Despite the fact that there appears to be substantial debt and investment money available, small business loan approval percentages from large banks dropped from 13.5% in September to 13.3% in October while small banks approved 18.4% of funding requests, down .1% from September.
These changes highlight the challenges of small business owners searching for capital during the pandemic. “Securing small business funding remains challenging at the moment.” states Rohit Arora, CEO of Biz2Credit.
Many business owners are refraining from applying for credit because they are unsure if their “forgivable” PPP loans are going to be forgiven. This is a time of great uncertainty for companies from sole proprietors to firms with millions in gross sales. Many companies are struggling to just hang on and are likely to go under if they don’t receive a financial lifeline to survive until the pandemic ends.
SMALL BIZ OWNERS ARE …
The US Bureau of Labor Statistics report of early November found that non-farm payroll employment rose by 638,000 in October dropping the unemployment rate to 6.9%.
Despite these figures, small business owners are still very worried. Many states are considering new restrictions due to the cresting wave of Covid 19 creating a state of limbo for all sized companies.
Despite the declining rates of loan approval in banking, two categories of lenders rose slightly: Institutional lenders approved 22.2 percent of loans in September with alternative lenders approved 23.3% of loans in the same month.
For these lenders, loan activity is starting to come back. Since banks have been more cautious, borrowers looked to other sources. Since institutional lenders and alternative lenders are seeking yields, they are willing to continue to provide funding in these uncertain times.
PRIVATE LENDING THRIVES IN …
Private money lending has always thrived during economic downturns. While the coronavirus pandemic and its widespread economic effects are historically unprecedented, tightening standards and restricted liquidity in the conventional lending space are not new. During cycles when conventional lending opportunities contract, private lending expands, as borrowers and investors alike look for new options.
It is important to note, however, that private debt is not fully immune to the damage caused by the severe economic impact of COVID-19. In the last couple of months, a number of private debt funds and capital providers either temporarily or permanently shuttered their operations due to a freeze of their capital sources, poor underwriting practices, and/or non-performing loans, resulting from a coronavirus-related forbearance or default.
For those that are fortunate to be actively lending today in the private debt environment, the landscape is riddled with market delays, stemming from rate renegotiations, expanded due diligence, short- term extensions on maturing debt, re-underwriting loans, and arbitraging greater spreads for investors. In addition, since private money – perhaps wrongfully so – tends to be the choice of last resort, there is the continual shopping for cheaper debt from traditional lenders.
Despite those unavoidable delays, most purchases and refinancing’s currently in the market require the execution speed that only private lending can deliver- agility that is proving quite beneficial.
For example, there are a significant number of cash-out transactions, as some borrowers seek to inoculate their operating businesses with cash infusions to get them through the current economic hurdle.
SHOPPING SPREE OPPORTUNITIES …
Some borrowers are looking at this time to expand their financial coffers in anticipation of ready-made, perhaps even unprecedented, shopping spree opportunities of distressed, but quality, real estate and other assets.
Other borrowers may be preparing for what they believe could be a slow reopening and reintegration process, or another wave of reinfection and more closures in the coming fall or winter seasons.
Private lenders are approaching the new market challenges in new and different ways. Some private lenders are pressing the pause button to focus on managing their existing portfolios and negotiating workouts on any non-performing loans.
TODAY’S NEW NORMAL INCLUDES …
Others are actively transacting, but they are implementing modifications to their existing guidelines. Today’s “new normal” in commercial loans and real estate lending may include all or a combination of the following:
• Price increases
• Reduced loan-to-value thresholds
• Removal of vulnerable property types, such as retail and hospitality from their pipelines
• Reduced or eliminated subordinate financing
• Requiring or increasing interest reserves
• Applying full recourse in instances where non-recourse was the normal
MOVING FORWARD …
Prudent private lenders aren’t standing by to see what happens.
They are adjusting their valuation methodologies and underwriting standards to ensure that there is ample equity coverage to account for the new economic, political and societal stresses on collateral.
With the inertia-busting agility of private capital along with the guidance of trusted advisors, investors and lenders can continue to move forward and thrive, even in the midst of a global pandemic.
Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.
