The last 7 days have been quite unlike anything we’ve ever faced during our years in banking. We understood the why and the how of the Great Recession twelve years ago. The contagion then was banks and well, we are bankers. But the COVID-19 crisis is different. We are concerned when (or if) we leave our house. There is no orderly way to unwind a virus. Humanity has certainly come together in profound ways over the past 3 months.
COVID-19 Will Change the Business Climate. But How?
All lenders, especially CDFIs, need to respond to the immediate needs of their clients during difficult times. We have fielded calls from every client on a variety of topics that cover a wide-range of responses to the economic fall-out this crisis will have on every business in America. As we came up for air over the last 24 to 36 hours, the question of the future kept coming to mind. What will the new normal be? How will small businesses change how they operate in the next 12 to 18 months? While the answers to these questions are unknown, what can lenders do now to be ready to be engaged lenders in the new normal?
Small Steps, Big Impacts
First, make measured decisions on providing economic relief to the borrowers in your portfolio impacted by the COVID-19 crisis. Start with simple, small modifications to loans that preserve your Borrowers cash flow and capital on your balance sheet. Most of our clients are doing this via short-term payment moratoriums or interest only periods.
Second, don’t be complacent. Give instructions to every borrower as to what to expect at the end of the relief term. Connect every borrower with technical assistance. Have customers prepare reasonable projections for the next 12 months. They can begin to re-tool their business processes to adjust to a new business climate. Have customers provide regular status updates. Then worst-case scenarios can begin to be synthesized internally. This way more drastic measures can be processed before the relief period ends.
Third, be consistent and document the procedure and process used to provide relief to the customer. This is a critical piece that we believe will play a key role in the future success of small business lenders. Lenders, including CDFIs, have to provide clear and accurate data to investors, auditors and government agencies on what relief was provided to borrowers. Outside parties want to know what nascent losses are embedded in a portfolio waiting to emerge. Have a consistently applied policy and procedure in place now. Then, it will be easier to find potential problems in the future.
There will be painful economic impacts from this crisis. When the dust settles, what lenders do today will have a tremendous impact on their ability to operate in the future. Keeping these three ideas in mind, lenders can be ready to serve their communities when the new normal arrives.