Many small and medium-sized businesses have struggled to get through the pandemic. Statistics Canada reported that 58,000 active businesses shut down across the country in 2020. A Léger survey for Equifax in August 2021 indicated five per cent of businesses had closed for good, and 23 per cent did not expect their businesses to recover in 2022.
Even those continuing to operate have seen a deterioration in their balance sheets. Collectively, small and medium-sized businesses (SMBs) took out an additional $135 billion in loans in 2020.
Lenders that want to keep their businesses are going to have to get more hands on, recognizing that their clients’ balance sheets may have suffered over the past two years, and help them navigate the recovery.
“There’s a lot of credit education that has to happen with small businesses. We haven’t seen that so far from lenders or government,” says Jeff Brown, Head of Small and Medium Business Strategy and Innovation for Equifax Canada. “We’re really looking to these lenders to give solid advice.” Specifically, there are four actions they can take:
1. Make small-business clients aware of their credit score
Equifax’s survey indicated that only 59 per cent of SMB owners even know they can obtain a credit report for their business, while just 40 per cent know what their own business credit score is and 30 per cent know where to get it.
Lenders need to ensure their clients are not only aware of their credit score but also how it affects their access to credit and the interest rates they pay. Help them ensure their use of Canada Emergency Business Account (CEBA) and other government assistance improves — rather than worsens — their credit standing.
2. Give them ample notice of deadlines
SMB owners need a reminder that interest will be applied to their CEBA loans. Owners shouldn’t get reminders about their loans just one or two months prior to the deadline.
3. Identify products and programs they can take advantage of now
Lenders should give their clients a high-level overview of their financial status, then recommend the best available government programs and loans for their business.
4. Look beyond scores, grids and ratios
Many small businesses have yet to return to their pre-pandemic activity levels, yet this is when they need to increase their lines of credit most. Look beyond quantitative measures and find out how the business is regarded in its neighbourhood and among its employees.
For lenders, it’s about remembering the last of the five Cs of credit: character. (The other four are capital, cash flow, conditions and collateral.) The traditional credit metrics often fail to recognize intangible sources of value, even in prospering businesses.
At this, financial institutions may point out they have their own challenges, whether wrought by the pandemic or not, so why bother devoting all this time and effort to holding the hands of their SMB customers? Brown has a pointed answer: “If you don’t change your ways, there is a pool of alternative lenders that are going to come in and steal your customers if you aren’t providing that kind of support.”
You don’t want to be left behind when the SMB sector rebounds and resumes its long-term growth trajectory. Two-thirds (68 per cent) of respondents to Equifax’s August 2021 survey said they expect their small business to recover in 2022.
We want to help Canadians live their financial best. To learn more about how understanding our latest quarterly trends can help your clients run their small business and boost your business growth, please contact your Equifax Account Representative. You can also reach us directly at 1-855-233-9226 and follow us on Twitter and LinkedIn.
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