If you were to take the stock market as a measure of the economy, you could be mistaken for believing we’re experiencing productive and strong growth. The reality couldn’t be further from the truth. Many major economies dipped into a recession, including the United States, due to the havoc that COVID-19 and the respective lockdown measures caused.
Coffee outlets, clothing stores, and many other businesses were forced to close back in March. Whilst many have been able to re-open, they have done so with limited demand, limited capacity, and a financial headache. Given that COVID-19 is likely not going to be around forever (or at least, we will be better equipped to live with it), then we can assume our economic downturn is very much temporary.
This is good news because it means that businesses can turn to financing options to tie them over. Whilst credit is being suppressed; currently, there are some options available, and a comparison of small business loans can bring a sigh of relief as a small business owner.
The PPP Program is drying up.
The Paycheck Protection Program was a $669-billion strong scheme to help businesses, the self-employed, and sole proprietors continue to pay workers. Of course, this is in the US government’s best interest because they do not want to pay for welfare for the rising unemployed, and it’s good for the economy to continue producing.
The biggest issue is that the US debt-to-GDP is already over 100%, way over the recommended amount. The loan amounts were roughly 2.5x the average monthly payroll, thus being far from long-term. This scheme is already looking like it’s drying up, with potential future programs unlikely to be as helpful.
Last week, the Senate failed to pass through a $500 billion “skinny” bill, which was first stipulated in September. So, the White House has now proposed a $1.8 billion stimulus package, which will be put to the vote before the US elections occur.
The issue is, however, the bill isn’t all that likely to pass. If it does, then businesses may be relieved of financial woes for another few months, but if it isn’t, it’s difficult to forecast their next care package. Whilst the UK and Australia similarly helped small businesses, it’s unlikely they can continue to do so.
We only have to take a look at unemployment figures to see the actual damage and lack of help that businesses are given. In July, employment in the UK fell by 650,000 since the COVID-19 crisis began, whilst Australia lost 85,700 jobs in May alone. This, of course, further hurts businesses because disposable income falls among those that have lost their jobs, and thus demand also falls.
The upcoming financing wave.
With government support somewhat drying up and unemployment rising, there will be an imminent wave of businesses that will gain financing. Of course, there’s already a huge demand, but the second wave of coronavirus has only just begun. Cases are rapidly rising in most countries with what seems to be like a seasonal virus, and thus there are many more difficult months this winter than last winter, in which COVID-19 only took its hold from February onwards.
Whilst some sectors thrive under this lockdown structure, such as couriers and home entertainment, many do not. The most likely services that will require financing will be tourism and transport companies such as airlines and hotels, along with small retail stores, cinemas, cafes, and certain IT and management companies.
It’s not just the restrictions of customers coming into stores, but it’s that businesses are working from home. Entire operational structures are changing, with companies turning to outsourcing to remote working overseas to cut costs. Management consultant companies likely won’t be thriving under this model, and nor will office cleaning companies.
Lockdown measures also disproportionately harm small businesses too. Not only do large businesses have more cash reserves and ability to take credit, but they also tend to be favored in closing measures due to being able to provide necessary goods. For example, supermarkets cannot close, whereas independent cafes are seen as trivial.
Small companies often have less-than-perfect credit scores, so many will be turning to alternative lenders. For example, online lenders cater to those that don’t have a great credit score and cannot get a bank loan. Furthermore, they’re much, much faster with their funding too. It can be a matter of days, if not hours, before gaining approval and the funds.
To borrow or not to borrow?
Borrowing from high-interest lenders is a difficult decision. On the one hand, it’s the number one way to “waste” money in a business, possibly paying hundreds or thousands in interest every month. On the other hand, it could be the difference in surviving and weathering the storm.
The most important thing to accept is that prolonging an inevitable closure is pointless and causes more harm than good. Taking out a loan, knowing you cannot make the repayments is disingenuous and reckless. High-interest loans can absolutely be worthwhile so long as there’s a meaningful plan: how you will make repayments and why your situation will be sustainably improved — not just temporarily.
The most important thing to realize is that COVID-19 wasn’t a 2020 phenomenon. Many have the attitude that somehow next year will be different. Whilst many of us are confident that the economic downturn is only temporary, we’re unsure exactly how long this will last.
This means two things. First, you should not take on debt to assume that sales and economic recovery will presume in 6 months. This is very unlikely, albeit impossible to forecast. It’s better to be pessimistic about the situation than optimistic, given the severity of it.
Secondly, it also means that you should adapt to the times. In the scenario that our society is still living in partial lockdown for two years, this is simply too long to cling on to a failing business. It may be preferable to use the financing money proactively, as opposed to a bandage. This might mean making bold investments, diversifying revenue streams, and entering new markets. For example, in the UK, a traditional pub should certainly consider building a kitchen because, under Tier 3 rules, only pubs that act like a restaurant can remain operating.
It may seem absurd to take out a loan for expansionary developments in such turbulent times, but it’s also absurd to sit and wait for this to all blow over. The real difficulty lies within the detail and forecasting future cash flow to ensure repayments, staff, and overheads can be met.