US banks will reap billions in fees from the government for coronavirus SMB loans

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US banks could make billions of dollars in fees from the nearly $350 billion in loans that will be issued to small businesses through the federal government's coronavirus relief efforts, as part of the $2 trillion stimulus package signed by President Trump last week, the Financial Times reports. The Small Business Administration (SBA) is extending loans through banks and credit unions to small businesses with less than 500 employees.

The government will pay banks processing fees for facilitating loans, with fees ranging from 5% for a loan under $350,000 to 1% for a loan over $2 million. Businesses are eligible to borrow 2.5 times their average monthly payroll up to $10 million.

The loans will basically function as grants and will be forgiven for businesses that use the full amount for payroll, mortgage interest, rent, or utilities within two months of receiving the money. Otherwise, they'll act as very low-interest loans: Amounts not forgiven will accrue 0.5% interest, and the principal will be due in two years.

But banks could face backlash if loan processing during the crisis is too slow. There are 30 million businesses in the US with less than 500 employees, employing 60 million people. About three-quarters of small businesses are being negatively affected by the coronavirus, according to The National Federation of Independent Business, suggesting there will be widespread demand for these loans.

But it could be difficult for funds to be disbursed quickly, due to the high volume of requests, potentially causing a backlash from businesses that have to wait to receive funds. That in turn could reflect poorly on banks as the issuers of the funds, and they risk reputational damage.

The processing fees that banks can collect are an immediate benefit that should spur them to facilitate loans during the crisis - but the opportunity to generate goodwill should motivate them as well.

• Being compensated for issuing SBA loans will enable banks to devote the necessary resources to disbursing the funds to businesses in a timely manner. Pushing through a large volume of loans in a short amount of time could be cost-prohibitive to banks, but the processing fees from the government should offset those costs. That means banks could actually boost their bottom lines by extending SBA loans, making for a rare bright spot in what's expected to be a challenging year for banks' earnings.
• Stepping up to help small businesses during the crisis will also put banks in a favorable position with regulators and customers alike. The processing fees the government is offering to pay banks shows that it expects them to come to the aid of customers impacted by the coronavirus pandemic. Failing to meet these expectations could therefore be damaging to a bank's relationship with regulators in the long term. And for businesses that approach a bank for aid during the pandemic, declining to extend a loan could likewise damage the bank's chances at doing future business with them. But actively extending loans and quickly processing them will result in goodwill from both parties, ultimately benefiting banks' reputations even beyond the current crisis.

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