Post-Pandemic Small Business Recovery & Financial Trends
The past two years have presented many challenges for small business recovery and lenders alike. Even though the pandemic took a significant toll on small firms and the economic impact on the future seems uncertain, there are still signs of optimism. Lenders have had to pivot in order to respond to the pandemic and support economic relief programs. However, they faired better than expected. In tandem with this shift, several new trends have emerged as it relates to small businesses. Read to learn more.
Small business ownership has grown significantly since the pandemic.
A critical factor driving recovery is the number of small businesses that have been formed since the pandemic. Between 2019 and 2021, almost two million new business applications were submitted, according to the U.S. Census Bureau. This growth data surpassed the startup data after the great recession.
In 2020, we saw a high increase in temporary closures for Black and Latino businesses, but since then, this trend has been reversed.
The highest rate of business closures among all small businesses occurred in April of 2020. The largest of which impacted Black-owned businesses, which declined by 41%. However, by April 2021, these same Black and Latino-owned businesses were able to recover at pre-pandemic levels. And most importantly, in September 2021, these numbers were significantly higher, exceeding pre-pandemic levels.
Product innovation will be key in meeting credit demand
Startups have proven to be the lifeblood of our economy. Investing in new product lines, technology, and process improvements can be costly and risky for a new small business and lenders. Therefore, there should be more creative ways to fund these resources, such as grants, in addition to solid balance sheets in years to come.
Loan performance was surprisingly strong from 2020 to 2021.
Mainly because of pandemic relief and aid programs, the lending industry remained stronger than anticipated. Commercial bank small businesses loan performance showed delinquency, and charge-off rates increased from April to June 2020 because of business closures. However, after June, the rates trended downward. Small business loans in construction, retail, accommodation, and transportation sectors had similar peaks in delinquency in 2020 and are experiencing different levels of recovery as 2022 progresses.
Banks are contracting their commercial and industrial lending volume.
Banks experienced a similar financial loss in the early stages of the pandemic, but in 2021, they began to see a significant increase in noninterest income. Despite their recovery, there is evidence that banks are contracting their commercial and industrial lending volume for the first time since the last recession. Some industry leaders speculate the C&I lending volume will continue to fall as banks will have difficulty underwriting business based on financials that were affected by the pandemic.
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