Fintechs Saved PPP and Should Be Included in the State Small Business Credit Initiative

[Editor’s note: This is a guest post from Ryan Metcalf, Head of Public Policy & Social Impact at Funding Circle.] 

Fintech lenders have forged access to Paycheck Protection Program (PPP) relief funds for underserved and the smallest of small businesses. However, after March 31st—barring an extension of the PPP—there will no longer be any federal relief funds available for fintechs to lend. The imminent end of federal funds available to fintech lenders tees up yet another mounting obstacle to recovery for underserved and the smallest of small businesses, especially as COVID-19 and its economic impact persists.

In its first weekly PPP Report of 2021, the U.S. Small Business Administration (SBA) concluded that “non-bank lenders are reaching underserved businesses with a larger proportion of their loans” despite “large institutions…driving the majority of PPP lending.” 34.32% of fintech PPP loans have gone to businesses in low-moderate income areas and 69.75% of fintech PPP loans are for less than $150,000—percentages that are well above the program averages among all lender types, according to the report.

The outsized impact fintech lenders have had on reaching underserved and the smallest of small business borrowers is not unique to PPP loans made this year. Six fintech members of the Innovative Lending Platform Association, including Funding Circle, provided PPP loans totaling $16.5 billion and saved more than 2 million jobs in 2020. A New York University study of 2020 PPP lending concluded that, fintech lenders not only “originated much smaller loans than other lenders,” but also “appear to have played an important role in extending PPP loans to Black-and Hispanic-owned businesses.”

Small businesses continue to disproportionately bear the brunt of pandemic-related business challenges and economic devastation. In the recently-released results of the Federal Reserve’s Small Business Credit Survey (SBCS), conducted in September and October of 2020, 95% of surveyed businesses reported that the pandemic had impacted their business, with 80% experiencing financial challenges during the previous 12 months. Minority-owned businesses had been especially impacted. 57% of all surveyed small businesses described their financial condition as “fair” or “poor,” with this figure jumping to 79% for Asian-owned businesses and 77% for Black-owned businesses. Despite nearly all surveyed small businesses reporting being affected by the pandemic, only 77% of those who applied to receive PPP funds reported receiving all of the funding they sought.

Even more illuminating, among the report’s results about access to PPP funds, 95% of surveyed small businesses who sought PPP loans from large banks had an existing relationship with that bank. Traditional banks in large part restricted PPP access to existing customers at larger loan sizes, with many financial institutions simply not lending or accepting new customers during this round of PPP. Fintech lenders on the other hand bridged the gap by extending PPP loans to small businesses regardless of whether they had an existing relationship or not, and in 2021 when more than 300 banks opted to not process applications for first draw and or second draw loans, fintechs stepped up to fill the void.

Without fintech lenders like Funding Circle, PPP funds would not have reached the small businesses needing it the most to the degree that they have. To ensure this segment of borrowers that fintechs are serving will still have access to critical funds after the March 31st PPP deadline, state licensed and regulated lenders and those approved by the SBA and U.S. Treasury to offer PPP loans should be eligible to participate in lending an estimated $10 billion in State Small Business Credit Initiative (SSBCI) relief funds anticipated as part of the pending $1.9 trillion stimulus package. Despite being able to offer PPP loans, fintechs will not be able to participate in lending these SSBCI funds, which are restricted to “community development financial institutions” as defined by a law passed nearly thirty years ago in 1994 that only includes banks, credit unions and CDFIs. It is fair to say that a lot has changed since 1994 and so should the laws and programs that Congress implements to help small businesses recover from this crisis.

Support for fintech inclusion in Federal SMB loan programs has received broad bipartisan support from the SBA and Congress. Small Business Administrator Nominee Isabella Casillas Guzman recently remarked that the “adoption of Fintech across the banking sector is critical and expanding distribution will improve access and that we need to…keep them engaged in 7(a) programs…and take advantage of that.” In February, Congressman Barry Loudermilk of Georgia introduced an amendment to pending COVID-19 relief legislation that would extend SSBCI eligibility to all PPP-approved lenders, but the House did not include it in the bill sent to the Senate. However, Senator Tim Scott of South Carolina has since introduced an identical amendment in the Senate.

If state licensed and regulated fintech lenders can offer government guaranteed PPP & 7(a) loans and are serving the smallest and most underserved small businesses, then there is no reason to exclude them from SSBCI. As eligibility requirements are considered, Congress should reflect on the unique vulnerability of underserved and the smallest of small businesses during COVID-19; the impact that fintech lenders have had on making sure PPP funds have reached these borrowers; and the overdue necessity to modernize eligibility requirements that reflect a bygone pre-fintech era. With the end of PPP mere weeks away, I urge Congress to pass Senator Tim Scott’s amendment. Time is truly of the essence.

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