On June 16, Brex announced that it plans to leave the small and medium-sized business (SMB) market and will close current clients’ accounts by August 15, 2022. Brex is a fintech vendor based out of San Francisco that focuses on cash management and business credit cards. The company, valued at over US$12 billion, advertises easy-to-access capital and financial services for fast-scaling companies.
The pivot away from SMB clients to large enterprise customers is likely to impact tens of thousands of small business startups, and it is speculated to be the result of low earning margins from SMB customers. The move may be an outcome of the NASDAQ’s downturn, a tightening of venture capital, and warnings of an oncoming recession.
Brex’s rapid entry and dramatic withdrawal from the SMB market is yet another example of the SMB credit market’s particularities over the past several years—or even since the 2008 recession. Trepidation, occasional turbulence, as well as considerable opportunity and growth characterize the SMB lending and credit markets. While Brex may not find short-term gains in continuing its relationship with small and medium-sized businesses, recent Aite-Novarica research demonstrates that financial institutions (FIs) are relatively aligned in seeking growth in the current SMB credit market.
Just as the trepidatious approach to SMB limited recovery from the 2008 recession and ensuring liquidity for SMBs was central to maintaining economic stability during the COVID-19 pandemic, the future of SMB lending could become even more critical as warnings of an oncoming recession grow more frequent. Now more than ever FIs should understand and prepare an SMB lending strategy for economic disruptions in the near and medium term.
SMB Lending and the Last Recession
The landscape of SMBs and SMB credit markets was significantly altered due to the 2008 recession. A January 2020 report from the Consumer Financial Protection Bureau’s Office of Research (CFPB) outlines two major changes that were the result of 2008: First was a significant reduction in the number of small businesses, and second was a decrease in the number of smaller community banks that often served the SMB credit market.
Lending to small businesses declined so significantly during the recession that, as of 2017, small business lending still had not returned to pre-2008 levels, though with some variation based on locality and geographic region, as the CFPB report indicates.
Hampering economic recovery efforts after 2008 was a lack of new small businesses compounded by insufficient access to SMB loans. It was the COVID-19 pandemic that ultimately reversed trepidation toward the SMB credit market, though not without considerable turbulence.
COVID-19 and SMB Credit Markets
Like so many other things, COVID-19 severely transformed the economy for SMBs. Between lockdowns, transitions to remote work, making safe environments for workers and customers, and general economic uncertainty, among many other challenges, SMBs were forced to adapt to an entirely new business landscape.
While assistance was available through various government programs to help survive the initial crisis, such as the Paycheck Protection Program (PPP), COVID-19 continues to economically reverberate across SMBs through labor shortages, supply chain issues, inflation, and now a potential recession. PPP and other programs helped confront immediate liquidity shortages, but ultimately it was FIs that became critical partners to SMBs during the height of COVID-19.
These partnerships helped limit closures and unemployment, and they maintained a relatively well-functioning economy during a global pandemic. While the pandemic already had extremely negative outcomes, they could have been compounded by economic disaster. As Aite-Novarica Strategic Advisor David O’Connell notes, it was PPP and the aggressive focus of FIs toward SMB lending during COVID-19, with all the turbulence those processes entailed, that permanently reversed over a decade of FIs’ ambivalence toward SMB lending.
Current State of the SMB Credit Market
In O’Connell’s May 2022 report, The Go-Go State of the SMB Credit Market: Everyone’s Building a Bigger Boat, he provides an in-depth and up-to-date overview of the current state of the SMB lending world. Based on extensive interviews with bankers at FIs engaged in SMB lending, he finds that no FIs were considering reducing their position in SMB loans—instead, most sought to increase involvement in the market, with over half intending major growth. Automation of loans, which increased tremendously during the COVID-19 pandemic, is still a pain point in increasing loan volumes.
Most FIs expect greater automation in coming years, suggesting an updated and digitized infrastructure capable of handling greater volumes of SMB loans. However, these trends are not inevitable, and at the granular level, growth will be apparent in certain geographies and loan types while stagnation or reduction might characterize other parts of the SMB credit market. At a macro level, these trends could also reverse due to economic instability from another recession.
The Next Recession?
Another recession is not inevitable, and if there is a recession, its exact contours and impact on the SMB market will not be easy to predict. However, if the 2008 recession and the disruptions caused by COVID-19 offer any lessons for this market subsegment, it’s that a robust SMB lending program from FIs that ensures liquidity for SMBs to adapt to transforming economic conditions is essential to lessen and eventually reverse any impacts from a new recession.
FIs missed considerable opportunity to provide loans to SMBs during the economic recovery after 2008 until COVID-19 brought SMB lending to the forefront. Once FIs renewed SMB lending volumes, the banks, SMB owners and employees, and the general economy benefited. A severe tightening of SMB liquidity could worsen and prolong a future recession and could form another missed opportunity for FIs.
Instead of retreating, FIs should reevaluate at a granular level which subsections of the SMB market make the most sense for their lending programs, continue automation efforts, and pursue other modifications to their overall lending strategies. These actions would be especially helpful if another recession were to occur.
To learn more about the current SMB lending market and how financial institutions can align lending strategies for a possible economic recession, please reach out to us at [email protected] or [email protected].