.6 million loans had been approved through nearly 5,000 lenders since April 3. According to the U.S. Treasury, the SBA "processed more than 14 years' worth of loans in less than 14 days" through PPP.

The speed and efficiencies that fintechs can provide could also prove useful down the road during other crises, Shah of Buckley added, with the distribution of emergency loans to businesses impacted by natural disasters, for example.

"In the event of a hurricane or an earthquake, fintechs would have the ability to marshal their resources and get those loans out to people and businesses in need," Shah said. "There might be an opportunity for collaboration in the future between fintech companies and the SBA."

Shah is less convinced that the involvement of fintech companies in PPP will translate directly to their involvement in traditional SBA-backed loans when the COVID-19 crisis subsides. He notes that it is unclear whether the fintechs approved to be lenders for PPP will be able to continue lending under their existing applications, or whether they will need to reapply to be a so-called 7(a) lender with the SBA.

"They might have to go back through and become an official 7(a) lender," Shah said.

"All of the companies being approved now will certainly have the benefit of having been a PPP lender so that the SBA knows who they are, but the deeper dive that you would typically do for anyone that's going to be involved in a government-backed program just hasn't been there in PPP," he added.

While Intuit's Voiles did not directly address his company's continued involvement with SBA post-COVID-19, he noted that Intuit is "always looking for ways to help small businesses improve their cash flow."

"As we work with the SBA, we will continue to look for more ways to help small businesses get back on their feet," Voiles said.

--Additional reporting by Andrew Kragie and Al Barbarino. Editing by Jill Coffey and Alanna Weissman.

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