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Updated: Mar 18, 2020
By: Ryan Metcalf, Head of U.S. Regulatory Affairs & Social Impact, Funding Circle
The coronavirus outbreak has now been declared a global pandemic by the World Health Organization and in the United States, the impact is being felt most acutely by small to mid-size businesses. The latest report by McKinsey and Company and Oxford Economics shows that a pandemic-driven recession, where the virus is not seasonal and continues to spread throughout Q2 and Q3, would push recovery in consumer confidence to Q3 or beyond resulting in a recession with global growth in 2020 falling to between – 1.5 percent and 0.5 percent.
Small businesses will be impacted the hardest with the growth slowdown, especially those in the service industry such as restaurants, airlines, travel, entertainment, and tourism. A steep drop in consumer demand will have implications for many consumer companies (and their suppliers) that operate on thin working-capital margins. Without working capital to cover fixed costs of operating, our nation’s small businesses will start to close in large numbers resembling the financial crisis of 2008.
As part of the government’s response to the economic crisis, they must move quickly to get credit to small businesses as quickly and efficiently as possible. Time and distribution are crucial components in delivering much-needed capital to small businesses because they just can’t afford to wait. With that said, there are a number of things governments can do now to get capital to small businesses:
It is important that governments not rely solely on banks to extend credit to our nation’s small businesses because more than a decade after the financial crisis only .7% of US banks’ balance sheets consist of small business loans. As a result, small businesses are increasingly relying on financing from online lenders. In 2018, 32% of U.S. small businesses seeking finance turned to online providers, up from 19 percent two years prior. Online lenders approve more than 80% of applicants compared to small banks (70%) and large banks (<60%). The Federal Reserve Bank of Philadelphia recently published a report showing that “[online] lending activities have penetrated areas that could benefit from additional credit supply, especially highly concentrated banking markets and other areas that have fewer bank branches per capita (i.e., smaller number of bank branches to serve a larger number of local potential borrowers)…have a higher market share in areas where economic variables indicated a more challenging environment…and can fill credit gaps in areas where bank offices may be less available and the local economy may be more challenging.”
Funding Circle is the world’s largest online small business lender and we are able to approve and fund loans up to $500k in as little as three business days compared to banks which can take more than a month. Funding Circle’s online distribution is able to reach small businesses in any community, especially underserved communities: approximately 64.47% of our loans and 63.86% total dollars loaned are to businesses in low-moderate income areas. We are also a state-by-state regulated online lender that lends in all 50 states.
If governments work together with fintech to update outdated laws and regulations that are restricting access to credit and invest in innovative platforms and loan loss programs, more small businesses throughout the country will be able to get the capital they need in time to save their businesses, keep their employees hired and save our economy.
Ryan Metcalf is the Head of U.S. Regulatory Affairs and Social Impact at Funding Circle. He experienced in engaging with local, state and federal governments and all three branches of government. Expert strategist and manager of successful lobbying campaigns with comprehensive knowledge of legislative, regulatory and political processes especially as it pertains to financial technology.