The pandemic has raised questions about where small businesses might seek credit.
Even during an existential crisis, small businesses will go to great lengths to avoid taking on debt. According to the latest Small Business Credit Survey (SBCS), fielded and published by 12 Federal Reserve Banks, the most common actions taken by small businesses in response to financial challenges from autumn 2020 to autumn 2021 were:
- Obtaining funds that do not have to be repaid: 71%
- Using personal funds: 61%
- Using cash reserves: 56%
- Obtaining funds that must be repaid: 52%
In any given year, of course, according to the SBCS, fewer than half of small businesses seek external financing. The last two years forced most small businesses to seek external assistance from financial institutions, particularly through the Paycheck Protection Program (PPP). For most borrowers, a PPP loan ended up being a grant. As of a few days ago, 89% of the total value of PPP loans had been forgiven.
As the survey results above show, small business owners sought forgivable PPP funds as well as grants from public and private sources. Then, before seeking credit, they used whatever they had in the bank, including their personal accounts. In the 2016 SBCS, 71% of small businesses said they carried outstanding debt. In 2021, 74% did.
We hear about small business resilience all the time—part of being resilient in a crisis means going to great lengths to sustain your business without endangering its long-term viability. Many small businesses have evidently been able to survive the pandemic without loading up on debt. (The situation is slightly different for many of those who received Economic Injury Disaster Loans.)
The experience during COVID-19, for small business borrowers and lenders alike, raises several questions about the future of small business financing. Some may have used an online lender or other alternative. Some might even have used a bank for the first time. Many turned to the Small Business Administration (SBA) for the first time.
Will Financing Gaps Close—or Widen?
It’s well known that the Covid-19 pandemic had a disproportionately negative impact on people of color. Prior to the Omicron surge over the winter, the SBCS data indicate that firms owned by people of color “were most likely to be in fair or poor financial condition.” Three-quarters (76%) of Black-owned businesses, for example, described themselves this way compared to 55% of White-owned businesses.
The pandemic’s uneven racial and ethnic impact came on top of racial gaps in small business and startup financing that have persisted for many years. Black and Hispanic business owners have historically been more likely to seek smaller amounts of credit. That type of financing gap only widens over time as businesses grow and mature.