The COVID-19 pandemic is rampaging across the world doing untold damage to the global economy. Many experts predict this will be the worst crisis since the Great Depression. It definitely looks like it for small businesses, which are near devastated by the pandemic. Because of the enforced lockdowns as well as other factors small businesses are in desperate need of money. However, lenders have all but stopped providing loans, with only rare exceptions. In fact, many financing providers are suffering just as much and have little chance of surviving through this crisis – Impact of the COVID-19 Crisis on Business Loan Companies.
Small Businesses Hit by the Coronavirus Crisis Desperately Need Loans
Small businesses are hit hard by the COVID-19 pandemic and the impact of it is sure to last. The majority of them are struggling under lockdowns, which caused a great loss in business. However, an even bigger issue is the reduction of revenue.
That problem will persist even after businesses can restart. That’s because millions of people lost their jobs due to the pandemic-induced crisis. The unemployment rate has reached 14.7% already and it might yet increase. The loss of income for all these people means that they had to drastically cut their expenses. Therefore, they are consuming a lot less.
As a result, businesses lost their clients, so reopening will not solve all their money problems.
The solution for small businesses is to obtain a loan that will help them cover essential expenses through the worst of the crisis. However, business lenders are nearly inactive at the moment.
Big banks weren’t keen on small business lending even before this COVID-19 crisis. With the risks increased because of it, they’ve all but stopped their financing offers. Those that do face a lot of criticism for the terms they offer to desperate clients.
Small businesses now have to turn to various business loan companies. Those providers are still willing to take risks, but not all of them are active. The reason for this is that lenders were hit by this situation just as hard.
Whether it’s a small business like Middleby Corp or large scale businesses like Burger King is hit hard by the COVID-19 pandemic and the impact of it is sure to last. The majority of them are struggling under lockdowns, which caused a great loss in business. However, an even bigger issue is the reduction of revenue.
Impact of the COVID-19 Pandemic Crisis on Business Lenders
Lenders are as much out of business as businesses because of the situation. However, their reason for this isn’t the lack of willing clients. The biggest issue that prevents loan companies from offering their services is a risk.
There is always a significant level of risk involved in the lending business, especially unsecured loans. But as the economy has been growing steadily and a great number of small businesses were successful, the risk level for lenders was lower. Also, even the losses were worth it as a far bigger number of clients paid off their debts with interest.
Now, the situation has changed. Therefore, lenders are reacting by withdrawing their services. Those that are still active are changing lending terms increasing interest rates, demanding better collateral, and otherwise making their loans less accessible.
The exception is SBA-eligible lenders that are working under the Paycheck Protection Program (PPP). They are actively distributing funds provided by the government in support of the small business. $350 billion of this funding have run out already and the second wave of $250 billion is close to ending as well. Lenders that operate under this program get a 5% commission for every loan they provide. That’s the funds that keep them going at the moment.
How Does the PPP Affect Lenders and Businesses?
The Paycheck Protection Program is a very good solution to the problems of many small businesses. At least, it should be this kind of solution in theory. This Program allows small businesses to take the loans they require to cover their essential expenses during the lockdown period. The loans will be forgiven if specific terms of the Program are met.
The money from this loan can be used only for a limited number of expenses. The main purpose of it is to cover payroll to motivate business owners to keep their employees. No less than 60% of the loan money must be used for payroll expenses.
Other costs you can cover with the remaining 40% (or less) are utility bills, rent, and mortgage payments. All in all, the money is to be used to keep the business afloat even while it’s not working.
Unsurprisingly, business owners are all hyped up and trying to get these loans. Lenders are even more willing because the PPP is absolutely no risk to them. All these loans are backed by the SBA. Moreover, lenders are getting a hefty commission of up to 5% for distributing these loans. This is a great compensation for the loss of interest rates in time when offering regular financing is too high-risk.
However, even the PPP is far from being perfect. Some of the lenders approved for it seem to be offering these funds to those who shouldn’t be eligible, namely big businesses. Complaints and even court cases are already starting to flood the justice system. The number of those might increase as the PPP funding runs out and thousands of US small businesses are left with no place to turn to for support.
The question is whether those same lenders that got PPP commissions will use that money to finance other small businesses on their own terms?
Final Thoughts: What’s in the Future for Business Loan Companies?
During the Great Recession of 2008 small business lending ground to a halt. This led to a drop in the number of both small businesses and startups. It took ten years for the situation to improve and as lending recovered, the number of new businesses reached record heights.
It’s reasonable to assume that this recession will follow a similar pattern. In fact, the situation might be somewhat better because SBA -approved lenders managed to get a hefty cash injection from the PPP. Due to the high commissions they got, they would be able to get back to more active lending faster.
Of course, lenders that aren’t eligible to disperse the PPP funds are now stuck. They will most likely remain in this position for a few years. It’ll take at least that for the economy to recover enough to reduce the risks of offering loans to small businesses. Therefore, aspiring entrepreneurs will be suffering from limited financing options for a while.
Impact of the COVID-19 Crisis on Business Loan Companies