Why Big Banks Don't Want To Fund Small PPP Loans

A 26-year old entertainment business forced to close, a 3-year-old egg production company stopped expanding and a 2-year old children’s birthday party planner shut down because each can’t get the PPP money needed to survive. 

Since the Feds pay fees based on a percentage of each loan, banks invite their larger business depositors to apply for PPP money first because they’ll have the biggest payrolls.  

Spending the same amount of time processing each loan, banks make more money with a $2M PPP loan to a private resort in Florida than Get Away With Murder’s, Akron Ohio, $6,000 request or the $10,000 Snowflake Eggs, Arizona, needs to survive. For NYC Birthday Clowns, New York City, $21,000 would keep them solvent for a few more months until children host birthday parties once again.    

As a mentor, I advise small business owners to have more than one banking relationship. When times are tough, they’ll have a better chance of being noticed at least by one of them. As a management consultant, I advise banks to follow the money, but as a small business owner, it upsets me that I received my PPP application three days after the money ran out from the first round.   

If Feds dedicate a portion of this second round to community banks and still pay fees based on the size of each loan, what will be different?  Unless the incentives change, the process won’t change.

Banks earn 3% underwriting an 800K loan, 5% processing a 6K loan, and 1% on a $2M request. Simple math shows banks make more money inviting their larger customers to apply first. People are asking why smaller businesses that really need money didn’t get it in the first round. It isn’t because 71 publicly traded companies took it all. It isn’t only because banks want to keep their major depositors happy. It’s because banks don’t make any money on small loans so they didn’t bother to invite them to apply.

If the second round of PPP funding requires small businesses to certify they can’t borrow money from anywhere else, will this rule include their borrowing capabilities on high-interest rate credit cards? This is where most small business owners go to borrow money. What are the requirements for small businesses to apply in this second round and certify they’re out of options? Will their maxed-out credit cards be proof they can’t apply anywhere else?