As small businesses race to submit SBA loan applications, small banks are struggling too

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The rollout of the Small Business Administration’s Paycheck Protection Program has been chaotic already, and some regional and community banks are concerned about running short on money.

The SBA package currently totals $350 billion, but many smaller banks are already feeling stress on their liquidity and capacity to keep processing loans amid a massive volume of applications.

For David Reilling, the CEO of Sunrise Banks, the loans “would ultimately stress our leverage-capital ratio.”

“In talking to other community banks around the country, liquidity was probably their biggest concern, that they were just going to run out of liquidity,” Reilling tells Fortune. “They could make $50 million, $100 million, $150 million of the loans, but then they would be done.”

The Minnesota-based bank has been an SBA lender for 20 years, and has been accepting PPP loan applications since Friday. But Reilling is concerned that, given the volume of applications they’re already getting (he says they’ve already received over 1,500 as of Thursday, with inquiries for an additional 1,500 more—”North of 2,000 pending applications, easy”), liquidity might be tight.

One small, community bank Reilling has spoken with had about $75 million to loan through this program, until they got to a liquidity standpoint “where they’re probably saying, we can’t do anymore,” he notes.

Others like Rockford Local Development Corporation (RLDC), an Illinois-based not-for-profit economic development group who are an SBA-approved in-between for local banks, have seen an increase in applications on Thursday.

“It started to slow down on Wednesday, but now it’s picked up again,” John Phelps, RLDC’s executive director, tells Fortune, amid news that Congress is held up on approving another $250 billion for the program. “What we think is happening is the banks are realizing that the funding is going to dry up eventually, with no certainty yet it will be re-appropriated, so now they’re scrambling.”

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RLDC partners with a few local banks in Illinois including Stillman Bank and BlackHawk Bank to access the SBA’s database and input the loans for them, getting PPP loans approved before sending them back to the banks to close and fund the loans. Phelps says RLDC has been “inundated” with new applications amid a “second wave” of activity on Thursday.

What happens when SBA loans run out?

On Monday, the Fed declared it would provide support for the new SBA program via a lending facility, but left the details blank. That is, until Thursday.

The Fed announced a lending facility that would be available to lenders participating in the Paycheck Protection Program, providing financing for banks making the loans, as part of a massive $2.3 trillion backstop package.

“The facilities will provide necessary liquidity to banks to extend the credit. More importantly, however, the facilities will effectively function as working capital loans for businesses as the nation emerges from the COVID-19 emergency, … [and] provide necessary credit enhancement to encourage banks to extend the working capital credit in the first instance,” Joseph Lynyak, partner at international law firm Dorsey & Whitney, wrote in a note Thursday.

In Sunrise Banks’ Reilling’s mind, the facility is essential.

“Other institutions call us and say, ‘can we refer our customers to you? Because we’re out of liquidity and capacity to do these loans, or we just don’t do SBA loans,’” he says. “I think in time, while we still have a runway to go to keep funding, the ability in which to sell loans to the Fed is ultimately going to be that remedy for those smaller banks and for that program to continue on a longer term basis.” In other words: banks who might otherwise have hit a lending cap can keep on lending.

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In fact, Sunrise Banks has already received what Reilling estimates is roughly over $1 billion worth of applications. The bank was in the $300 million to $350 million range “in terms of where we would have probably capped out” for PPP loans, he says. But with more funds likely on the way, and the Fed’s lending facility, “It will double or triple what we could have done before.”

Some small businesses are struggling with big banks

Many of the country’s biggest national banks, like Bank of America, are already accepting hundreds of thousands of loans. In fact, as of just Monday, the bank reportedly had $32.6 billion worth of applications, nearly 10% of the $350 billion program.

Many big banks typically extend loans in the hundreds of thousands or millions of dollars for small businesses. That leaves those small businesses seeking a lesser amount, like a $50,000 loan, in a difficult situation, notes fintech Plaid’s head of policy John Pitts.

For some of the bigger banks, Sunrise Banks’ Reilling says, “small business is not their thing.” But for community banks and community financial institutions, “this is our bread and butter—This is our backyard, our neighborhood, our fabric of our community,” says Reilling. Small banks and small businesses, he says, are “linked together in terms of mutual interest … Making them be sustainable for their future, because it’s our future.”

Initially, some of the big banks saw backlash from small businesses on Twitter, who expressed frustrations about the rollout on Friday that initially prioritized current lending customers at some banks like Bank of America.

Without other lenders like fintechs or smaller institutions able to lend to their normal client base earlier this week, “Ironically, the very small businesses who are the ones … most at risk from this economic crisis and least resilient … are going to be the last ones in line to get money because they’re not existing bank customers, and their lenders who they trust and rely on are not able to access the program,” Plaid’s Pitts recently told Fortune. (Fintechs are now coming into play, as applications to become SBA lenders and participate in the SBA’s program became available on Wednesday night).

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Some small businesses are taking matters into their own hands and trying to figure out the best way to get their PPP loan application accepted. Several small business owners recently told Fortune they are submitting multiple loan applications (as many as five, for one small business owner who spoke with Fortune), carefully calculating their payroll costs, and calling their bank’s credit department.

And those like Colin Kampmier, the CEO of ColinKurtis, a food and beverage advertising company based in Illinois, got their applications in just in time.

Kampmier, who applied on Saturday for a $475,000 PPP loan for 32 employees with his regional bank, Illinois Bank & Trust, told Fortune he received an email late Wednesday from his bank: “If you do not have your application in, they are done accepting applications,” he recounts.

Kampmier was told his application was approved late Thursday evening.

More must-read finance coverage from Fortune:

—3 strategies small business owners are using to get their SBA stimulus loans faster—When will your SBA loan be approved? Why the process is moving so slowly—College educated investors may be more likely to fall for coronavirus scams—Corporate credit markets do brisk business after Fed help—Listen to Leadership Next, a Fortune podcast examining the evolving role of CEO—VIDEO: 401(k) withdrawal penalties waived for anyone hurt by COVID-19

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