While the U.S. economy has started to reopen, it is clear that many businesses will not return to pre-pandemic revenue levels for quite a while, if ever. Consumer behavior reflects a great deal of anxiety about the health risks associated with the coronavirus, and folks are going to be reluctant to attend sporting events, fly in airplanes, stay in hotels, dine in restaurants, go to the gym and visit shops until they feel safer. The survival of many businesses will depend on the cash reserves built up prior to the pandemic and the speed that an effective vaccine is developed and widely distributed.
There are a few bright spots in the economy, though, as demand has soared for home-improvement items, recreational vehicles, pool supplies, cleaning supplies and groceries, among others. As always, when there is massive change in consumer behavior, there will also be great opportunities for entrepreneurs with vision, access to capital and the skill to implement successfully.
Having started my banking career in 1980, this economic downturn will mark the sixth recession I’ve experienced. When the economy turns down, we are always faced with questions about the depth and length of the recession. What makes the current downturn particularly unique and difficult to forecast is that the trigger is a public health crisis. As a consequence, we have a double dose of uncertainty: How long will we go without a vaccine? It is impossible to project the outlook for the economy with confidence without having an answer to this question.
On March 27, the Coronavirus Aid, Relief, and Economic Security Act was passed into law with $349 billion (later expanded to $659 billion) in funding made available on very favorable terms for small and midsized businesses via the Paycheck Protection Program. On short notice, the banking industry was asked to process a huge volume of loan applications under stressful circumstances.
Most of the banks and their bankers stepped up to meet this challenge. I’m very proud of the industry’s performance, as nearly five million borrowers have already received $517 billion in PPP loans — money intended to provide a financial bridge until the economy recovers. Still, this financial bridge will not be long enough for some businesses as the impact on the economy of COVID-19 is going to last longer than our policymakers had originally hoped.
Banks have a symbiotic relationship with the economies in which they operate: A healthy economy typically leads to healthy banks, while a poor economy will stress the financial system. While the most important elements for an economic recovery will come from the health care system (i.e., a COVID-19 vaccine), the strong banking industry in Sacramento will play a vital role in the following ways.
More Funds Are Available
Banks are in the business of providing capital to support the operations of focused, entrepreneurial, competitive and successful business owners. With interest rates at historic lows, the cost of borrowing is attractive compared to the cost of raising equity capital. The PPP understandably garnered most of the attention in the CARES Act, as it has provided a tremendous stimulus to the economy, but the less well-known federal Main Street Lending Program could play an important role in the near future.
The MSLP is designed for midsized businesses that were doing well before COVID-19 negatively affected their operations and now need working capital to sustain operations. While not as generous as the PPP, the terms of the MSLP are still quite attractive. For instance, the MSLP loans have a five-year term with the majority of the loan amount not scheduled to be repaid until the maturity date.
Depository and Cash Management Services Are Even More Important
It is important that bank depositors take advantage of the many tools banks provide to protect their money, as cyberfraud has been expanding rapidly during the pandemic. Banks provide Federal Deposit Insurance Corp. insurance — potentially in unlimited amounts via the Promontory Network — to ensure funds in deposit accounts against bank failure. In addition, banks have many tools their customers can use to mitigate the risk of having funds in deposit accounts stolen.
Relationships in business matter, and during times of stress and uncertainty, they matter even more. Now is the time for business owners to draw upon the trust and goodwill that they have built up with their bankers over time. Bankers should be communicating regularly with their clients (with proper social distancing), developing a clear understanding of what is happening with their businesses and seeking ways to help.
Steve Fleming is president and CEO of River City Bank, the largest and oldest bank based in Sacramento. He’s been in the position since 2008 and has worked in the banking industry since 1980. He’s also a member of Comstock’s Editorial Advisory Board.
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