Small-business funding dispute challenges community lenders

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WASHINGTON—Entrepreneurs in the mountain communities surrounding Asheville, N.C., can’t always get the money they need from a bank. That’s where Matthew Raker and his team come in.

Mr. Raker is the executive director of Mountain BizWorks, a nonprofit loan fund focused on lending to small businesses that typically have trouble securing loans through traditional financial institutions. Many of the 350 small businesses he works with are led by women, minorities or people from rural areas.

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Those clients are now looking for aid from the Small Business Administration’s Paycheck Protection Program aimed at helping smaller companies survive the fallout from the coronavirus pandemic. But getting a slice of the roughly $350 billion set aside under the PPP so far is a challenge for lenders such as Mountain BizWorks, which are struggling to gear up as quickly as banks and other lending institutions with greater resources.

“We didn’t get started as quickly as the others did, so we’re worried that by the time our program gets in place, that all of the funds for PPP would have been allocated,” Mr. Raker said.

Democrats in Congress are looking to address that issue by setting aside roughly half of $250 billion in additional PPP funding for what are known as Community Development Financial Institutions such as Mountain BizWorks, along with other lenders such as credit unions and community banks.

That effort has faced resistance from Republicans, leading the emergency-funding appropriation to stall last week.

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Sen. Marco Rubio (R., Fla.), who has helped spearhead the small-business relief efforts, said he favors expediting the current legislation and believes more community lenders should be encouraged to participate through other means.

“This can be done by regulations from Treasury and the SBA,” Mr. Rubio said last week.

Democrats counter that community lenders, credit unions and other nonbank lenders serve small, fledgling businesses that are now at high risk of going under—and are typically underserved by traditional lenders.

A recent Federal Reserve survey found, for example, that black- and Latino-owned businesses and very small businesses were roughly half as likely to receive financing through banks compared with white-owned small firms and those with larger revenues.

Sen. Chris Coons (D., Del.) said he is hopeful negotiations would yield provisions for community lenders.

“It seems to me that should be reasonably accomplishable by bringing in credit unions and CDFIs in particular,” said Mr. Coons, a member of the Senate’s small-business committee.

Community-development lenders typically have an express mission of lending to low-income and disadvantaged borrowers.

“We are more in the niche of serving smaller businesses that I think are not as profitable and therefore not as attractive as customers to a lot of mainstream banks,” said Jennifer Vasiloff, chief external affairs officer at Opportunity Finance Network, a membership association for CDFIs.

Under the Paycheck Protection Program, loans of as much as $10 million are made by lenders at rates of 1%. Companies are generally eligible for the loans if they have fewer than 500 employees, and the debt and interest can be forgiven if the money is used to retain or rehire employees and for expenses such as rent and utilities.

The program generated overwhelming demand from its launch, and some banks have said they are prioritizing existing clients in an effort to manage large application volumes. Lenders that were previously authorized to lend through the SBA’s flagship 7(a) program had the authority to process Paycheck Protection Program loans right away.

Many of the nation’s federally insured credit unions couldn’t immediately participate because they either had to reactivate their SBA lending credentials or never had them in the first place, according to Carrie Hunt, executive vice president of government affairs at the National Association of Federally-Insured Credit Unions, a trade group.

Any additional Paycheck Protection Program funding that is earmarked for community financial institutions would amount to “an extra layer of protection so we don’t have anyone that is left behind,” Ms. Hunt said.

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Ruben Alonso, president of the loan fund AltCap in Kansas City, Mo., said he had looked into participating in the program, but was unsure whether the fund could meet eligibility requirements issued by the Treasury Department.

AltCap, a CDFI, has instead focused on raising $5 million to provide relief loans to coronavirus-affected small businesses in its community. Mr. Alonso said AltCap’s familiarity with the local community allowed it to quickly organize the relief fund over the past two weeks. The majority of AltCap’s borrowers are low-income, and minority-owned businesses comprise 60% of its loan portfolio, according to the lender.

“We know these businesses,” Mr. Alonso said. “We almost can be like acupuncturists in the sense of knowing where to move this capital and provide this capital where it’s needed the most.”

Chris Evans, owner of T-Shirt King in Kansas City, Mo., said he had applied for a $20,000 loan through AltCap’s relief fund and was expecting the money to be disbursed this week.

Mr. Evans tried to apply for the PPP through Bank of America, but was unable because he didn’t have a business loan with the bank, as was initially required. Bank of America subsequently changed its policy, but by that time Mr. Evans had applied for the program through another bank. He said he hasn’t received word on the status of the application.

“AltCap by far was the most responsive and prepared, even more so than the banks,” Mr. Evans said. For black-owned firms, “the shortage of capital is a very real thing, so we come up with creative ways to finance business,” he added.

The Treasury Department has said it is working to add lenders to the program, including nonbank and non-federally insured lenders, such as fintech companies, that previously didn’t lend through SBA but want to participate in the program.

Ryan Donovan, chief advocacy officer at the trade group Credit Union National Association, said simply boosting funding and the number of participating lenders wouldn’t necessarily ensure equal access to the program for community lenders, which typically have smaller staffs and fewer resources compared with larger banks.

“It’s going to take a little bit longer for community-based institutions to get this up and running and get their lending flow moving,” Mr. Donovan said.