Small business lending programs address a need created by COVID as companies look to return to normal. According to an Amazon release, a new partnership with Community Development Financial Institutions (CDFI) will help serve “urban and rural small businesses in socially and economically distressed communities.”
While the lending model is not new, the targeting is notable. “Amazon Lending began offering loans to businesses selling in Amazon’s store in 2011, based on the knowledge that an infusion of capital at the right moment could put small business sellers on the path to success. Year to date, Amazon and third-party lending partners have lent more than $800 million to SMBs in the U.S. to support their growth.”
One issue for small businesses is cash flow, which often ends up with a small business bankruptcy, but the filing trend did not hold true during the COVID cycle, as CARES Act programs offered a safety net for many businesses. As the LA Times noted, some businesses just closed, rather than draining personal assets necessary to sustain changes in consumer purchasing.
- The National Restaurant Assn. estimated in December that more than 110,000 restaurants had closed either temporarily or permanently. Coresight Research reports there were 8,736 announced store closures last year and only 3,300 announced openings — with about 1,500 of the new stores in the dollar store category.
Relief programs worked for the moment, but the question is in the long-term impact.
- Economist Chris Thornberg, founder of Beacon Economics in L.A., thinks a key reason there has been no bankruptcy tsunami is simply that the extent of the economic damage has been overstated.
- Unlike the lead-up to the Great Recession, when the housing market collapsed amid unsustainable debt loads, he notes that personal debt loads were at historic lows early last year, even for low-income workers. He estimates that perhaps 7 million people have been absorbing the brunt of the economic pain during the pandemic, while the huge stimulus has thrown off so much cash that better-off Americans have paid down debts or dumped it into the stock and housing markets, which have taken off.
But the Washington Post suggests the bankruptcy wave is still coming.
- Nearly a year since coronavirus-related shutdowns began affecting large swaths of the American economy, more businesses are filing for bankruptcy as Chapter 11 filings were up nearly 20 percent in 2020 compared with the previous year, court records show.
- Data on a subset of businesses ― those registered as corporations ― shows that some sectors are faring much worse than others, with restaurants, retailers, entertainment companies, real estate firms and oil and gas ventures filing for protection in far greater numbers than in previous years, according to New Generation Research.
- Economists are predicting strong economic growth this year overall. But the bankruptcy data show that despite $3.7 trillion in federal stimulus spending to combat the recession triggered by the pandemic, and another $1.9 trillion being proposed by President Biden, businesses in certain industries have become particularly vulnerable and may take years to recover enough to pay their bills. Others will not recover at all.
Small business borrowing and cash flow are essential to keeping small businesses afloat. So is the indoctrination of eCommerce in a fledgling enterprise. The linking of Amazon and a community development firm will likely help some businesses flourish in a tight business market.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group