There is a wide array of economic stats being put out as the U.S. rounds a full opening. But one of the most unsettling is this: For the first time in the five years since the Federal Reserve began conducting its national small business credit survey, more businesses experienced decreases in revenues and employment than increases. Yes, circumstances last year were extraordinary—but even more, so is the current need for capital by small business owners.
In past surveys, the primary reason for seeking capital was to finance expansion. In 2020, the primary reason was to meet operating expenses. Responsible for forty-four percent of the U.S. economic activity, small businesses are the backbone of our economy. And that backbone is hurting: this is the first year the majority of them have been on the decline. It’s time to get small businesses back on an upward trajectory, starting with efficient lending.
Statistics point to a greater need for small business lending
The numbers from the Federal Reserve survey illustrate the distressing situation facing small businesses:
- Greater challenges. The share of firms that experienced financial challenges in the prior 12 months rose from 66% to 80% between 2019 and 2020. In response to those challenges, firms most commonly used personal funds (62%) or cut staff hours/downsized operations (55%). Takeaway: small business owners were and are doing whatever they can to continue operations.
- Unprecedented need. Amid the pandemic, firms have been less successful at obtaining loans, lines of credits, and cash advances. Prior to March 1, 2020, 81% of applicants were approved for at least some of the funds they sought. After March 1, only 70% were at least partially approved. Takeaway: thirty percent (almost one-third) of small businesses that applied for funding got the money they needed. There’s still pent-up demand for capital.
- Small banks’ valued role. Forty-three percent of businesses turned to a small bank (versus another type of lender), up from 36% in 2019. Takeaway: Small banks can play a big role in helping small businesses recover.
The upside is this: the demand for funding is there, and banks play a critical role in helping to meet that demand.
How banks can put small businesses on stronger financial footing
As people once again start frequenting restaurants, refreshing their wardrobes, and traveling for business and fun, small businesses will need to ramp up hiring, replenish inventories, and make sure every aspect of their operations is fine-tuned. And for that, they will need capital.
How do you decide which businesses you should lend to, how much, and at what terms? If the pandemic taught us anything, it’s that it’s time to rethink what defines a strong business model.
Traditionally, lenders have been jittery about approving loans for small businesses, often viewing the risk as greater than the reward. But new technology has paved the way to reduce risk, allowing lenders to employ small business-appropriate criteria to evaluate creditworthiness. What the lending community has found is that for small businesses, cash flow is one of the most reliable performance indicators.
What’s more, your institution can approve more small business loans faster and with less work through automation. A lot of the loans that went unfulfilled during the last year and more were simply due to a lack of bandwidth to review applicants’ paperwork. Manual processes are not just time-consuming for banks and lenders. Think of small businesses doing everything in their power to stay afloat—working longer hours to cover the loss of employees, installing new safety equipment, and brainstorming creative ways to attract and retain customers—leaving little in their tank to put together hard copies of documents or visit a bank branch to meet in-person with a loan officer. A digital end-to-end solution saves time for all parties, while also enabling you to implement the rules that make the most sense for your institution and your customers.
Everyone is hopeful that the decrease in small business revenues and employment is more of a temporary blip than a persistent dip. But there’s more that can be done than just hoping, and that’s acting expeditiously. Providing small business funding now can put lenders and community banks in a stronger position for growth, and help deliver on their responsibility to small businesses in their area. Only then can we start to reverse this never-seen-before trend and allow small businesses to thrive.