Soon, we will be back to “normal,” or at least something that resembles it. Promising vaccines are on the horizon. In some states, businesses are reopening. Holiday shopping is even underway.
At the same time, millions of US-based businesses are preparing for 2021 and what it may bring. Through the sharp second quarter decline, many industry sectors saw gross revenues drop by more than 40%. The same was true for consumer spending, which represents more than 65% of US GDP. Here is where US businesses stand, on average, as we enter winter.
Now we find ourselves, after a sharp third quarter recovery, in a more challenging growth environment, where we may experience one step back for every two steps forward. There continues to be uncertainty due to the spread of the virus and its impacts on local business conditions. The key question when it comes to businesses growth or “regrowth” is: Where will owners find the short-term working capital to fund their new sales?
Here’s a glimpse into the pre-pandemic mindsets of small business owners.
Many businesses and major corporations borrowed heavily on their credit lines, pre-shutdown, to ensure adequate cash reserves moving into March 2020. This can be seen in the graphic below, which shows roughly $228 billion in new commercial loan growth during that month. Much of that cash was depleted through the summer and fall.
Commercial & Industrial Loan Balances in the US
Of course, CARES Act initiatives began in April, including the Paycheck Protection Program (PPP). We then saw commercial loan balances increase by more than $370 billion. But PPP funds were only designed to fill a short-term payroll gap of eight to ten weeks.
In order to manage future growth, businesses will once again need access to short-term working capital, either through private investment or commercial finance. To accommodate the fluctuating nature of the financing need, all forms of working capital financing are expected to take center stage in 2021.
As these businesses start their engines for the race to come, they will need fuel. At the same time, financial institutions will likely be receiving 2020 financials that reflect the severe stress many of these businesses were under throughout much of this year.
This leads us to the credit challenge of making loans available in a tight credit environment. Meeting that challenge will require good data and responsive financing systems to address volatile credit risk while striving to address client demand and help businesses in our local communities.
As businesses’ sales increase, so will the accounts receivable on their balance sheets. This is where they will have the opportunity to unlock the cash tied up in those accounts. Financial institutions that offer monitored borrowing base lines of credit hold a distinct market advantage by affording the opportunity to help businesses unlock those frozen assets.
As an eternal optimist, I choose to believe that 2021 will be an exciting time when we will all witness the re-emergence of our economy to levels that will eventually reach higher than they were pre-pandemic.
Financial institutions will play a significant role in the recovery and accounts receivable financing will be a major way in which they do it.
Community financial institutions hold a mandate to serve local economies, and I believe that obligation is felt deeply by every successful lending officer. Former IBM CEO Thomas Watson, Sr. once said, “To be successful, you have to have your heart in your business, and business in your heart.” That statement exemplifies the sentiments that will carry us beyond our current struggles and into the promise of renewed prosperity.
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