When will your SBA loan be approved? Here’s why the process is moving so slowly

Subscribe to Fortune’s Bull Sheet newsletter for no-nonsense finance news and analysis daily.Those like Anne Bader-Martin were up early on Friday to apply for the Small Business Administration’s Paycheck Protection Program loan at her bank.Bader-Martin, the founder and executive director of One Can Help, a Massachusetts-based nonprofit providing resources to children and families in the juvenile court system, went to apply for a $19,000 loan from Bank of America (the nonprofit’s longtime bank) on Friday morning once its PPP loan portal opened. Instead, she was met with a message familiar to many small businesses that day: They were ineligible because they didn’t have a current lending or credit relationship with Bank of America. The loan Bader-Martin needs is to keep five part-time employees on the payroll. Once the nonprofit was unable to apply at Bank of America, she tried to apply to several other banks for the loan. On Saturday morning, Bank of America contacted her—They had amended the policy and she was now able to apply. “I like to think it was because of me, but I somehow doubt it,” she laughs.The SBA and the Treasury’s $350 billion Paycheck Protection Program loan rollout was “not perfect,” says Maria Earley, a financial services regulatory and enforcement partner at international law firm Reed Smith, and former Consumer Financial Protection Bureau enforcement attorney. But with time limits and billions in loans to distribute, “I don’t think you can blame the lenders,” notes Ken Logsdon, partner at Dorsey & Whitney. “They’re doing their best to manage the unbelievable volume of applications.”

A messy rollout

Doling out $350 billion in weeks: That’s the task the SBA and Treasury have undertaken alongside banks and lending partners.

With the bill for the package having only passed roughly a week before the rollout was supposed to begin, time was never on anyone’s side.

“There just weren’t enough hours, period—Not for the regulators or the banks, or anybody, to have this be anywhere close to perfect,” Reed Smith’s Earley tells Fortune. “It was barely functional, but my understanding is everybody did everything they could to get it there.”

With only the bare bones guidelines for lenders available late on the eve of the program’s launch, banks and lenders clearly scrambled to be open for business on April 3.

In fact, given the time crunch, those like Earley “applaud the regulators for getting the thing up as quickly as possible.”

Banks’ concerns about due diligence and fraud

Banks certainly got plenty of feedback from customers Friday, as reams of small businesses took to Twitter to express frustrations on the rollout that initially excluded many of them from applying for the loan.

But for many banks and lenders, grey areas in the SBA guidelines initially left some concerns over who exactly is liable for the loans, and, potentially, fraud.

“Obviously nobody wants to accept an application where there’s been fraud,” Reed Smith’s Earley notes. “I think that banks would rightly be very concerned.” That concern, or perhaps precaution, may be part of the reason why banks have begun with current lending partners.

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“I think 99% of the people who are applying are doing the right thing, but there will be fraud. There will be fake companies, and there will be people doing fraudulent things, and no bank wants to be the one that approved that [application]. So the existing customer is the safest path,” Earley suggests.

Plus, for many banks, Dorsey & Whitney’s Logsdon notes, the process of doing ‘know-your-customer’ due diligence for accepting new customers could take days, even weeks.

John Pitts, the head of policy for fintech Plaid, argues it’s a function of both timing and getting “the lowest hanging fruit” first. The “easiest thing to do,” he notes, was for already-approved SBA lenders to extend applications to their existing loan customers.

The problem with this approach is that the loan is first-come, first-served. “Once [the money] is gone, it’s gone,” Pitts notes. For small businesses who may rely on fintech lenders or other banks that were unable to extend loans to them, “you’re facing the very real threat that, by the time you’re able to apply with the lender of your choice, the money’s not there anymore.”

Some banks have been hesitant to participate at all, according to Kathryn Petralia, co-founder and president of Kabbage, a fintech that offers automated cash flow to small businesses. “I’ve talked to a lot of banks who have said, ‘we’re not doing it,’” because the process is too uncertain, she told Fortune. “They don’t want to be left with a loan on their balance sheet that’s at 1% [fixed interest rate] for two years.”

Still, the question of loan forgiveness on the backend has gotten a bit more clarity in recent days. Logsdon notes the SBA has been tracking loans that have been committed to, which is “good to know because that will determine what funds are available on the backend for the forgiveness piece,” he says. “They’re doing that right.”

Plus, some help came for banks on Monday à la the Federal Reserve. The Fed announced it would help provide a facility for lenders so that more companies could get funding, but left out the details of how it would play out (Pitts thinks the Fed may purchase PPP loans on the secondary market).

Non-SBA partners were largely a non-starter

The size of the SBA’s program is what Dorsey & Whitney’s Joseph Lynyak calls “almost biblical.” And given how ambitious it is, those like Plaid’s Pitts note the SBA’s current pool of approved lenders aren’t enough to cut it.

