The Gates Family Foundation, the Colorado Office of Economic Development and FirstBank are scrambling this weekend to extend funds to the state’s three nonprofit microlenders so they can, in turn, provide loans through the federal Paycheck Protection Program when it reopens at 8:30 a.m. on Monday.
“Banks are saying they have $200 billion in the queue. This money might only last a few hours or a few days,” Jeff Kraft, director of business funding and incentives at COEDIT told the Colorado Economic Development Commission during an emergency meeting on Saturday afternoon.
“We want our nonprofit lenders to feel comfortable they have the capital to process as many loans as possible,” he said of the second round of the PPP, which will issue $320 billion in loans after pushing out $349 billion in just 13 days in the first round.
The U.S. Small Business Administration reserved $30 billion of the second round specifically for community development financial institutions and other small lenders. The hope is they can better reach the smallest of small-business borrowers, including the women-owned, minority-owned, rural enterprises and nonprofits that critics say were largely passed over in the first round.
But Colorado has a problem in that regard. The Colorado Enterprise Fund, Colorado Lending Source and DreamSpring say they are tapped out after making loans in round one of the PPP and dealing with defaults from existing borrowers.
Ceyl Prinster, president and CEO of the Colorado Enterprise Fund, said her $37 million loan fund had largely lent out what it had available prior to the COVID-19 outbreak. Now, about two-thirds of its loan portfolio is on principal deferment, meaning borrowers are only paying interest.
“We just need the liquidity,” she said.
Another drain on the lenders has been the size of the PPP loans borrowers are requesting. DreamSpring’s prior loans averaged around $13,500, but PPP borrowers averaged $35,000, said Michael Burns, chief operating officer at the lender.
Mike O’Donnell, executive director of the Colorado Lending Source, said his fund has tried to scrape money together, borrowing at 3.75% interest to fund PPP loans earning only 1%.
“We are trying to help businesses that no one else will help,” he said. “Many of the big, big banks were self-serving. They would only work with their big customers.”
That’s where the Gates Family Foundation is looking to step in. It has assets it can offer as collateral, but not enough cash on hand to make a difference for the microlenders come Monday morning. FirstBank can provide a large loan in short order, provided collateral is there to back it up.
The Colorado microlenders estimate they have demand for $21.4 million in PPP loans. But board members at Gates were only comfortable providing $5 million in collateral, given other COVID-19 assistance efforts the foundation is trying to support.
“We are looking for someone to share the losses at the end of the day,” said Tom Gougeon, president of the Gates Family Foundation.
Gates has a verbal commitment for another $5 million from Gary Community Investments, Gougeon said, and it also asked the state to join in.
Colorado has $17 million in its Cash Collateral Support program, which came out of the Great Recession as a way to convince hesitant banks to lend to small businesses by providing collateral. COEDIT is willing to pitch in $2 million from that program.
Kraft told commissioners that any losses would likely be minimal. If PPP borrowers use 75% of loan proceeds to cover payroll costs by June 30, then their loans will be forgiven. The SBA will refund the three microlenders, who then can pay back FirstBank, which will then return the collateral the state and foundations provided.
If borrowers don’t get forgiveness, they will have to carry a loan at 1% interest for two years. Some may or may not be able to repay that, depending on how severe the downturn is. The SBA then will step in with its loan guarantees, provided the loans weren’t made fraudulently.
At Kraft’s request, the EDC approved five waivers that would allow the state’s cash collateral fund to participate, basically by parking a $2 million certificate of deposit with FirstBank. Currently, the fund only takes the last loss position on a loan, meaning it only pays out when all the other collateral is claimed. The EDC agreed to share losses proportionally with Gates and any other foundations that participate.
Normally, the state provides around $250,000 in collateral support on a single loan, but the commission approved providing up to $2 million. It will also waive the 3% fee that lenders are usually charged when it helps shore up a loan.
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