The Coronavirus pandemic has hurt businesses in multiple ways. Not only has lockdown restrictions meant that many businesses cannot get customers through the door, but the market crash and complete uncertainty over the economy have led to another credit crunch.
Difficulties of getting a business loan
Financial institutions in America are notoriously reluctant to offer small business financing. In particular, large highstreet banks just don’t want to know. Of course, the Coronavirus pandemic has made this situation worse. Not only is there a lack of credit at the moment, but businesses also cannot put forward a solid argument for a loan. Banks already want cash flow forecasts, revenues, and a general business plan. It’s difficult in a time where demand for their product may be on a temporary halt, but nonetheless cannot prove they will make the repayments.
There are online solutions for business financing, which are essentially the alternative to banks and particularly focus on small businesses. These have grown in popularity during the pandemic, as they are still offering loans as per usual. Of course, where there’s more risk for the lender, the price is higher, so these aren’t cheap alternatives.
Essentially, small businesses only really have a short term financing solution right now. There’s a huge market failure surrounding long-term loans, which are increasingly difficult to get their hands on. The US Government has done a fine job at offering government-backed loans so far, the only issue is that this looks to be coming to an end.
Credit difficulties for individuals
It’s not only businesses that are struggling, but individuals also. March saw the lowest level of mortgage credit available in five years, according to the Mortgage Bankers Association. Investors in mortgage-backed bonds pulled back during the market’s crash, which then in turn negatively affected lenders’ liquidity. Understandable, given the 2008 crash would have obliterated all those jumbo-mortgage bonds, and it’s still very much present in our memory.
Joel Kan, and MBA economist, states “There was a reduction in the availability of loans with lower credit scores and higher LTV ratios, and the largest pullback came from the jumbo and non-QM space.”
Back in Easter, Wells Fargo, America’s largest mortgage lender, suspended the purchasing of nonconforming loans from correspondent sellers due to unprecedented and unique market conditions.
JP Morgan Chase also changed their underwriting guidelines, in which mortgage applicants now need a 700 FICO credit score and make a minimum 20% downpayment.
Chase Home Lending’s Chief Marketing Officer, Amy Bonitatibus, stated that “Due to the economic uncertainty, we are making temporary changes that will allow us to more closely focus on serving our existing customers,”
How many people are reliant on government support?
With credit less available and lockdown restrictions still in action, millions of businesses and people around the country are currently reliant on government support. By the first week of June, 160 million stimulus checks had been issued. That is 120 million direct deposits, 35 million paper checks, and a few million debit card payments.
Recipients are those that are working and those that aren’t, working class and middle class. Essentially, this has been a form of Universal Basic Income, in which the government has decided everyone needs a life jacket. Those earning over $75,000 may not have gotten the full $1,200, but they will have gotten something, up until $99,000. A for married couples, this threshold is $198,000.
The $376 billion CARES Act also included small businesses, in which many have benefited so far, as well as the $660 billion small-business relief program. The PPP reports show 660,000 small businesses that received over $150,000 in funding each. Yet, this is only 15% of the total number of loans.
Businesses are still struggling with demand as a result of lockdown restrictions, yet grants are running dry. Sooner or later, they will be turning to private means of financing. As mentioned earlier, this is difficult, to say the least.
Long term impacts
The idea that the government can literally hand out over a thousand to most people in the economy was something not everyone really believed could happen. Or rather, not everyone believed the US Government would go for.
Whether or not this stimulus package has had detrimental effects on national debt, it has happened, and it is now an option on the table. This means that for those wanting better social security or Universal Basic Income, there is a rise in bargaining power now.
As for small businesses, they will be turning to a difficult and tight credit environment as government-backed loans run dry. With many inevitably getting turned down, even from alternatives such as P2P loans, we will inevitably see an influx of businesses defaulting and unemployment earlier next year. Even the companies that have survived will be more highly geared given the acceptance of what is, on average, $107,000 in government loans.