Treasury makes coronavirus loan terms less favorable for small businesses

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KEY POINTS
  • Paycheck Protection Program loans have a higher interest rate and a shorter payback period for small businesses than originally stipulated.
  • The $349 billion forgivable loan program is a core component of the $2 trillion coronavirus relief package and officially launched Friday.
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GP: Steve Mnuchin Members Of The Coronavirus Task Force Hold Press Briefing - 106472751
Steven Mnuchin, U.S. Treasury secretary, speaks during a Coronavirus Task Force news conference at the White House in Washington, D.C., U.S., on Thursday, April 2, 2020.
Kevin Dietsch | Bloomberg | Getty Images

The Treasury Department changed the terms on some loans it’s offering to small businesses during the coronavirus pandemic, making them less favorable for borrowers, experts say.

The loans at issue are being made through the Paycheck Protection Program, which offers up to $10 million in forgivable loans to businesses with 500 or fewer employees.\

The program, which officially opened for many borrowers on Friday morning, will dole out up to $349 billion to ailing small businesses to help cover costs like payroll, rent and utilities. The loans are made through lenders approved by the Small Business Administration and other institutions.

In initial guidance, the Treasury Department had said banks would charge a 0.5% fixed interest rate and that a loan’s unforgiven portion could be repaid over 10 years.

However, loans now carry a higher interest rate — 1% — and come due in a much shorter period — two years — than originally stipulated, according to Treasury guidance released Thursday.

Banks were loath to offer loans under the initial terms and pressured federal officials to change them, according to Roger DaSilva, founder of Realm Startup Advisory, which serves as an outsourced chief financial officer for small businesses.

“It’s worse than was initially laid out [for borrowers],” he said. “But the fact is, there’s no way you would have gotten the banks to play ball and do this unless you changed terms.”

“And these aren’t bad terms,” DaSilva added. “I would gladly take a 1% loan for two years.”

The loan program, which is being implemented by the SBA, is one of the core provisions of the $2 trillion coronavirus relief package known as the CARES Act, which was signed into law Mar. 27.

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