The COVID-19 pandemic triggered an unprecedented crisis that sent the global economy reeling. No one is sure how this will turn out, but already experts forecast that global GDP might shrink by up to 13%. Small businesses are affected the most by this economic crisis and they are already drowning in debt. With the coronavirus relief program that might not be a relief at all the future looks bleak.
One thing is sure, in order to help small businesses, governments will need to change their approach to financing. Already there is almost no way for SMEs to get the money they need to run. Many of them are on the verge of bankruptcy or already filing for it, and millions won’t make it. Therefore, developing an efficient method of financing distribution must be a priority in this crisis.
Why Are COVID-19 Loan Relief Programs Failing?
It must be noted that the government response to the pandemic was commendable in some ways. Initiating multiple relief programs for businesses affected by the pandemic is a great thing. However, this solution didn’t turn out as useful as one might think.
Yes, many businesses got loans that provided some immediate relief. However, these financing programs have some very big issues. Let’s consider PPP (Paycheck Protection Program) in the US, because it’s definitely the biggest and seemingly most thorough COVID-19 relief solution. Over $4 trillion went into financing coronavirus relief from the Federal Reserve. However, the first problem is that only a fraction went into the PPP and even less actually reached small businesses. The program received a lot of criticism for helping millionaires and big companies instead of the SMEs it was supposed to fund.
Another major issue with the PPP and all similar solutions offered by other governments is that they are loans. Of course, they are supposed to be forgiven, to a degree. However, the majority of small businesses have already been struggling due to loans. In fact, millions of them were looking for every possible way to reduce debt long before the COVID-19 crisis has arrived. Adding more debt to this only makes the situation worse.
The biggest issue, however, is that the PPP and the majority of other relief solutions have highly restrictive terms. They must be used to cover paychecks to ensure businesses retain their employees. If the money isn’t used for the express purposes granted by the program, the loan will not be forgiven.
But paychecks aren’t the main expense for small businesses. And it’s not to mention the fact that lockdown-induced drop in business makes retaining the same number of staff impossible.
Challenges for Alternative Financing During and After the Pandemic
So, government coronavirus relief programs might be too restrictive and not all that helpful. However, there is no denying the fact that SMEs desperately need money if they are to have any hope of survival. Banks aren’t giving any loans now, so they turn to alternative fast and unsecured financing. This is a good solution that became very popular after the previous economic recession of 2008.
At that time, banks and other traditional lenders also tightened up their eligibility requirements and reduced loan originations. Unsecured alternative financing was a necessity and many a startup appeared only due to this type of funding.
However, the COVID-19 crisis is so big and totally unprecedented that it basically stopped every part of the economy. This includes financing as an industry. Getting a loan today is extremely hard, if not totally impossible. Even credit card companies aren’t issuing any new contracts to desperate SMEs.
Therefore, the biggest issue that small businesses face today is that they have no access to any type of funds. Considering that the majority of them exist “paycheck-to-paycheck” this means that losses among them will be extremely high. With millions of SMEs closing and going bankrupt, the world as a whole will change.
This will definitely slow down the recovery of the economy, as SMEs make up nearly 90% of all businesses worldwide.
How Will the Financing Industry Change During the COVID-19 Crisis?
The world as a whole will be irrevocably changed by the COVID-19 pandemic and economic crisis following it. The financing industry will be greatly affected due to the fact that lenders are struggling and going out of business fast. One shouldn’t forget that alternative lenders that offer unsecured loans are themselves small businesses on this industry’s scale.
At the moment, they’ve stopped loan originations. This means that they also don’t get any new business incoming. Moreover, they are also facing a crisis as many clients will, no doubt, default on their loans.
However, these lenders can’t go back to doing business either. That’s because the risks are extremely high. It’s clear already that the global economy will require a lot of time to recover. Therefore, multiple SMEs will have no choice but to default on their debts. This means lenders face not merely a “risk” but a “certainty” of huge losses. Stopping with loan originations even if it constitutes them going out of business, seems to be the least damaging decision.
In Conclusion: What’s in the Future for Small Business Financing?
The future of small business financing isn’t looking good right now. Admittedly, the global economic situation is rather bleak. Infusing the economy with SME financing can help it recover faster. However, governments seem to be going about this the wrong way.
With no alternative lenders active due to risks, businesses are left with very few choices. Changing COVID-19 relief policies can definitely improve the situation. But this hasn’t happened anywhere yet. And at this point, the question is whether the change will be enough even if it happens.
Small businesses are already drowning in debt. This latest addition of relief loans will increase that burden and might make it unsurmountable. As consumer demand will not get back to its pre-pandemic levels for months, the lack of financing will cause companies to shut down.
Will the politicians see this and intervene with more efficient relief plans? Will alternative lenders choose to take risks and start offering financing again?
We’ll see answers to those questions in the upcoming months.