Now is not the time to freeze small-business lending
A recent survey showed a glimmer of light: 83% of small businesses had an optimistic view of 2021.
As we enter the dark days of winter with the coronavirus pandemic surging to new highs across the country, the resilience and courage of small-business owners cannot be denied.
Yet looking ahead to the recovery, a worrisome trend has emerged. Bank lending to small businesses, outside of the emergency government aid programs, has slowed to a trickle and may soon completely freeze.
Banks’ retreat from small-business lending reflects the impact that public health measures like stay-at-home orders and social distancing have had on otherwise thriving enterprises. These measures remain essential to the health and safety of owners, employees and customers, and could continue to affect sales and profits well into next year.
But the resulting performance profiles and risks can turn a formerly appealing small-business bank customer into an underwriting nightmare.
How bad is the problem? A survey from the Federal Reserve shows that the percentage of senior loan officers reporting tightening credit standards has risen to levels not seen since the 2008 financial crisis. This situation requires immediate attention in Washington — in addition to continued pandemic relief.
As this public health crisis continues, small businesses absolutely need a new round of grants and forgivable loans, such as those deployed in the Paycheck Protection Program (PPP). Survey data from Alignable, a network of nearly 6 million small businesses, shows that 42% of small-business owners anticipate not having enough revenue to survive the fourth quarter this year.
Across the board, their greatest concern is retaining sufficient cash reserves to make it to the end of the pandemic. Deploying the remaining $134 billion of PPP funds and additional Small Business Administration Economic Injury Disaster Loans is clearly an immediate imperative.
But we need to look ahead and anticipate the next challenge as well. If banks are not lending, where will surviving small businesses get the cash they need to rehire employees, restock their shelves and drive the recovery as public safety allows?
Right now, large businesses can get loans at some of the lowest rates in decades. Small businesses lack access to the cheap capital markets that are available to their larger counterparts. Without decisive action from the government, the impending credit crunch will lead to a slower, more painful economic recovery for small businesses and, as a result, the entire nation.
However, there is already a playbook for getting capital flowing to small businesses again.
In 2009, when I was sworn in as the head of the SBA, lending had frozen — for very different reasons. The cause then was damage to banks’ balance sheets from bad mortgages, arguably a situation largely of their own making.
Nonetheless, it was small businesses who faced the consequences as the credit spigot shut off, and small-business employment slumped. In the first quarter of 2009, the nation lost 1.8 million small-business jobs.
The SBA took immediate action, and it worked. We temporarily raised the guarantee on the SBA’s flagship 7(a) loans from 75% to 90%, and reduced or eliminated the borrower fees for both the 7(a) and 504 loan programs.
The results were dramatic. From Feb. 17, 2009, to Sept. 30, 2010, weekly SBA loan dollar volumes rose more than 90%, and the changes brought more than 1,000 banks back to SBA lending. These actions contributed to record years in SBA lending, supporting about $30 billion in total loans in each fiscal year from 2011 to 2013, with loss rates of under 5%.
The aftermath of the 2008 crisis then was nothing compared to the one we’re facing today. But with the same problems emerging in the lending landscape, these solutions can work again — with a few adjustments for the current environment.
One of those should be including fintech and platform lenders in SBA lending. The rollout of PPP proved that responsible nonbank lenders like Kabbage, Intuit and Square have the reach and technological expertise to get the smallest-dollar loans to the most vulnerable businesses.
In short, nonbanks and fintechs fill an important gap in small-business lending, making the small loans that banks find less appealing. Keeping fintechs involved in future SBA lending efforts will help many more small businesses get access to the help they need to return to full strength.
This is the worst small-business crisis I’ve seen in my lifetime, and I’ve seen quite a few. It’s time to act.
We couldn’t control the advent of the pandemic, but the tools needed to help small businesses recover are right in front of us.
The SBA needs to step up, raise its guarantee rates and follow its mandate: providing credit support to the many small businesses who fall through the cracks of traditional lending markets.
There’s little risk involved, knowing that these strategies have worked well in the past.
Nearly half of the people who work in the United States own or work for a small business, according to a SBA 2020 report. By taking quick and decisive action in pandemic relief and recovery support, we can ensure that small businesses gain access to the capital they need to recover, and keep communities healthy and vibrant.