There's no return to normal for small-business lending

America’s small and medium-sized businesses are under siege. The pandemic forced them to change their operations, close or run at half-speed and lay off or reduce hours for workers. The government and banks marshaled significant resources, perhaps most notably with the Paycheck Protection Program — but new applications are no longer being accepted, and yet many small businesses remain in acute need. This raises thorny questions about how banks and other lenders can support small businesses, which are in dire need of aid.

I believe that the crisis offers fertile ground for innovation and that the unwinding of the PPP can accelerate the evolution of the credit market, driving lenders to adopt underwriting practices and technology that will allow them to better serve small and medium-sized businesses while improving their own operations.

Of course, this situation in which small businesses are starved of credit predated the pandemic. We’ve seen a contraction of small-business lending in the wake of the 2008 crisis, but the gap has only grown since. At JPMorgan Chase, non-PPP loans to small businesses fell to $956 million in the third quarter of 2020, the lowest level since 2010. This has contributed to half of SMBs reporting that getting financing is difficult or takes too long. A staggering 86% say they have to resort to the owner’s personal credit to gain access to capital.

The current state of affairs would seem to be a huge opportunity for banks to step up to serve the companies that make up the backbone of the economy. As a recent report from Accenture points out, “Banks have played a critical short-term role as fast and at-scale distributors of public-backed loans to help alleviate the initial economic distress of eligible" small and medium-sized businesses.

It went on to say that banks that helped small and medium-sized businesses access new capital and adapt their operations to thrive post-pandemic “will not only fulfill their social purpose but also build trust in their organization.”

Small-business owners spend a significant amount of time and energy managing payroll, bank accounts, invoices and accounting. When in need of credit, getting the data required and reformatting it to share with a lender often takes a considerable amount of effort. Moreover, the picture of a company’s creditworthiness is often incomplete, because of a rigid approach to a limited number of specific data sets and a focus on bank accounts and tax filings. In fact, the situation today isn’t that far off from that in the consumer space five years ago.

Just as they have widened the scope they use to assess consumer creditworthiness, lenders need to adjust the way they look at small-business lending. Businesses may not look the way they did before the pandemic. Since early in the COVID-19 crisis, around 60% of restaurants have invested in curbside pickup. Nonessential retailers have expanded their online presence and added new capabilities and policies. This all needs to be taken into account as credit lines come up for renewal.

Unusual financial data patterns and other business model pivots mean that lenders will need to look at businesses through a new lens to figure out who’s risky and who’s not. This will be challenging but can be achieved with a wider data set, collected and submitted in an efficient manner, and with a new approach to credit underwriting.

Driving home the importance of financial data to unlocking credit for small businesses is a report released by the Federal Reserve Bank of New York.

“Our work shows that bank liquidity in bad times such as the COVID shock mostly flows toward larger rather than smaller borrowers," the report says. "This is consistent with lenders placing stricter loan terms on small borrowers, which give lenders greater discretion in providing funds. This fact, in turn, places greater constraints on smaller companies from drawing on their credit lines to weather a downturn, which can have wider detrimental economic effects.”

The authors of the report point out that smaller businesses don’t get the same access to credit as larger businesses because they lack timely, comprehensive and reliable financial information lenders demand.

The course of the pandemic is shifting — and lenders' response must shift as well. PPP helped temporarily patch over an already existing credit crunch for small and medium-sized businesses. Timely and cost-efficient access to a wider financial data set can help combat barriers to credit access, but requires lenders to adopt new technology and processes. As we move forward, we must ensure adequate support to the 30.7 million businesses that provide 47.3% of all jobs in our country and contribute $5.9 trillion to our GDP. They are ready to capitalize on new opportunities, but need the funds to do so. We have an obligation toward them and the communities they underpin to make sure they get to take their shot.