I am the SVP of Partner & Lender Strategy at Lendio, the largest marketplace for small business financing.
In early March, when the word “coronavirus” was still a whisper in the halls of Congress, I was returning from a business development meeting in California to pitch a prospective partner.
With a new year and new goals fresh in our minds, it seemed almost impossible that a black swan event would change the face of business lending in just a few weeks’ time. Who could have predicted the extent of the crisis beginning to unfold?
Even for companies like mine, which already had a blueprint in place for operating during an economic downturn, this was a shock to the system. We’ve learned a few things since then, and while as an industry we remain cautious, we see this as an opportunity to improve our systems and remain agile.
Rapid Change Makes Lending Even Riskier
When the novel coronavirus forced businesses to shutter without warning, these businesses were suddenly unable to provide lenders guarantees about their ability to generate revenue. And without these guarantees, businesses can’t access the capital they need to survive.
Under normal circumstances in commercial lending, lenders’ ability to assess risk is often based on how a business performs financially over a period of time. Lenders must rely on steady data.
Now lenders are forced to weigh the risk of issuing lines of credit that will not be used for working capital, but instead, for survival. This rapid change has truly stifled lenders’ ability to assess risk; as a result, they may have trouble participating in lending.
Additionally, when businesses quickly became nonoperational, some also became unable to service their existing debts with lenders. As I spoke with our lending partners about their mounting concerns, one thing became clear: The projected lag in payments and the potential exponential increase in the rate of write-offs could bring enormous losses in a short time period.
The Paycheck Protection Program (PPP) brought some relief, but it didn’t come without challenges. Critics scrutinized the management of the PPP rollout, particularly the program’s ever-changing guidelines. Additionally, large banks reportedly didn’t prioritize small-dollar applications, and thriving corporations received relief funds they didn’t need.
While the PPP wasn’t perfect, I believe the overall program was needed and largely effective. However, we are far from solving the challenges for small businesses in this Covid-19 era. These challenges will continue to play out as PPP lenders and borrowers turn their attention to the loan forgiveness process and a potential second injection of relief funding.
Back To Lending Basics
Prior to the global pandemic, online lending was highly automated. But because small business lenders can no longer rely solely on data, the speed of decision-making has decreased. With no certainty around the duration of this crisis and no end in sight, lenders must adapt more than ever before.
The challenge for lenders that want to gain market share in the space will be their ability to lend creatively during a time when businesses are still unable to show sustained revenue.
In order to do this successfully, lenders may need to return to their roots, favoring human skills over automation, at least in the interim. At my company, we have pivoted quickly. When a business applies for a loan through our marketplace, we provide current month-to-date statements to our lenders. Additionally, we are doing social media sweeps to provide further proof points of a business’s operating status and its ability to generate revenue in this new normal.
Even With Support, We’re Asking A Lot Of Small Businesses
All this adaptation on the part of lenders can’t guarantee the survival of small businesses.
We’re experiencing a classic chicken-and-egg paradox, and frankly, we’re asking a lot of small business owners.
Businesses that need inventory to survive are reliant on capital to front the investment. But lenders cannot issue credit to nonoperational businesses. Essentially, we’re asking American business owners to come back, without capital, and operate on already razor-thin margins. We’re asking them to do the impossible.
A June 2020 survey from the NFIB found that “of those small business owners who have applied for a PPP loan, an EIDL [Economic Injury Disaster Loan], or both, nearly half of them anticipate needing additional financial support in some form over the next 12 months.”
Lender Sentiment Remains Cautious
According to a survey of small and medium-sized businesses conducted by the Electronic Transactions Association and the Strawhecker Group, “eight in ten small and medium businesses (SMBs) that were closed at some point during the Covid-19 pandemic have reopened in some capacity. The survey also found that the majority of SMBs (55%) are optimistic about their business’s recovery, with retail merchants being the most optimistic vertical surveyed.”
Still, businesses that were well positioned prior to the pandemic will inevitably need to fine-tune their plans, and those that were not but somehow survive will need to build their internal infrastructure to withstand further challenges.
On the lending side, lenders may need to work on configuring new and more creative underwriting processes to include elements of data that were once considered irrelevant. They need to simultaneously try to stop the bleeding while supporting customers and providing new payment options that allow them to service debt.
In addition to creating new back-end processes, lenders ought to rethink how they provide support for their small business customers on the front end. Now more than ever, customer servicing efforts are vital to keeping customers happy, sane and supported. While not all existing customers may be fundable given the current circumstances, many will be as the economy begins to open back up. Keeping close to and supporting those customers will be invaluable as the lending economy begins to recover.
For lenders and small business owners alike, planning and preparation, two hallmarks of sound business operations, are more important than ever. While I do expect small business lending to begin picking up speed again early next year, one thing remains clear: We cannot afford to repeat this crisis.