Business

SMEs hit by a pandemic are hungry for credit

SMEs that have cleared the hurdles of shutting down the coronavirus are now facing too familiar obstacles. Banks don’t want to lend to them.

The Paycheck Protection Program poured $ 525 billion in permissible loans into millions of small businesses early in the pandemic. However, the massive injection masked the long-standing shrinkage of SME lending in parallel with the large corporate borrowing boom.

In 2007, banks held $ 721 billion in small loans to businesses and small commercial mortgages of $ 1 million or less, according to an analysis of bank regulator filings by Professor Rebel A. Cole of Florida Atlantic University. Did. By 2019, such loan balances had declined by about 6% to $ 680 billion. Meanwhile, larger business and commercial mortgages more than doubled to $ 2.82 trillion.

There are several reasons for credit chasm. Thousands of community banks have disappeared in the last decade, removing major sources of funding for many local businesses. Even small loans are much less profitable. Bankers say it costs about the same to process a $ 100,000 loan application as it does to process a $ 100,000 loan application.

Loan officers’ federal reserve survey shows that lenders have receded further during the pandemic, tightening SME underwriting standards this summer to an unprecedented level since the last financial crisis.

At JP Morgan Chase and Company, America’s largest bank in terms of wealth, non-PPP loans to SMEs fell to $ 965 million in the third quarter, the lowest level since 2010. Companies in recent years are also shrinking. PayPal Holdings Co., Ltd.

And square Co., Ltd.

We have suspended new credit offers in the spring and have not returned to pre-pandemic lending levels. Kabbage Inc. has not yet made a new loan since it was sold to American Express. Co., Ltd.

Earlier this year.

Scottwood and his son at the courtyard brewery were unable to proceed with planning for a new location.

Lenders have even reduced loans made under the Small and Medium Business Administration’s traditional lending program, where the government bears most of the default risk.

Credit cannot save an infeasible business. But without it, companies that survive the pandemic may lack the funds to rehire dismissed workers, hindering the recovery of the labor market and hindering economic recovery. According to a study by Federal Reserve economist Michael Seamer, a lack of credit after the last recession caused small businesses to grow employment by 10.5 compared to large companies that had more borrowing options. I was forced to reduce the percentage points as well.

Bill Phelan, general manager of PayNet, a division of Equifax, said: Co., Ltd.

Track commercial loans. “Probably alleviated by PPP, but it won’t last forever.”

It took weeks this spring for the Courtyard Brewery in New Orleans to secure approximately $ 34,000 in PPP funding from bank JP Morgan. Large customers are more likely to be approved than smaller customers because of the way banks processed the application early.

Still, it was Scott Wood’s most money-owner of money he managed to get from JP Morgan for years. Banks have repeatedly rejected brewery requests to raise credit card limits for small businesses. And when Mr Wood approached the bank last year to fund the expansion, he didn’t go anywhere.

Wood planned a new location in the Midcity area of ​​Big Easy with a tap room and restaurant. He lined up investors and real estate developers to cover about one-third of the cost of about $ 2 million and asked JP Morgan to lend the rest.

JPMorgan led him to apply for an SBA loan because his personal credit score and Courtyard income were more than enough to qualify. After months of negotiations, JP Morgan asked Mr. Wood or one of his investors to personally guarantee the entire $ 2 million project, not just the amount of funding. Mr Wood decided not to move forward.

“The bottom line is that you’re not playing unless you’re in a stacked game,” Wood said.

A spokeswoman for JP Morgan declined to comment.

According to the latest data available from the Census Bureau, SMEs employed about 61 million people in 2017, or about 47% of the private sector workforce. Despite being important to the economy, they have long struggled to raise money.

According to a April survey of 12 Federal Reserve banks, only 35% of SMEs with at least one employee and annual revenues of $ 100,000 to $ 1 million have received bank funding in the last five years. Was there. For companies with annual sales of $ 100,000 or less, this figure dropped to 24%.

SMEs have historically turned to small banks because of their funding needs. According to the Federal Deposit Insurance Corporation’s latest small bank, banks with less than $ 10 billion in assets account for only 17% of the total assets of the banking industry, but as of the end of 2017 53 small loans to businesses. Had close to%. -Business loan survey.

