Small Business Access To Credit Improves, But Fed Cautions Full Recovery May Not Be Until 2022

The approval percentage for non-CARES Act Payroll Protection Program (PPP) small business loan applications at big banks ($10 billion+ in assets) rebounded to 11.5% in May from just 8.9% in April, according to the latest Biz2Credit Small Business Lending Index™.

This figure is still far below the record high rate for big banks set in February 2020, pre-coronavirus pandemic. PPP loan approvals are made by the government, rather than by the banks themselves.

The approval rate at small banks climbed to 16.9% in May from the disappointing 11.8% in April. Just a few months ago, in February 2020, small business loan approvals were a robust 50.3%.

Big banks, small banks, and all other categories of lenders saw their approval percentages rise in May, after a truly horrendous April. PPP funding threw a lifeline to small business owners, and much of the economy has begun to reopen.

Many economic factors have fluctuated greatly since 2020 began. The economy was at full employment for months until the pandemic hit, and then unemployment rose to Depression era-levels. However, unemployment figures dipped from 23 million in April to 21 million in May, a swift and somewhat unexpected rebound.

However, we cannot count on things being rosy anytime soon. On Wednesday, June 10, the Federal Reserve’s FOMC policy statement said that the “ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health have induced sharp declines in economic activity and a surge in job losses.

Weaker demand and significantly lower oil prices are holding down consumer price inflation. Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. — Federal Reserve’s FOMC policy statement

The central bank is playing a key role in trying to get the economy back on track. The FOMC decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

On Monday, June 8, the Fed expanded its Main Street Lending Program to allow more small and medium-sized businesses to be able to receive support by:

·        Lowering the minimum loan size for certain loans to $250,000 from $500,000;

·        Raising the maximum loan limit;

·        Adjusting the principal repayment schedule to begin after two years, rather than one; and

·        Extending the term of each loan from four to five years, thereby providing borrowers with greater flexibility in repaying the loans.

“Supporting small and mid-sized businesses so they are ready to reopen and rehire workers will help foster a broad-based economic recovery,” Federal Reserve Chair Jerome Powell said. “I am confident the changes we are making will improve the ability of the Main Street Lending Program to support employment during this difficult period.”

Powell said that small and medium-sized businesses are “a vital part of the economy and employ tens of millions of people, and, because their needs vary widely, the Board has extensively sought feedback and revised the Main Street program accordingly.”

The Fed chair cautioned on Wednesday that the economy may not fully recover from the coronavirus pandemic until 2022. Until that time, it is likely that interest rates will remain near zero until that time. The government will not be able to continue “forgivable” loans in perpetuity, of course, and small business owners always will need access to capital. Low rates are good news for borrowers.

Small business owners also received good news last Friday, when the SBA dropped the percentage of PPP funding that must go towards employee salaries from 75% to 60%.

Related: PPP Saved The Day For Many Businesses, Now It Has Been Extended

To date, the PPP lending program has provided more than 4.5 million small businesses well over $510 billion  in potentially forgivable loans, directly ensuring 50 million American workers keep their jobs, according to a new report by the SBA on PPP loan approvals. The average loan size is $113,228 and 5,458 lenders are participating in the program, a 200% increase in the amount of agency lenders.

According to a recent National Federation of Independent Businesses (NFIB) survey, PPP loans, which are administered by the SBA, have had a largely positive impact on small businesses. The survey found that more than three-quarters of eligible businesses have applied for a PPP loan, and 93% of those received one. The “vast majority of small business owners (67%) say the PPP loan has been “very helpful” in financially supporting their companies with another 14% calling the funding “moderately helpful.” Only 2% said that the PPP loan is not at all helpful, while 7% said that it is too early to tell.

The Treasury Department and SBA made some desperately needed adjustments, which helped small businesses apply for – and receive – cash to spend. The assistance seems to be working to help the economy.

According to the Jobs Report issued by the U.S. Bureau of Labor Statistics on Friday, June 5, non-farm employment rose by 2.5 million in May. Additionally, the unemployment rate declined to 13.3%. These improvements in the labor market reflected a limited resumption of economic activity that was curtailed in March and April due to the coronavirus pandemic. In May, employment rose sharply in leisure and hospitality, construction, education and health services, and retail trade. However, government employment continued to decline sharply.

Small businesses drive much of the economy’s growth and new job creation. The SBA, the Treasury Department and the Federal Reserve have done much to bolster small businesses during the COVID-19 pandemic. It is safe to say many companies would have already gone bankrupt without federal government assistance.