Credit Where Credit Is Due: How lenders are starving small businesses of needed credit
Updated: Nov 8, 2021
As we approach the year anniversary of COVID-19, it’s become increasingly clear that small businesses are in pain. The September 2020 Local Economic Impact Report noted that nearly 100,000 small businesses have shuttered their doors since the start of COVID-19. What’s more, those who are still in business are facing immense challenges in securing the financial support they need. We will not know the total impact of COVID-19 on small businesses until it is in our rearview, but the problem of securing loans, an ongoing issue for small businesses, has continued to grow in its wake.
At the beginning of the pandemic, qualifying small businesses were offered aid in the form of the Payment Protection Plan, which provided over $525 billion in funds nationally, totaling over 5 million approved loans from over 5,000 different lenders. As of January 11th, a second Payment Protection Plan has opened for applications, offering help to qualifying first time applicants as well as those that had received a First Draw PP Loan. This program ends March 31st, offering $284 billion in additional funding. The Small Business Association approved over $1.2 million in PPP loans, totaling over $100 billion from January 11th through February 7th. A 14-day period, beginning February 24th, offers an exclusive window for businesses with fewer than 20 employees to apply for PPP funds (notably, 98% of small businesses have less than 20 employees). This is welcome progress, but cannot undo much of the damage already done to small businesses.
COVID -19 has exacerbated a consistent problem that small businesses have been facing for years: credit is not readily available. The Wall Street Journal shares, “in 2007 banks held $721 billion in small loans to businesses and small commercial mortgages…by 2019, such loan balances had fallen around 6% to $680 billion.” However, this tightening of small business credit is not indicative of the availability of funds, as bigger business loans more than doubled during that time.
Not only are these issues true of all small business owners, but minority owners are also disproportionately challenged when receiving economic aid. Score’s “The Megaphone of Main Street: The Impact of COVID-19” fall 2020 study highlighted the severe challenges Hispanic and Black business owners have faced, noting that Black business owners are twice as likely to be denied loan assistance than other small business owners. The same study noted that of the Hispanic business owners surveyed none that sought funding from investors found success.
Why are these loans drying up? While it is tempting to imagine that less money is available due to COVID-19, this only addresses part of the problem. There are a few reasons why small businesses are not receiving the loans they need to recover from COVID-19, many of which existed before the pandemic began.
Independent community banks have been a key source of small business credit in the past. The proximity to these institutions, and the personal relationships made as a result, are integral to small businesses receiving the help they need. More and more, we are seeing these institutions disappear. Thousands of these hometown lenders have closed their doors, cutting off a vital line of funding for local business owners.
As these local banks close, small businesses are shifting their attention to bigger lenders, and finding little success. The reason is simple: there is a lack of incentive for big banking institutions to help small businesses. Bankers have remarked that it costs the same to process an application for $100,000 loan and $1 million, so it is far more profitable to spend their time on bigger loans. Along with this incentive shift, underwriting standards have tightened, making it more difficult for small businesses to qualify for credit. Moreover, these lenders are even cutting down on the amount of loans made under the Small Business Administration’s lending process, which puts the weight of the risk on the government rather than the lender.
Lastly, many small businesses are facing major risks to their viability and survival. For lenders to approve qualifications, there needs to be some assurance of expected financial health for the business. While all the above reasons are causing lenders to be more cautious, the pandemic has crippled some businesses past the point of rebuilding without additional funds. In many circumstances, employees cannot be rehired, inventory cannot be replenished, and hours cannot be worked without the additional aid.
Although the above findings are grim, there are still options available. Exposing what is not working now can lead us to find options that are more fitting for the future. Below are a few ways many small businesses are coping with the current economic challenges.
NONTRADITIONAL LENDING SOURCES
It is true that fewer loans are being extended to small businesses, but this does not mean that all financial help is unavailable. Nontraditional lending sources are a great resource that many small businesses are taking advantage of this year. Even if you think your small businesses may not qualify, look again. Some potential sources of aid can be found by searching through the links below.
Small Business Grants COVID-19 Relief: Where to Find Free Money in 2020
Best Small Business Grants for 2021
2021 Ultimate List of U.S Small Business Grants
SMALL BUSINESS COLLABORATION
Now is the time to fortify existing partnerships and create new ones. Small businesses thrive when they compete, but they also can help sustain each other when working together. Many different businesses are cooperating to keep their doors open. How can you work with local organizations to ensure mutual success? Collaborating through promotions, marketing, or even distribution can help cut costs for both parties involved and improve revenue.
ADAPT YOUR OFFERINGS
Similarly, it is important to rethink what you are offering as a business. The needs of consumers have changed in response to COVID-19. While some of these changes will be impermanent, COVID-19 will have a lasting effect on certain business practices. Consider ways you can adapt to the current market. For example, some clothing companies have created face masks, and alcohol producers are now selling sanitizer. While you may not be able to create a product that directly response to COVID-19, there are ways to reposition your business to offer something valuable to your market. This means you have the power to assess your businesses vulnerabilities and shift your positioning to be more prepared.
If your small business is struggling and looking for guidance, our team is here to help. Contact us by phone or email today to discuss how we can serve you.
For more resources on how to prepare for COVID related cash flow issues, see this article.