United States

With the CARES Act online lenders are poised to become mainstream


Effective April 16, 2020, the Paycheck Protection Program exhausted its initial funding. Discussions related to an additional round of funding continue on Capitol Hill, and potential borrowers should consult with their lender about the possibility of completing an application to be in the queue for potential future funding.

The $2 trillion CARES Act promises to help many American businesses, individuals and states overcome the severe impact from the coronavirus pandemic. The 883-page document covers a range of industries, updates portions of tax reform and provides financial support for businesses and individuals.

But one industry in particular is in a strong position to benefit: Fintech, and especially online lending businesses that have been gaining market share in recent years. If these businesses can clear the hurdles to participate as lender in the CARES Act, they will find a receptive market in struggling businesses that urgently need the help.

Fintechs emerge from brick and mortar

The term fintech, which stands for financial technology, represents the rapid digital transformation of the financial services industry. As consumer centricity becomes an important focal point because of demographic and technological shifts, these emerging companies are looking for ways to improve the digital experience while simplifying complex financial activities.

These companies come in all shapes and sizes, and consumers may not even realize they are using a fintech product. Six verticals within fintech have been identified by Bloomberg Intelligence:

  • Peer-to-peer lenders — platforms to facilitate nontraditional lending between investors and borrowers.
  • Crowdfunding — companies, entrepreneurs, charities and others raising funds for a purpose on a public internet platform.
  • Blockchain and cryptocurrency — blockchain is the foundation for processing cryptocurrencies.
  • Wealthtech –– personal and wealth management conducted by automated financial advisers, also known as robo-advisers.
  • Mobile payments — bankless banking.
  • Insurance — companies dedicated to cutting the time it takes to buy an insurance policy.

As consumers have shifted to mobile computing, the popularity of these companies has increased even as they have faced challenges. Those challenges include data protection, customer adoption, capital funding, regulatory hurdles and intense competition from both established and emerging players.

Qualifying as a lender

Enter the CARES Act. The biggest stimulus program ever launched in the United States just may provide an opening for fintech lenders to become mainstream in the government’s quest to quickly and efficiently process applications and inject funding into struggling American businesses.

The act establishes the Paycheck Protection Program to allow small businesses, sole proprietors, independent contractors and other self-employed individuals, including gig economy workers loans through the SBA’s 7(a) program that is intended to cover up to eight weeks of cash flow assistance.

The act establishes the Paycheck Protection Program to cover up to eight weeks of cash flow assistance.

Under this program, the act would authorize $349 billion in total 7(a) lending that is fully guaranteed by the federal government from February 15, 2020, through June 30, 2020 at a rate not to exceed 4%. The loans issued could be up to 2.5 times the monthly payroll costs as measured over the prior twelve months, or $10 million, whichever is smaller.

Provided a business retains existing employees at or near current salary levels, the debt will be forgiven to the extent the proceeds are used in an eight-week period following loan origination for payroll costs, mortgage interest, rent and utility payments. The amount forgiven will be reduced by a formula that takes into consideration any reduction of workforce or wages.

But there is a hurdle for online lenders to clear. Within the text of the bill is the term “additional lenders.” These additional lenders will need to be approved by the SBA and the Treasury secretary to have the necessary qualifications to process, close, disburse and service loans with the guarantee of the SBA.

Still, the opportunity is there. Fintech lenders believe this might be the opening they need to be a participating lender in this program. We expect further guidance from the Treasury Department as to how to become an additional lender.

Looking ahead

The popularity of online lenders in the past few years has grown based on their simplicity, rates and ability to qualify for a loan much faster than a traditional lender. Recently, a handful of lenders have promoted the ability to approve a loan in 24 hours and funding in less than five days. According to PitchBook, the key players include Kabbage, BlueVine, Stripe, Square, Branch, Funding Circle and others, which have issued billions in loans efficiently and quickly through their mobile platforms.

But the SBA might have a tough time processing all these applications if they are only lending player in town. The agency’s track record has shown significant delays in processing, which puts business owners in a tough situation if liquidity dries up.

Businesses, after all, sorely need the help. They are struggling to stay afloat as consumers are staying home because of federal and state stay-at-home mandates. As revenues fall, owners must decide which expenses to cover. This is where fintech could come in and process applications quickly, extending loans in days and not weeks, and providing additional support for business owners. The biggest perk of working with a fintech is the ability to work with them from anywhere as they operate in the digital world.

The takeaway

The opportunity for fintechs to participate on a larger scale with their mobile technology platforms, quick loan review period and funding expediency promises to help business owners find the necessary liquidity to cover critical expenses.

RSM's latest insights on the CARES Act

Coronavirus Aid, Relief, and Economic Security Act (CARES)


Coronavirus Aid, Relief, and Economic Security Act (CARES)

The CARES Act, including a proposed main street lending program, offers help to middle market businesses facing challenges from COVID-19.


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