Under Pressure: Small-Business Lenders and COVID-19

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides $376 billion in relief for American workers and small businesses (meaning firms with fewer than 500 employees). This money is available through four main programs administered by the U.S. Department of the Treasury (Treasury) and the U.S. Small Business Administration (SBA): the Paycheck Protection Program (PPP), the Economic Injury Disaster Loan (EIDL) Emergency Advance, SBA Express Bridge Loans, and SBA Debt Relief. The SBA and the U.S. Senate Committee on Small Business and Entrepreneurship provide additional information about these programs, and although program details are outside the scope of this post, it suffices to say that these programs are complex and demanding to implement. Financial institutions that lend to small businesses are on the front lines of financial support, both in terms of working out existing loans and providing access to these new federal programs. What are these lenders experiencing right now, and how are they working to support small businesses?

As the COVID-19 pandemic has unfolded, the Richmond Fed has continuously gathered information from a wide range of businesses, financial institutions, nonprofits, local government agencies, professional organizations, and others in the Fifth Federal Reserve District (which includes Washington, D.C., Maryland, North Carolina, South Carolina, Virginia, and most of West Virginia). This information gathering allows us to understand local and regional challenges, help identify and share promising solutions, and inform future policymaking and research.

In mid-March — before the passage of the CARES Act — we were hearing about early challenges facing small-business lenders, particularly community banks, credit unions, and community development financial institutions (CDFIs). To better understand these challenges, including the degree to which lenders were receiving and granting loan modification requests for existing small-business customers and the potential ramifications for future small-business lending, we ran a survey of small-business lenders from March 18, 2020, through April 1, 2020. The survey asked four main questions:

1. Has your institution received accommodation requests from small-business borrowers as a result of their inability to service debt due to COVID-19?
2. What level of disruption do you anticipate COVID-19 having on your small-business borrowers and loan portfolio?
3. Do you anticipate making future accommodations for small-business borrowers impacted by COVID-19?
4. Do you anticipate curtailing future loan originations to small businesses?

In total, the survey collected information from 83 small-business lenders headquartered in the Fifth District. These lenders were primarily community banks (65.9 percent), followed by CDFIs (19.5 percent) and regional banks (7.3 percent). Respondents were asked to indicate all Fifth District states in which they operate; the majority operate in Virginia (52.4 percent) and Maryland (45.1 percent), with fewer respondents from the District of Columbia (9.8 percent), North Carolina (12.2 percent), South Carolina (11.0 percent), and West Virginia (3.7 percent).

What Are We Hearing from Small-Business Lenders?

Survey responses indicate that small-businesses lenders began receiving loan accommodation requests from existing borrowers early and in relatively high numbers. For the purposes of the survey, “loan accommodation” broadly includes any request that a small business makes for their lender to alter loan repayment terms. In total, 61 lenders (73.5 percent) received either a “moderate” or “significant” number of loan accommodation requests by the beginning of April. When survey data are broken out by week, we can see increasing occurrences of loan accommodation requests over time. In week one (March 18-22), 14.0 percent of respondents had not received any accommodation requests, but by week three (March 30-April 1), all respondents had received some level of requests. (See chart below.)

At the time of the survey, respondents widely anticipated disruption to their small-business borrowers and loan portfolio. All respondents indicated that their borrowers and portfolio would experience at least some disruption, with 82.0 percent of respondents anticipating significant disruption. (See chart below.) Of those who anticipated significant disruption, respondents were evenly split in their expectations for recovery; 34 lenders expected disruption to be temporary, while another 34 expected recovery to be difficult.

When asked if they would make future accommodations for small-business borrowers, 82 of the 83 respondent lenders said “yes.” While broadly accommodating, lenders generally indicated that borrowers would need to prove financial hardship that resulted directly from COVID-19 and associated prevention measures and would need to have been in good financial health with a strong credit history prior to the pandemic. Several lenders also noted that they would need federal guarantee funds (like the funding provided through the CARES Act) to feel confident granting loan accommodation requests and to help protect their balance sheets.

The final survey question sought to understand potential ramifications for future small-business loan originations. Respondents were split on whether they would curtail future loan originations to small businesses, with 53.7 percent saying “yes” and 46.3 percent saying “no.” Lenders who indicated they may curtail future originations were primarily concerned about their organization’s capacity and financial stability, and they emphasized that they may need to focus their time and resources on helping their existing customers.

While this is understandable, it may disadvantage small businesses without an established lender relationship. According to the Federal Reserve’s Small Business Credit Survey (SBCS), 29 percent of employer small businesses nationwide do not have outstanding debt. A lack of debt may serve those firms well in a strong economy but could leave them scrambling to find a lender during this economic downturn. Minority-owned small businesses may be at a further disadvantage, as these firms are less likely to have an existing credit product — 41 percent of black-owned businesses do not have outstanding debt.

The federal small-business stabilization programs make it more viable for some financial institutions to originate small-business loans, although lenders continue to face time and capacity constraints. During the Richmond Fed’s information-gathering conversations, lenders have cited a number of challenges, including hurdles to the SBA approval process, questions related to guidance on loan processing, and past experience with SBA loan guarantee denial due to technical or administrative issues. And federal funds allocated for small businesses are going fast — as of April 13, just over 70 percent of allocated PPP funding was already committed ($247.5 billion of $349 billion). Given ongoing uncertainty and persistent economic need, where do we go from here?

What Comes Next?

As of the writing of this post, Treasury has requested that Congress authorize an additional $250 billion for the PPP. The Federal Reserve has announced that its PPP Liquidity Facility will extend credit to eligible financial institutions that originate PPP loans and has committed to purchase up to $600 billion in small and mid-sized business loans through its Main Street Lending Program to support the flow of credit to these businesses.

The importance of small businesses to the national economy is well established. According to the SBA, these firms employ about half of private-sector employees, provide 40 percent of private-sector payroll, and represent one-third of known export value. Supporting their health and stability remains a priority as our country weathers the COVID-19 pandemic. An important piece of that support remains ensuring that financial institutions have the liquidity, capacity, and regulatory flexibility to respond to small-business needs.

Are you a small-business lender in need of additional resources?

• U.S. Department of the Treasury Coronavirus Information Page
• Federal Reserve Coronavirus Information Page
• FDIC Coronavirus Information for Small Business Lenders
• NCUA Coronavirus Information for Federally Insured Credit Unions
• Opportunity Finance Network Response to COVID-19

Are you a small-business owner in need of additional resources?

• Find an Eligible Lender
• U.S. Department of the Treasury Coronavirus Information Page
• SBA Coronavirus Relief Options
• U.S. Chamber of Commerce: Combating the Coronavirus

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Views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.