We are in the kind of economic environment that activates the natural instinct of banks to tighten credit. But for small businesses, limiting their access to capital when they need it most can create a negative feedback loop – as they struggle and, in some cases, shut down, the economy weakens further, which makes banks even more cautious.
Bottom line: The country simply cannot afford financial service providers to stop lending to small businesses. But that doesn’t mean that banks and credit unions should take unnecessary credit risks as an act of public service.
There is already a guide to safely extending the financial lifeline that small businesses desperately need. We can learn important lessons from the 2008 financial crisis to help community banks provide the support that will help communities survive hardships and re-emerge into a new normal.
Rely on the SBA
Millions of businesses kept the lights on in 2020 with the help of Paycheck Protection Program loans offered by the Small Business Administration under the CARES Act. A second round of PPP loans will be offered, which is long-awaited good news for small businesses, but these loans are not a panacea for all the financial difficulties that small business owners are currently facing.
Fortunately, long-standing loan programs like the SBA 7 (a) program continue to be available and have been proven successful in the most serious stress tests.
In the aftermath of the 2008 crisis, the SBA stepped in with increased guarantees, higher loan limits, and lower fees for borrowers (and we may revisit these credit enhancements soon). During the Great Recession, 7 (a) loans pulled countless businesses to the brink of collapse. As today, these companies were victims of circumstances and were not doomed to failure.
Banks are in better shape today than they were during the financial crisis and even better positioned to make full use of SBA resources. Private community lenders can be the hero small businesses need by providing credit to the millions of small businesses that meet general SBA criteria.
Provide access to permanent working capital
When cash flow is tight, many businesses turn to lines of credit for quick access to funds. But as we saw many times during the Great Recession, it can pose big problems for both businesses and financial service providers when the economic downturn persists. If a business can’t pay off the balance and renew credit properly, it’s easy to dangerously reverse its borrowing base. A fragile business with a large balance that needs to be paid off quickly is headed for trouble.
What many businesses need during economic uncertainty and the potentially lengthy recovery is permanent working capital. This means long-term access to a large amount of money that can be managed by the business and repaid over a longer period on terms favorable to both the business and the bank.
This is another important application for the SBA 7 (a) loan. The benefit to the borrower is obvious for the reasons outlined above, but it also makes good business sense for the lender. Not only does this strengthen and strengthen the bank’s brand in the business world, but the secondary SBA loan market provides a solid source of non-interest income in the low rate climate.
Refinance and strengthen existing credits
Lenders watch their portfolios with concern as the evidence points to the deterioration of existing credit. It was this (well-justified) fear that turned off the tap of critical capital after 2008, and if we hope for a better 2021, we cannot repeat it.
Banks and credit unions should carefully review their business portfolios to identify previously strong companies that are being hit hard by the pandemic. It is important that they do not become unnecessary victims of external circumstances which can be alleviated to some extent.
In 2008-2010, many companies on the verge of bankruptcy were rescued by restructuring their existing debt. Refinancing with an SBA 7 (a) loan allows borrowers to consolidate debt and extend repayment terms longer than most conventional business loans. This reduces monthly payments, helps stabilize their financial situation, and provides additional security for the lender.
More … than 60 million Americans work for small businesses. The country has been eagerly awaiting further help from Congress, but the new stimulus efforts will not answer all prayers. Community lenders have the opportunity to fill the void quickly and responsibly by making the best use of the SBA tools at their disposal.