“They are trying to loan $350 billion in the next two weeks. That’s 10 years plus of [the SBA’s total 2019] loans in two weeks. The only way that happens is if as many lenders as possible are participating,” Pitts says.

Within the guidelines for the PPP loan, non-SBA lenders (meaning lenders who aren’t already approved for SBA loans) would be given the opportunity to apply to become an SBA lender for the emergency loans. But that approval process didn’t happen quite as intended.

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In fact, according to Pitts and Earley, it was largely a nonstarter.

This was supposed to be a “huge watershed moment for the fintech world in that it puts them on par for the first time with traditional financial institutions as lenders here,” Pitts tells Fortune. Instead, most fintechs have been “sidelined,” Reed Smith’s Earley states. That has created problems addressing chunks of the market who the fintechs have relationships with, but may have trouble with the big banks.

In fact, one of the big issues with the rollout, say experts, was that non-SBA lenders like fintechs are responsible for servicing a good amount of small businesses—including sole proprietors or 5 to 10-employee businesses, according to Pitts. These kinds of businesses would need much smaller loans than some 500-employee businesses that might apply to a traditional bank.

Lending limits

Even if small businesses qualify for applications at banks, there’s no guarantee they’ll get funds. That’s due, in part, to issues with lending sizes and fund distribution.

Many of the biggest banks typically extend loans in the hundreds of thousands or millions for small businesses. But for a small business needing that $50,000 loan, Pitts says, things might get more challenging.

“Fintechs have specialized in that area, … [and lots of small businesses] disproportionately rely on fintechs for their capital funding,” he notes. Without those kinds of lenders able to extend loans, “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.”

To wit, banks like Wells Fargo had a lending limit cap (at $10 billion) imposed by regulators, limiting the resources they have to help an existing client base (the bank said Sunday the cap was hindering its ability to lend to qualifying businesses). The bank has said it is directing loans to those with 50 or fewer employees and nonprofits first. However, on Wednesday, the Fed announced it would temporarily lift Wells Fargo’s asset cap to help the bank provide additional lending to small businesses.

Another problem? The size of the package.

Despite the $350 billion loan package from the SBA (which marks a massive uptick from the administration’s 2019 total loans of about $28 billion in value), small businesses, experts, and lawyers are already concerned the package isn’t sufficient. In fact, Senate Majority Leader Mitch McConnell said in a statement Tuesday that the Senate was working on getting more funding (to the tune of $200 billion to $250 billion, according to a tweet by Sen. Marco Rubio), hoping to approve more funds on Thursday.

“It is quickly becoming clear that Congress will need to provide more funding or this crucial program may run dry. That cannot happen,” McConnell wrote.

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Money running out has been a principle concern for small businesses and lenders alike, even just a few days into the program. Bank of America reportedly has already received $32.6 billion in applications for the loans—or roughly 10% of the available funds for the whole program from one bank.

“If you are a small business and you see that 10% is off the table already from one bank, … there is a real concern that you want to get access as quickly as possible before the money goes away,” says Pitts.

In short: many small businesses who either have smaller loan requirements or preexisting relationships with non-SBA lenders have been put in a difficult position where they have to apply to banks that may not be accepting non-customer applicants due to time constraints, and therefore are being either denied or put at the back of the line to get their PPP loan. The Small Business Administration did not immediately respond to Fortune‘s request for comment on the status of approving non-SBA lenders.

Systems have been overloaded

To make matters worse, banks have reported intermittent issues with the SBA’s processing platform E-Tran.

“They were swamped. They were actually swamped,” President Trump acknowledged about the SBA launch during a White House coronavirus briefing on Monday.

Banking representatives and an administration official who spoke on condition of anonymity told Bloomberg that the E-Tran system (used by lenders for loan processing and authorization for the SBA loans), which launched on Friday, was inaccessible for part of the day on Monday—as long as four hours.

“Throughout the course of the day, it’s been up and down,” Independent Community Bankers of America president and CEO Rebeca Romero Rainey told Politico on Monday. “That’s been the experience since this all went live.” The Small Business Administration did not immediately respond to Fortune‘s request for comment.

Lenders and regulators alike are pushing to widen efforts, through both the Fed’s assurances at helping out and a possible new round of funding. And the number of banks and lenders accepting applications has increased since Friday. But One Can Help’s Bader-Martin, who hasn’t heard back about her application yet, is still concerned.

“The thing that really bothers me the most about it is the … small groups that might have given up or may be behind me in line because they don’t have a bank they could just go to like that at all,” she says. “I just worry about them.”

Additional reporting by David Z. Morris.

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