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The federal government doubled the interest rate that lenders may charge small businesses — from 0.5 percent to 1 percent — under the $350 billion emergency loan program after top U.S. banks complained that the previous rate would require them to take on too much financial and legal risk.
Treasury Secretary Steven Mnuchin and Small Business Administration Administrator Jovita Carranza released the updated guidelines hours before the lending program, known as the Paycheck Protection Act, launched. The change is intended to make the program more attractive to smaller community banks worried they would reap “unacceptable losses” if required to offer a 0.5 percent interest rate.
“You will get the money. You will get it the same day,” Mnuchin said Thursday. “You use this to pay your workers. Please bring your workers back. This is a very important program.”
PPP is designed to get cash in the hands of struggling small businesses and incentivize them to keep staff on payroll, or re-hire workers who have already been laid off. To receive the aid, businesses must have been operational by at least Feb. 15.
Companies may borrow up to 2.5 times their payroll, or up to $10 million, which can be used for payroll and other expenses, like insurance premiums, mortgages, rent or utilities. The loans, which are guaranteed by the federal government, will be fully forgiven if 75 percent of the money goes toward keeping workers employed, according to the SBA.
"As long as you hire those people, your loan will be forgiven," Mnuchin told FOX Business last week. "This keeps 50 percent of American workers at work."
But small banks had sought a higher interest rate. In a letter to Mnuchin and Carranza, Rebeca Romero Rainey, chief executive of the Independent Community Bankers of America, said a 0.5 percent interest rate was not “feasible” and instead pushed for a 4 percent rate.
“It would not make these loans profitable for lenders; we recognize that’s not the purpose of the Program,” Romero Rainey wrote. “But a 0.5 percent rate would create unacceptable losses for lenders, which have a duty to preserve their financial strength for the sake of their communities. We recommend changing the guidelines to allow for rates at the 4 percent level provided for in the CARES Act or as close as possible to that level.”
Organizations can apply for PPP by calling their banks and other SBA-backed lenders directly.