However, the integration of the banking industry has made far less options for companies seeking small loans. Between the end of 2007 and September 2020, the number of banks guaranteed by the FDIC decreased by 41% to 5,033.

The courtyard brewery has attracted customers in Saints football games during the pandemic.

SMEs are inconvenient for large banks’ bureaucracy, unified underwriting systems, and centralized credit committees because of their sparse financial records and their tendency to fluctuate their growth trajectory.

“The small loans needed by small businesses on the main street are not economically feasible and are not central to large banks,” said Tammy Halevy, senior adviser to Public Private Strategies.

Banking industry groups also quoted economists’ findings that banks subject to the Fed’s annual stress test significantly reduce the credit of certain SMEs over banks not. Pointing out changes in requirements.

When policymakers and central banks worked to contain the economic impact of the pandemic, they focused on strengthening the credit markets that serve large corporations. The Federal Reserve Board has promised up to $ 750 billion to buy corporate bonds and syndicated loans, and billions more to support the market for commercial paper, a type of short-term corporate IOU.

These measures were generally successful. According to LCD, a unit of S & P Global Market Intelligence, junk-rated companies issued over $ 430 billion in speculative-grade bonds between the beginning of the year and mid-December.Companies whose business has been disrupted by travel restrictions and curfew, such as Carnival, a cruise line operator Co., Ltd.

, Was able to sell bonds to investors after the Fed intervened to clear the market blockage.

The Fed’s tools have not been very effective in ensuring credit flow to SMEs.

Few SMEs met the criteria for borrowing under the Main Street Lending Program. This is a $ 600 billion effort by the Treasury and the Fed to encourage lending to medium-sized businesses. Individual federal agencies targeting the securitization of PPP loans and SME loans have released some of the bank and investor balance sheets, but eventually more new credits will be given to SMEs. It was never expanded.

Federal Reserve Board Chair Jerome Powell told Congress in September that the central bank’s approach to focusing on bond market interventions has enabled it to act faster in the most effective places. “Evidence suggests that most credible SMEs can now get loans from private financial institutions,” he said.

Due to the integration of the banking industry, SMEs like Courtyard Brewery have far fewer options.

However, in the current environment, lenders are more difficult to assess the creditworthiness of SMEs when traditional indicators such as previous year’s tax returns and owners’ credit scores are less predictable. I will.

SME Credit Card and Commercial Loan Balances at Bank of America Co., Ltd.

Excluding PPP loans, the end of September was about 8% lower than the end of 2019, despite low default rates, according to securities filing. Brian Moinihan, CEO, said at a meeting earlier this month that banks’ SBA lending, excluding PPP and other disaster loans, was 30% lower than this time last year.

“We had to tighten in the midst of the crisis,” he said.

Wells Fargo & Co. Halved its credit line to Rishi Khaanna’s software outsourcing company during the last financial crisis. ISHIR Inc.’s borrowing limits are currently barely rising, despite his annual earnings well above his approximately $ 29,000 credit line.

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With a $ 45,000 PPP loan, the company was successful during the early months of the pandemic. When the business recovered in the fall, Kanna re-approached Wells about increasing credit lines. The new client wanted to take 90 days to pay the ISHIR invoice. He needed a loan to fill the gap and potentially hire more workers.

Wells, like JP Morgan, who also had a credit line on ISHIR, rejected his request. Kanna turned to the Texas Community Bank, which helped ISHIR secure PPP loans. He said the bank was told that it was too busy processing the PPP forgiveness application to accept the new credit request.

Wells Fargo offers “all direct financing that can be responsibly supported to support a customer’s credit needs,” a spokesman said in an email. JP Morgan declined to comment.

The bank’s treatment of ISHIR “did not bother me until the pandemic occurred,” Kanna said. “Now I need help. Where are you?”

Scott Wood, owner of the Courtyard Brewery.

Write to Peter Rudegeair at Peter.Rudegeair@wsj.com

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SMEs hit by a pandemic are hungry for credit

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