Reading The Tea Leaves Of Post-Pandemic SMB Lending

During periods of volatility and uncertainty, it can be next to impossible to plan for the long-term future. That’s especially true for small and medium-sized businesses today, which, while hoping to plan for growth in the coming years, are more often looking toward resources that can help them survive in the next few weeks and months.

While initiatives like the PPP (Paycheck Protection Program) initiative have helped many SMBs access the capital they need to continue operating in the short term, business owners continue to struggle to strengthen their cash flows as restaurants are once again forced to shutter, and as social distancing requirements limit capacity within storefronts.

Their financial service providers are challenged, too, in looking into the future and forecasting the performance of small business clients seeking financing to carry them through the pandemic. According to Kris Puskar, senior vice president and business banking sales and innovation director at Eastern Bank, the current climate has forced both small businesses and their banks to shift their mindsets away from historical data and take a closer look at what’s happening today in order to best prepare for tomorrow.

A Hectic Experience

According to Puskar, small businesses face a tough challenging act when it comes to their financing needs.

“Because we’re in the midst of a pandemic, businesses are considering how much debt they want to take on right now,” he explained. “They’re balancing that with how to keep their business afloat, versus what they need for long-term growth in their business.”

When they seek a loan, SMBs must come to their own conclusions about how much they want to focus on the here and now, and how much they want to plan for the future. They’re also tasked with choosing the best route to obtaining working capital as the number of options grows. From traditional bank loans to alternative financing to other sources of capital like PPP loans, there are many options today, said Puskar.

The PPP initiative was instrumental in helping small businesses navigate market volatility in the near term. For financial institutions like Eastern Bank, however, it was a challenge to link as many SMBs to capital as possible.

Puskar described the early days of the PPP effort as “hectic.” The program had to be up and running very quickly, and the bank faced an overwhelming deluge of demand as lenders worked to dole out funds to as many businesses as possible before funds ran out.

“We did more loans in a two-month period than we did in 10 years of SBA lending combined,” he said. “We had to navigate our resources internally to focus on doing that many loans that quickly.”

Reading The Tea Leaves

The chaos of the PPP effort may have subsided for now, but small businesses continue to face uncertainty. According to Puskar, the current climate has forced lenders like Eastern Bank to shift their mindsets toward the present and future, rather than solely the past.

“Historically, traditional business lending is based on historical financial performance,” he said. “Right now, we’ve been taking a look at 2018 and 2019 tax returns. But because we’re in a pandemic, we’re also trying to assess how they’re doing in 2020, and what their plans might be to get back up and running to where they were previously.”

Looking ahead in a period of such uncertainty is a tall order, however. As Puskar noted, it involves a bit of “reading the tea leaves” – not only when it comes to assessing small business performance, but also when it comes to what’s ahead for the small business community as a whole.

It’s difficult to determine what small businesses’ appetite for financing might be in the months ahead, considering that so much depends on how quickly customer behavior returns to normal once a vaccine has been administered. Further, it’s unclear exactly what that “normal” may look like. But while small businesses are simply trying to get through the next few days and weeks, financial institutions like Eastern Bank are working to prepare for multiple potential scenarios.

That might include another stimulus package, in which case Puskar said Eastern Bank is ready for another period of potentially hectic SMB lending. It will also include the continuing practice of looking beyond historical data to assess SMBs’ future performance when decisioning and underwriting a loan.

Though small businesses are in a tricky spot, they should turn to their financial service partners for support and guidance, said Puskar. Regional banks are particularly well-positioned to offer more personalized aid to their SMB customers due to their understanding of local markets, particularly as these lenders begin to have more in-depth conversations with potential borrowers in order to understand performance and financial needs. This not only helps FIs with their own lending processes, but can also enable small businesses to begin to look into their own futures.

“For business customers, it’s really important that they establish a relationship with their banks and have dialogue around if and when it’s time for them to borrow money, and what they can do to get ready for those situations,” said Puskar. “They should start to prepare, and not wait until the time that they actually need money.”