Small business financial services providers face a very different economic reality than they did at the beginning of this year. The COVID-fueled recession has resulted in a new climate for small business credit and lending, which continues to evolve rapidly depending on factors such as public health developments, government policies, stimulus activities, and more.
In times of uncertainty, it’s helpful to know what your peers are thinking. With this in mind, we connected with around 30 senior leaders in small business risk, credit, products, underwriting, and beyond (names and institutions have been withheld to allow for full candor). Nearly 50% of participants are from community banks — the local go-tos for many small businesses — who are bearing witness to what’s happening on the ground right now. We also heard from voices representing top 50 U.S. banks and regional banks, as well as fintechs and online lenders.
Discover what these senior leaders are saying about the recession’s impact on small business credit and lending today, and what they predict for the future.
While some organizations experienced initial slowdowns in small business lending and credit earlier this spring, the majority of institutions have since rebounded. A few banks mentioned record lending activity, especially with SBA backed loans (both inclusive and exclusive of PPP).
A leader at one of the largest SBA lender banks in the US stated, “We stopped our ‘traditional’ SBA lending in April to focus solely on PPP loans. We stopped our PPP loan process in May and resumed our regular SBA program.
"We funded almost as many SBA loans in 2 months of Q2 as we did in 3 months of Q2 in 2019. Q3 looks very strong for SBA lending."
Another community bank leader mentioned his $3B bank has extended over 7000 PPP loans - quite a feat for a bank of this size.
Where has small business lending slowed down? Online lenders. All 3 leaders from online lending organizations described huge reductions in lending and credit activities. “We are not lending any more money, even to existing customers at the moment”, mentioned one respondent. Another stated, “It has forced an almost complete shutdown of credit to SMBs.”
Aside from online lenders, most institutions are maintaining or increasing their engagement with small businesses despite the recessionary climate. However, some respondents mentioned more cautionary practices, which brings us to our next learning:
More than half of the leaders predicted that lending practices will tighten in this new economic environment — and several people mentioned that their credit and loan standards have already increased.
Several leaders mentioned that they expected tighter policies to remain in place for the foreseeable future, as a direct effect of the recession. A fintech leader (not an online lender), stated
“As the recessionary environment continues, we have limited our loan exposures and tightened our lending criteria. We currently plan to continue these policies until the small business sector clearly has recovered, whenever that may be.”
Industry plays a role in determining new credit standards as well. This was not surprising — in Enigma’s State of the Small Business Lending poll in early June, many participants openly stated they were looking for better industry data to inform credit risk assessments for different industry sectors.
Multiple leaders mentioned that policies were stricter for industries that have been hit harder by the pandemic. ”Going forward, we have tightened lending standards to certain industries impacted by the pandemic, such as commercial real estate and hospitality industries such as hotels and restaurants. We expect those vertical lending areas to shrink materially in the next year,” explained one community bank leader.
While tightened credit standards are a predictable reaction to the current recessionary environment, it presents a tough reality for small businesses in search of new capital or credit. Especially as many financial institutions believe small business lending and credit activity will not recover to pre-COVID rates for quite some time.
Very few leaders expressed confidence in a full return to pre-COVID lending and credit activities within a year. One community bank leader explained, “We clearly believe small business lending and credit activity will not substantially recover within a year... our fundamental view is that banks will increase underwriting standards and avoid aggressive lending, especially to vulnerable industries such as hospitality, commercial real estate, and energy, until there is much more visibility on the performance of deferred loan books and their ultimate impact on banks income statements and balance sheets.”
Leaders mentioned that factors such as the arrival of a vaccine, the forthcoming U.S. presidential election, the depth of government bailout activities, and business reopening timelines will all impact whether small business credit and lending can substantially recover by August 2021.
Several leaders described a challenging cycle wherein the declining state of small businesses informs the extent and availability of small business financial services, which then influences the state of small businesses (and so on). Many small businesses may not survive this recession, and a significant number of surviving small businesses will still face financial challenges, thus the general small business lending and credit economy will likely shrink.
One online lender shared their view of this dynamic, “Many SMBs have shut down and will not reopen as the same legal entity, if they reopen at all. Many lenders require 12 months of legal existence before they will lend to an SMB. Also, those SMBs that do survive will most likely have reduced cash flows, thereby reducing the amount of borrowings for which they will be eligible.”
How small business financial services continue to evolve in this recession remains to be seen. Though most leaders predict a longer recovery, these beliefs were shared by the same people who report that the current state of small business credit and lending is far from apocalyptic.
The past has shown that challenging economic climates can beget innovation. As one leader from a Top 50 bank mentioned, “there have been multiple discussions on offering customized new products for small businesses in the future.” We look forward to seeing what new services and offerings financial institutions and fintechs release in the coming months as they navigate this recession.
It’s also apparent that new kinds of data and signal will play an important role helping institutions navigate this recession. More than half of leaders agreed that their institution would benefit from additional signal to improve visibility into their small business risk exposure. This may in part be due to lagging data from traditional credit bureau providers — as one leader described, “Credit evaluation services have not kept pace with the situation, so that available credit rating information is often out of date or inapplicable.” Much like this recession will spark new product development, we expect innovative evolutions for small business data, specifically business risk and health indicators.
Did any of this post’s ideas or quotes resonate with your current experiences in small business credit and lending? We’re curious to hear from you. Get in touch to let us know what you’re seeing, and let us know if you’d like us to cover any other topics with our lending community in the future.
