I am the SVP of Partner & Lender Strategy at Lendio, the largest marketplace for small business financing.
I was struck by a thought the other day while our team discussed the details of the latest round of the Paycheck Protection Program (PPP). Before the program’s restart, Lendio had helped more than 115,000 small business owners get a PPP loan. That number – which is monumental by our standards – represents only a fraction of total PPP loans.
While internally, we view that accomplishment as a professional feat worthy of remembering forever, the truth is that number is really a devastating glimpse at the damage the Covid-19 pandemic has caused on our nation’s small business owners, their families, and their employees.
As vaccines continue to roll out, it is time for those of us in the small business lending community to think hard about the next steps. How can we get small business lending back on track and do so quickly? While it’s not impossible, it will require proper assessment, organization and a bit of proactive creativity.
Assessing The Lending Landscape
Predicting what 2021 will bring has become somewhat of a pasttime for many of us. We anticipate the life-altering potential of vaccines and other scientific advancements. We hope to rejoin our friends in lively bars and restaurants, attend a play or a concert, travel just about anywhere and, most importantly, be with those we love.
For small businesses, the overall desire is simple: resume operations as usual. As businesses seek government assistance, the traditional lending ecosystem stagnates. Following that, however, a massive and almost immediate influx of customers needing financing will appear.
Here’s what we’ve seen so far and what I expect to see as this year continues:
First Quarter 2021: Since the year began, lender sentiment is already improving as we see the expansion of credit boxes and a reduction in restricted industries. We hope this will continue in the right direction. On the other hand, the PPP has had a slower rollout than expected, and businesses are still awaiting their PPP second-draw loans.
Second And Third Quarters 2021: Businesses will be able to begin reopening their doors but will likely see hindered consumer participation until society gets more comfortable. Revenues will slowly increase. As restrictions loosen, business revenue will stabilize, as will lenders’ credit boxes.
Third And Fourth Quarters 2021: Hopefully, we’ll begin to see noticeable positive upticks in business operations and the beginning of a return to normal.
On the lending side, our data shows the total number of loans taken out by small business owners decreased by 78% from Q4 2019 to Q4 2020. And while I anticipate that number to begin climbing before Q4 2021, it may not begin to substantially increase until after relief funding is gone and businesses can operate at near full capacity.
It may be an unpopular opinion, but I don’t foresee business returning to “usual” until late Q3 or Q4. We still have a ways to go, and a lot of businesses to help.
Acting Based On Need
Small businesses across the country are shouldering immense burden amid the pandemic due to restrictions, closures and decreases in foot traffic. According to Yelp’s Economic Impact Report from September, “permanent closures have reached 97,966, representing 60% of closed businesses that won’t be reopening.”
Of course, not all businesses were hit equally. Depending on geography, industry or technical capabilities, some businesses thrived, and others pivoted to great success. Unfortunately, the majority experienced devastating decreases in revenue.
Fortunately, the latest PPP round included provisions to help the businesses that need the most aid. Restaurants and establishments in the service industry were able to take 3.5 times their monthly payrolls versus the 2.5 times in the previous rounds. Additionally, the SBA allowed CDFIs to submit completed applications days before other lenders, hoping that money would reach underserved applicants first.
This kind of thinking is what the lending industry needs and will continue to need. It would behoove all of us to be more forthright in assessing true need and then actively making business decisions to remedy that need.
As business begins to resume and operations go back toward normal, I would encourage owners to make cash flow management a weekly priority. Knowing where your peaks and valleys are can go a long way in the short and long terms, especially if you will need financing in the future. As soon as you are able, begin a business rainy day fund. Whether for an emergency expense or to get through an unexpected dip in revenue, being prepared should be on all our minds now. Lastly, if you have a trusted financial advisor, check with them to ensure you’re taking advantage of all programs and assistance available to you.
What’s been really incredible during this trying year is the amount of rallying that communities have done to support local businesses they love. Still, as we all know, it has typically not been enough to sustain them. The onus on keeping small businesses afloat cannot solely be placed on consumers; they don’t have that kind of power, particularly in a time of record unemployment and economic uncertainty.
The PPP was a much-needed start, but the damage done by restrictions will be long-lasting and so does any recovery plan. Government leaders need to get creative and be prepared for the next phase of recovery for small businesses.
I’ve stated before that no matter the direction, it’s imperative that SBA retains a seat at the economic table. Government officials, including the new administration, have the task of ensuring this. Along with the seat, it’s important for the SBA to stay close with fintech providers and others in the finance industry that played an important role in connecting relief funds with those who needed them.
Whether we like to admit it, there is a portion of small businesses that will never return. We will continue to mourn both lives and livelihoods as the weight of this pandemic lifts.
And in the same breath, we’ll acknowledge the history behind what we’ve witnessed and watch the generational impacts begin to unfold. At the end of the day, we’ll continue to celebrate the spirit and entrepreneurship of America. I’m confident that this crisis has made people hungry to solve problems and be part of solutions, ushering in new and welcomed innovation. For that, we hold hope.