Small business loans are MIA – WSJ

Selling the Covid Relief Package on January 22, Vice President Kamala Harris tweeted, “@POTUS and I are taking immediate action to help small businesses because they power our economy and they need relief. He got 120,000 likes! Then? Not a lot. The $ 1.9 trillion “bailout” porkfest has one-time grants, but it’s quiet about the resumption of small business lending. The United States has (or had) 30 million small businesses, employing almost half of the workforce. Of the 10 million currently unemployed, perhaps five to seven million worked for small businesses. They need help.

Last year’s Cares Act Main Street loan program set aside $ 75 billion in loss provisions so the Federal Reserve could facilitate $ 600 billion in small business loans. Here’s the report: As of October, MSLP had made less than 400 loans, totaling $ 3.7 billion. That’s it! A miss. That month, MSLP reduced its loan size from $ 250,000 to $ 100,000, but found few takers. It closed its doors in early January. It is the inaction of your government.

The average small business (less than 500 employees) borrows just under $ 40,000, according to Fundera. Sixty-one percent take out loans to finance day-to-day operations. Bars, hotels, small manufacturers, retail – they might own the pizza oven and now need the dough.

So why only 400 loans? These $ 40,000 loans, well below MSLP thresholds, typically last 18 months and 12% are never repaid. Add in the assembly and service costs, and banks have to charge teenage interest rates high or even 20% to make money – the Tony Soprano rates. No good optics.

Plus, banks like to lend to businesses that don’t need it. Primary customers have FICO scores of 720 and above. Too many small businesses score between 580 and 720. And banks are forced to take initial losses on these loans because of a standard known as CECL: current expected credit losses. The banks therefore did not bother. No wonder MSLP is a bust.

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