For many businesses, the past 20 months have been a never-ending nightmare. The first wave of COVID-19 was bad enough, as the average SME only had 27 days cash-on-hand. Without quick government intervention, many of these enterprises would have gone under.
And, to be honest, the rescue didn’t come in time for many small businesses. Some entrepreneurs had to liquidate property, retirement accounts, and other assets. Other owners, seeing the writing on the wall, closed their doors for good.
At the same time, though, other businesses started raking it in. For example, e-commerce firms were largely unaffected by pandemic restrictions. With big-box retailers shuttered in some areas, these sites were the sole source of goods for needy consumers. By exploiting this dynamic, these firms printed obscene amounts of money.
Meanwhile, Main Street continues to suffer. In this blog, we’ll document their bad credit financing struggles, how they are surviving, and how COVID-19 has changed how businesses get funding.
The Pandemic Has Changed How Businesses are Funded
Pandemics are the most insidious natural disaster out there. Unlike earthquakes, fires, or floods, virus outbreaks can last for months, even years. So, when COVID-19 began to shut down the entire US economy in March 2020, major US banks were quietly panicking.
At the time, Q1 2020 was drawing to an end. But because banks were anticipating bad loan write-offs, profits sank more than 40%. In future quarters, the unthinkable – net losses – were looming.
Against this backdrop, these institutions slammed their vaults shut. Private lenders were in the same situation, except they had even more exposure to the unfolding chaos. In this environment, borrowers with sterling credit ratings were the only ones who could get loans, and often, that was only with significant collateral. Everyone else was out of luck.
Facing the widespread collapse of the economy, the US government stepped in. Both Houses passed the CARES Act within weeks, which provided more than 300 billion USD for emergency SBA loans. With nowhere left to turn, SMEs in many industries applied for this lifeline.
After the first wave subsided, many businesses were able to reopen. But with retail traffic hampered by distancing restrictions and virus fears, lenders were slow to loosen their faucets. Their hunches were confirmed over the following months, as variants drove additional infection waves.
As this happened, local authorities re-imposed lockdown measures, sending many business owners back to square one. In addition, some banks and lenders, already wary of future fraud-related legal challenges, began to limit PPP loans to wealthier clients or preexisting customers.
Certain Industries are Now Toxic
Except for a few industries (e.g., e-commerce, cleaning products, tech, etc.), most economic sectors struggled in 2020. However, in niches reliant on overseas visitors, or where distancing was impossible, the challenges were especially dire.
Below, we’ll explain how COVID restrictions have essentially crippled several industries.
Travel
As COVID-19 became a pandemic, virtually everyone knew it would hurt the travel industry. However, as weeks became months, the pandemic wasn’t merely a disaster for this economic sector – it became a catastrophe.
For tourism operators, hoteliers, and airlines, many issues seemed insurmountable. The problems started with transport – on airplanes, trains, and buses, distancing is next-to-impossible. Even with mask-wearing enforcing, they still come off at meal times.
Then, there’s ventilation. Now, while airplanes use world-class HEPA filtration systems, the situation on other forms of transit is often far from optimal. Lastly, governments around the world, in an attempt to stop the spread, have closed borders. When leisure travelers cannot visit from abroad, it can be tough for tourism operators to make money.
Event Planning
To gather is one of the core aspects of being human. Sadly, viruses like COVID-19 thrive in close quarters. Even outdoor events like state fairs can attract hundreds of thousands of people in a single day.
So, once the virus was here, authorities canceled events of all kinds. And even after the first wave ended, distancing restrictions greatly reduced event sizes and increased expenses.
Hospitality
While politically divisive, mask-wearing has become one of the most effective ways to limit transmission. But, unfortunately, it simply isn’t possible to simultaneously cover your face AND eat/drink.
So, even after restaurants were allowed to reopen, they struggled to regain their footing. Capacity restrictions were bad enough, but many potential patrons – concerned about catching the virus – have stayed away.
How are Affected SMEs Surviving?
If you were an investor, would you sink your scarce capital into a restaurant, airline, or event planning business right now? Many wouldn’t touch these sectors with a thirty-foot-long pole – and can you blame them?
After every wave, we’ve held out hope that the worst was behind us, only to get blindsided by another surge of COVID. An increasing number of business owners have caught on – the rescue isn’t coming. If they want to pivot into the new normal, they’ll have to find another way.
As a result, these entrepreneurs have turned to alternative forms of finance. Crowdfunding is a common ploy, as it’s often easier to obtain funding from the general public than from a bunch of bankers. These owners can craft persuasive, emotionally-charged pitches on platforms like Kickstarter, IndieGoGo, and even GoFundMe. Because of this, more than a few have escaped from what would have been an impossible situation a decade ago.
Peer-to-peer lending is also growing in popularity as an alternative funding source. On these sites, non-traditional investors (i.e., everyday consumers) can directly fund businesses they like. However, these platforms will still assign a risk grade to applicants, which impacts the interest rate they’ll be charged.
This Pandemic Has Left its Mark on Small Business Owners
Unlike a year ago, things are looking up. COVID vaccinations are here, and more people around the world are getting jabbed every day. However, the future outlook is far from certain – after all, nobody predicted the Delta variant would throw a wrench in many reopening plans.
But despite this setback, business owners are looking ahead, albeit with a fearful eye, to 2022. Those who have survived, if they have been able, have socked away as much cash as possible.
The 2020s have thrown everything at them, and like those that survived the Great Depression, they won’t be caught unprepared again.
