We are in the kind of economic environment that activates banks’ natural instinct to tighten credit. But for small businesses, limiting their access to capital when they need it most can create a negative feedback loop – as they struggle, and in some cases even shutter, the economy further weakens, which makes banks even more cautious.
Bottom line: The country simply cannot afford for financial services providers to stop lending to small business. But this doesn’t mean that banks and credit unions need to take unnecessary credit risks as an act of public service.
There’s already a playbook for safely extending the financial lifeline small businesses so desperately need. We can look to important lessons from the financial crisis of 2008 to help community banks provide the support that will help communities survive the hardship and re-emerge in a new normal.
Lean on the SBA
Millions of businesses kept the lights on in 2020 with help from Paycheck Protection Program loans offered through the Small Business Administration as part of the CARES Act. A second round of PPP loans will be offered, which is long-awaited good news for small businesses, but these loans aren’t a panacea for all of the financial hardship facing small business owners right now.
Fortunately, long-standing lending programs like the SBA 7(a) program continue to be available, and have been proven to work under the most serious stress tests.
In the aftermath of the 2008 crisis, the SBA stepped in with increased guarantees, higher loan limits and reduced borrower fees (and, we may soon be revisiting these credit enhancements). During the Great Recession, 7(a) loans pulled countless teetering businesses back from the brink. Like today, these businesses were victims of the circumstances and not destined to fail.
Banks are in better shape today than they were during the financial crisis and in an even better position to fully utilize SBA resources. Private community lenders can be the hero that small businesses need by extending credit to the millions of small businesses that meet the SBA’s broad criteria.
Provide access to permanent working capital
When cash flow is tight, many businesses turn to lines of credit for quick access to funds. But as we saw many times during the Great Recession, this can pose big problems for both the business and the financial services provider when the slow economy lingers on. If a business can’t pay down the balance and properly revolve the credit, it’s easy to get dangerously upside down on their borrowing base. A fragile business with a large balance that needs to be repaid quickly is headed for trouble.
What many businesses need during the economic uncertainty and potentially long recovery is permanent working capital. This means long-term access to a significant sum of cash that can be managed by the business and repaid over a longer period of time at terms favorable to both the business and the bank.
This is another important application for the SBA 7(a) loan. The benefit to the borrower is obvious for the reasons outlined above, but it makes good business sense for the lender, too. Not only does it strengthen and reinforce the bank’s brand in the business community, but the secondary market for SBA loans provides a robust source of noninterest income in the low-rate climate.
Refinance and strengthen existing credits
Lenders are looking at their portfolios with unease as evidence points to the deterioration of existing credits. It was this (well-justified) fear that closed the spigot of critical capital post-2008, and if we hope for a better 2021, we can’t repeat it.
Banks and credit unions should carefully examine their commercial portfolio to identify the previously strong businesses that are being acutely affected by the pandemic. It’s important that they not become unnecessary casualties of external circumstances that can be mitigated to some degree.
In 2008-2010, many companies on verge of collapse were saved by restructuring their existing debt. Refinancing with an SBA 7(a) loan allows borrowers to consolidate debt and extend the repayment terms longer than most conventional business loans. This lowers monthly payments, helps to stabilize their financial position, and provides additional security to the lender.
More than 60 million Americans work for small businesses. The country has waited anxiously for more help from Congress, but new stimulus efforts won’t answer every prayer. Community lenders have an opportunity to quickly and responsibly fill the gap by making the best use of the SBA tools at their disposal.
Mike Slater is the president of VITAL Financial Services.
