The Future of Small Business Loans in a Post-PPP World

In the early days of the pandemic, one of the first lines of defence for many Americans was their ability to use a credit card or get a bank loan. For small businesses, the pandemic exposed a major gap in the nation’s financial safety net. With small businesses making up some 47% of the nation’s workforce, prolonged lockdowns, unravelling supply chains, and widespread economic volatility posed a significant risk to the economic well-being of millions of Americans.

To help combat this risk and stem the tide of joblessness and financial insecurity, the government established the Paycheck Protection Program (PPP), a $910 billion plan to provide short-term loans to small businesses and sole proprietors.

However, with the PPP now at an end and the government signaling its intention to taper off its lending programs, small business owners are turning back to traditional business finance channels to fulfill their credit needs.

As a result, small business financing has ramped up across the U.S. as banks and other lending institutions seek to fill the void left by the PPP. The surge in small business lending has been particularly pronounced in business-friendly jurisdictions like Texas, which has seen more than 15% growth in lending volume relative to January 2021.

What is the PPP?

Established under the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the PPP allows sole proprietors, eligible nonprofit organizations, and small business entities to apply for low-interest loans to cover payroll costs, rent, utility payments, and other operations costs.

Eligibility requirements were modest, and the loans were provided on a first-come, first-served basis. Importantly, because the loans were supplied on an emergency basis, they were not designed to be a long-term solution to the nation’s financial woes. Instead, the goal of the PPP was to provide businesses with the short-term working capital they need to remain operational until normal financing channels resumed.

To incentivize employee retention, the U.S. Small Business Administration announced that PPP loan recipients would be eligible for partial or full loan forgiveness if they could demonstrate stable employment numbers and steady employee wages. To date, the government has forgiven close to $400 billion in PPP loans. While some outlets have criticized the PPP for its high loan forgiveness rate, the program appears to have been successful in mitigating business closures and the mass layoff of workers.

Small Business Loans in the Post-Covid World

The existence of the PPP illustrates the federal government’s commitment to ensuring the long-term viability of small businesses in the United States. However, as the pandemic hits its third year, it’s becoming increasingly apparent that small businesses cannot count on the government to act as a long-term source of emergency capital.

Since the arrival of the highly contagious Omicron variant, the U.S. has experienced a staggering spike in community transmission. With the government shuttering PPP and the pandemic transitioning to an endemic phase, small businesses will need to look towards more traditional financing sources to meet short-term operating expenses.

Unfortunately, small businesses have another factor working against them in the post-Covid world: inflation. With inflation jumping to 7% in December, small businesses now have to contend with surging costs in inventory goods and services. In the latest Small Business Index report, 45% of small businesses owners admitted to taking out a loan in 2021 in response to inflation-induced expense pressures.

On top of rising inflation fears, small businesses also need to prepare for the general uncertainties of the post-Covid world. Could a future, more severe variant trigger a renewed round of government shutdowns? How will social distancing measures affect customer traffic and consumption? How long will it take for supply chain disruptions to return to pre-pandemic levels?

With PPP financing at an end, the small business loan industry is still struggling to integrate all of these risks into its lending models. According to the Biz2Credit Small Business Lending Index, approval percentages for small business loans are still down 50% from two years ago, with 14.3% and 24.9% approval rates from big banks and institutional lenders.

This should come as no surprise given both the general state of uncertainty surrounding the U.S. economy and the fact that small businesses are still in the early stages of adapting to the post-Covid business environment. However, with the Federal Reserve gearing up to hike rates early in 2022, the allure of high-interest loans is expected to significantly boost approval rates in the small business lending industry.