Could lenders have done anything differently in Puerto Rico?
Few small businesses hit by hurricanes in Puerto Rico last year sought loans to finance their recovery even though most of them were damaged, according to two new reports by the Federal Reserve Bank of New York.
Small businesses that applied for credit to bridge the gap between their losses and insurance coverage were more likely to get approvals than in years past — and more likely to get the full amount they requested, the New York Fed found. But credit demand among small businesses fell, continuing a skid that had already been in motion there before hurricanes Irma and Maria.
The reports — one on small-business sector trends on the island, the other more specifically on the impact of the hurricanes — were based on the New York Fed's annual survey of small businesses in Puerto Rico. They offer insights into the challenges that face business customers and their lenders after natural disasters. A top policy official urged financial firms to examine the results closely and think about them in relation to other regional recovery efforts.
“This report is another reminder of the extraordinary needs and opportunities for investment that exist on the island,” Federal Reserve Board Gov. Lael Brainard said in a press release Thursday. “We invite financial institutions to seriously consider Puerto Rico and other storm-damaged areas, including those affected by Hurricane Florence, as part of their [Community Reinvestment Act] activities.”
Just 30% of small businesses in Puerto Rico applied for credit in 2017, representing a small decline from the prior year. Between 2015 and 2016, however, the share of small businesses that applied for credit fell from 55% to 32%; that earlier decline was associated with economic problems on the island that existed before the destructive storms.
Those that did apply were more likely to be approved than in years past. According to the report, 75% of applicants were approved for at least some of the amount they requested, compared with 60% in 2016. The share that received all of the funding they asked for increased significantly, from 30% in 2016 to 53% in 2017.
The proportion of businesses that received no funding also fell significantly, from 40% in 2016 to 25% in 2017, and the share of businesses that received less than half of what they requested also dropped from 18% to 9%.
While the report offered few clues as to the surge in credit approvals, it shed light on why firms that did not apply for credit. When asked why they did not apply for credit, 42% of businesses cited an aversion to debt, while 19% said they didn’t need it, 16% said they were discouraged, and 15% cited a difficult application process. Among the factors that discouraged businesses were fears they would be rejected because they were too new or small or had less-than-stellar credit scores.
An aversion to debt has consistently been the top reason that businesses did not apply for credit for the past three years, but the agency said that it “became significantly more important in 2017.”
Among businesses that did apply for credit, the share that applied to banks also dropped dramatically, from 80% in 2016 to 50% in 2017. The share of businesses that sought loans from government sources more than doubled to 29%; the rest directed their applications to cooperatives, online lenders and other sources.
The New York Fed included a special section in this year’s survey focusing on the financial damages wrought by the 2017 hurricane season. It found that 77% of small businesses in Puerto Rico sustained financial losses because of the hurricanes, whether from decreased revenues, increased expenses or property damage. While 63% of small businesses had some form of insurance at the time of the hurricanes, only 4% of firms were fully covered and 23% were partially covered by their insurance.
Only 22% of those small businesses applied for financing to cover losses their insurance would not. Among those that did apply for financing, 84% applied to government entities and 20% applied to banks.
Among firms that did apply for financing, the greatest share, or 28%, needed between $10,000 and $50,000 to restore their business operations.