Introduction to the SMB crisis in 2020
With supercharged headlines and confusion, it is easy to lose sight of the colossal issues facing our Small and Medium sized business community. As an introduction, I’ve laid out 10 points to pay attention to when researching the SMB economy.
SMBs never recovered from great recession. Smaller loans (<1m) fell from 30% of total C&I lending in 2007 to 19% in 2019 Q4… (FRED)
For many rural counties, roughly 1.2 million jobs have been lost since 2005 due in part to a net loss of 200,000 businesses.
COVID was the nail in the coffin for many SMBs on the edge, especially in low margin retail and service businesses. About 50% of SMBs operated on a 15 day cash buffer and only 40% of firms have more than 3 weeks of cash buffer (JP Morgan).
Uncertainty around PPP loan terms and forgiveness has led to a lot of confusion and even stagnant capital at banks with surplus.
As of May 30th, $510bn was lent and lenders <$10bn led the pack with 44% of total lending volume (SBA).
In round 2, lenders with <$10bn in assets lent roughly 36% of all loans (SBA, May 30th).
Massive consolidation among smaller banks/community banks (roughly 4% per year) is going to choke out small businesses over the next few years after PPP. These banks have been too slow to adopt technology and must do so now to fend off coming wave of competition in the <$1m C&I loan segment.
While online lenders lending <$250k take on heavy defaults and losses, they will consolidate and jump back on the horse helping low or no credit businesses who get rejected by traditional lenders. In fact, applicants of online lenders are more than twice as likely to state denials by other lenders as primary reason driving them to online options. Furthermore, speed of application/decision was a key driver in stickiness over last few years.
Yet, in the last 5 years 44%, of firms have used a traditional bank to obtain a loan (SBCS, 2020). Small/medium sized banks and community banks have a small window to be there for SMBs in the coming year. If credit freezes up for all but the very best applicants, consolidating alt lenders, large banks (>$20bn AUM), and big tech lenders (this is coming) will scoop up nearly $50bn in volume/attrition from banks per year through 2025 (Business Insider, DeerCreek, 2020).
Non-employer firms are an anchor of the US economy providing primary and supplementary income for 17% of Americans. Nearly 63% of these businesses serve as primary income for the owner (SBCS, 2020).
During the COVID-19 employment crisis, we have to focus on SMBs even more, providing a clear path to forgivable capital with much simpler terms and arm up for the next year of attrition, SMB lending demand, and opportunity to get America employed again.