Covid-19 Impact on Global Economy
The COVID-19 pandemic is shaking the world still and hose tremors will last for a while. A global economic recession is imminent now and it will take a lot of time for businesses to recover. Small businesses are having the hardest time because of it. They don’t have the funds to last through such a downturn in the market. Therefore, multiple companies are failing or will do so in the near future. Small business lending should have helped stranded entrepreneurs. However, loans are almost impossible to come by now.
Lenders are wary, which shouldn’t be a surprise in the current economic conditions. Many of them are also going out of business because of the economic problems caused by the pandemic. Government programs in some countries help to offer small businesses some relief. However, those are far from perfect and face a lot of criticism because of their unfairness and lack of transparency.
How Does the COVID-19 Pandemic Affect Small Businesses?
Simply put, the pandemic makes it nearly impossible for small businesses to survive. Problems with the cash flow are the main cause of small business failure by default. Therefore, enforced lockdowns are literally deadly for such companies. Big corporations have buffers of store4d funds that can help them through periods of downtime.
However, as small businesses often operate “paycheck to paycheck”, they are in a very bad position at the moment. Without incoming profit, they are unable to keep up with running expenses.
And any kind of profit is very low or completely non-existent for multiple businesses in this situation. It’s not only because the lockdown made many companies close down completely. There is also the matter of consumer spending, which is low. Millions of people got laid off because of the economic downturn. Obviously, they are forced to cut their spending drastically.
All things considered, the level of consumption is low worldwide. That’s the main driving cause of the global recession triggered by the pandemic. Economies run on consumers. Therefore, if people aren’t spending money, they can’t fuel their countries’ economies. And any kind of “buffer” will only last so long.
Can Small Business Lending be a Solution for the Troubles?
It’s true that getting loans to cover essential expenses, such as paychecks, utilities, etc. can save many small businesses. However, the problem is that loans are extremely hard to find nowadays. Under this immense pressure, even top lenders have stopped lending money. Smaller online lenders, which used to be a popular option with small business owners, are also mostly inactive now.
This is understandable considering that the majority of small businesses are in chaos. Therefore, the chances of paying off their debts are small. Small business lending is a high-risk industry by default. But with the incoming global recession, those risks have grown exponentially.
Is There a Solution for Small Businesses?
The lending industry has become very unstable. However, some governments are working to stabilize it and therefore support small businesses. There are many state-sponsored programs that offer small business loans or grants to cover their running expenses during enforced lockdowns.
For example, in the US, it’s the Paycheck Protection Program (PPP). It offers loans to cover payroll and some other essential business expenses (rent, mortgage, utilities) for eight weeks. The loan will be forgiven, which means that businesses won’t have to repay it after the crisis.
Australia has several credit programs and grants that support small businesses in different ways. The versatility of these options makes them more easily available, compared to the eligibility requirements of the PPP.
The UK has the Coronavirus Job Retention Scheme and several other programs for small business support. That Scheme allows business owners to claim up to 80% of their employees’ wages and some other payments (pension contributions, etc.).
Many other countries offer variations of similar support programs for small businesses. Unfortunately, those programs all have limited funding. And in developing countries, that kind of support is extremely limited even if it is available.
Why Aren’t Government-Backed Loans Solving the Problem of Small Business Lending?
The biggest problem with loan programs sponsored by the government, like PPP, is that they aren’t very transparent. As a result, the funds allocated for these loans don’t necessarily end up with small businesses.
For example, today there are multiple complaints about how PPP loans go to big corporations and to regions that aren’t severely affected by the coronavirus. This means that small businesses are only able to obtain very small portions of the government-allocated funds. Those loans are insufficient, which makes the entire program ineffective overall.
Moreover, such state support programs have highly specific eligibility requirements. Many of them have to do with how the small business owners are going to use the money. As the main funds go to paycheck protection loans, many businesses aren’t able to use them to cover their other expenses.
Of course, keeping employees on the payroll is important for small businesses. Also, it’s essential for maintaining consumer buying ability. However, many companies will be crushed if they are unable to keep up with their other essential expenses.
Will Small Business Lending Come Back to Norm Soon?
Many people, who have tried and failed to launch a startup in the last decade, know from experience how difficult it is for small businesses to receive financing. That’s because banks, credit unions, and other major lenders are still wary of offering loans to small businesses. Eligibility requirements for those are stringent and it’s been like this since the last great recession of 2008.
Considering that this recession might be worse, it’s reasonable to assume that the lending situation won’t improve much.
On the other hand, online lending has been picking up in recent years. Alternative financing that’s easy, if expensive, offered a solution for small businesses that couldn’t get a traditional loan. Considering that the interest in fintech and online banking solutions has increased because of the pandemic, this type of lending might recover rather fast.
However, the most important factor is the lenders’ confidence. The situation in this market will stabilize only after risks abate for lenders. This means that nothing will be clear until the global economic volatility settles to a reasonable level.