Business Owner Challenges in the Disrupted Business Loan Market

COVID19 has affected the everyday life for all of us throughout the world. Some of the ones that have been hit the hardest is the SMEs, especially those whose business is dependent on a physical visit of customers. As SMEs saw the number of customers drop, so did their revenues and all of a sudden they had to fight for their survival. In Sweden, as for many other countries, this lead to a massive increase in demand of liquidity. When the need for cash increase, so did the number of loan applications being made on the Swedish market. We have spoken about the SME lending marketing with the online broker Kompar.

Kompar is business loan broker for startups and SMEs in Sweden, helping business owners to compare loans. This has given them a unique insight in how the market has developed since COVID19 started earlier this year. Throughout this period they have gathered data on how the demand for financing has increased. Also, they can see how the supply of financing has developed (e.g. the lenders risk appetite, their access to financing, and their portfolio development) and what governmental actions has been put in place and what effects these have had. Though most importantly, they have insights what concrete steps SMEs can do in order to improve on their financial situation during these unprecedented times.

Demand for business loans has increased

Not surprisingly, the demand for financing skyrocketed when COVID19 hit Sweden. As shops, restaurants, and other types of businesses had to shut down their inflow of revenue completely stopped whilst they were stuck with the fixed costs in terms of rent and employee costs. Though businesses with a physical point of sale was hit first, it soon started to affect other types of businesses as customers started to become more reluctant to buy products or services. For most SMEs in Sweden this resulted in a strong need for liquidity in order to cover the fixed costs until the storm had blown over. At Kompar they could see that the need for business loans increased massively and the volume of SME lending applications for loans quadrupled within days.

Supply of financing has been fluctuating

The business loan lenders reacted differently in the early stages of COVID19 in Sweden. Most of the lenders stopped their lending all together in order to assess what the effects were on their current portfolio of loans (i.e. the loans that they have given to SMEs previously). They did this in order to get an understand of what the damage would be to their business in case a lot of their current customers would go out of business. Other lenders (mainly the more expensive ones) seized the opportunity and pushed their lending more aggressively to get market shares.

From end of May the market has started to stabilize as the lenders have seen the effects from the governmental support programs that have been widely used by SMEs (mainly furloughs financed by the government). Today Kompar can see a pretty similar risk appetite on an overall level for lenders, i.e. on average they are giving out as many loans as previously. However, there are some changes to the type of businesses they are targeting for SME lending. Clearly, restaurants and tourism companies are still having a hard time finding financing.

Government programs has had an OK effect

The Swedish government put in place a government financed furlough program, allowing companies to cover roughly 50% of their employee costs without having to fire their staff. This has been widely used by most SMEs.

However, the funding program that was aimed at injecting the SME economy with funding through loans has not really worked. The funding was supposed to flow through the banks and had “attractive terms” in order to motivate the banks to jump on the program. Yet, the banks did not like the SME lending terms and only a few percentage of the total amount dedicated to the program has been lended to SMEs.

So what should I do as I business owner?

The key is to look over your cost structure. In particular, this means renegotiating your rent or ending your lease if necessary. Look over the amount of staff you currently have in your business and ask yourself if it really is appropriate given the current level of business you are doing. Sure, things might improve for the better, but right now we do not know when it will. Lastly, and it goes without saying, look over your unnecessary costs like subscriptions of services that you are not really using. Every dollar counts.

Second step is to see how can you improve on your sales. Are there new customers that can be won or can you increase your sales per customer by upselling them with additional services and products? When doing so it is absolutely key that you look at the margin for the additional services products you plan to add to your offering.

Lastly, if you are in need of financing, make sure to get the best SME lending deal. At tough times it is easy to make mistakes and go for the first option that is presented, as there are a hundred other things to be resolved. Getting the best deal for your company does not have to be complicated, as there are comparison services and brokers that help you in doing so. Target business loans with longer durations and the possibility to redeem the loan early. That allows you to sort out your short term cash flow issues and to refinance your loan when things have improved, so you can cut your financing costs.