Is recovery on the horizon for small businesses?

Small business recovery main image

The pandemic has put many small businesses through a gauntlet of challenges. Some have relied on their relationships with community banks to stay open, keep employees or maintain growth. While some sectors of the economy are still struggling, the vaccination rollout means many small businesses are planning for a swift recovery thanks to their ingenuity and perseverance—and help from community banks.

By Kelly Pike


After an exhausting year, small businesses are ready to retire the word “unprecedented” and replace it with a new phrase: cautious optimism.

While we’re not out of the woods yet, COVID-19 infection rates are trending down, while the vaccination rate is going up. A new round of Paycheck Protection Program (PPP) lending is providing the funds needed to help bridge the gap between now and a world that looks more like the one Americans lived in 2019. Recovery seems like a possibility.

Entrepreneurs may be dreamers, but they are also hustlers and problem solvers who have spent the past year finding ways to keep their businesses afloat. They have poured their personal funds into their businesses and worked with community banks to retain staff they consider family and save a business that’s also their passion. They’ve found new ways to deliver products and services. Now, many of them are depleted—with good reason.

In the Federal Reserve’s Small Business Credit Survey, published in February, 80% of small business respondents (up to 499 employees) reported having financial challenges since the pandemic began—compared with 66% in 2019. About three in four (78%) of these small businesses saw revenue decrease between October 2019 and October 2020. Nearly half (46%) let staff go.

There were also significant operational challenges brought on by reductions in demand (58%), government mandates (55%) and adapting to health and safety guidelines (52%), according to the Fed’s survey, which polled small businesses last October. About a quarter (26%) of small businesses had to close temporarily, 56% reduced their operations and 48% modified them. Yet, they found a way forward.


State of small business infographic

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Reinvention by necessity

If necessity is indeed the mother of invention, then the COVID-19 pandemic has been a master class in creativity and innovation for America’s small businesses.

“Small businesses have been improvising at a scale that bystanders and lenders could not have expected,” says David O’Connell, senior analyst at Aite Group, a financial services consultancy in Boston.

Most small businesses are started by very entrepreneurial, robust and rugged individuals.”
—Paul Merski, ICBA

Just as community banks rapidly embraced digitalization and remote technologies and implemented the PPP at an unheard-of pace, small businesses had little choice but to find new ways to deliver goods and services. O’Connell believes this adaptability and resiliency is the reason why the economy isn’t in even worse shape. “Some [business customers] have had to make drastic changes and concessions, and some have had slighter adaptations,” says Jim Gowen Jr., president and CEO of $329 million-asset Merchants and Planters Bank in Newport, Ark.

Many of Merchants and Planters Bank’s restaurant customers had to rethink their business models and offer delivery and takeout options. Some of the specialty retail shops embraced e-commerce, a major challenge for those without websites, the knowledge or man power to manage them, or the resources to outsource. Not every business made it—but most did.

“Most small businesses are started by very entrepreneurial, robust and rugged individuals,” says Paul Merski, ICBA’s group executive vice president, congressional relations and strategy.

He believes if small businesses can get through the next quarter or so, they’ll benefit from “a very positive rebound in small business profitability and viability.”

They’ll still need help, though. Nine out of 10 small employer businesses applied for emergency funding in 2020, including PPP funds, and 96% received funding, according to the Federal Reserve study. The second round of PPP funding approved by Congress in December may mean the difference between survival and dissolution for many small businesses. Nearly two-thirds (64%) of respondents to the Fed’s survey said they would apply for future government-provided emergency funding; 39% of those believed their business was unlikely to survive without it.

Small businesses owned by people of color have been particularly hard hit by the pandemic. Both Asian-owned (79%) and Black-owned (77%) businesses were 50% more likely than white-owned businesses (54%) to report being in poor or fair condition, the Fed found. Among Black-owned businesses, 30% said credit availability was the single most important challenge presented by the pandemic (versus 12% of white-owned businesses), while Asian-owned businesses were most concerned about demand for products and services (47% versus 36% of white-owned businesses).

Many businesses are still struggling, but there’s reason for optimism. According to February U.S. Census data, 28% of small businesses said they’ll need to make new hires in the next six months. And 31% plan on increasing marketing and sales, and 14.1% will make a capital expenditure.

While many small businesses (45.8%) said that it will take more than six months before their businesses return to a pre-pandemic level of operations, just 7.7% said they don’t expect to recover, and 2.1% said their business closed.


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How Bank of Idaho saved KV Inc.

KV building

When COVID-19 hit, KV Inc., in Idaho Falls, Idaho, was in the unusual position of having plenty of work but not enough man power or up-to-date equipment to meet demand.

An essential business that installs gas lines for regulated public utilities and homebuilders, the excavation company was still recovering from the 2008 downturn when the pandemic hit. Secretary-treasurer Vicky Elison, who has co-owned the business with her husband for 37 years, says they nearly lost it.

“We were devastated,” she says, adding that KV employs many of her children, grandchildren and great-grandchildren. “It was only because [the company had some] resources that we were able to keep the company going.”

Recovery from the recession came slowly, making it impossible to upgrade KV’s aging fleet of 12 to 14 backhoes. Money was tight, and Elison had a close call with payroll in the spring when a customer’s payment came in a few days later than she needed it. She nearly overdrew her account. That’s when a phone call with Jeff Newgard, president and CEO of Bank of Idaho in Idaho Falls, led to relief in the form of a $100,000 increase in her credit line. “He knew I was good for it,” Elison adds.

This time around, Elison worked with the community bank to secure Paycheck Protection Program (PPP) funds that made it possible to add and upgrade equipment and hire more employees. “[The PPP loan] has been a game changer for us,” she says. “In all these 37 years, I’ve never had money to do things like I’ve done this past year.”


A broad impact

Those losses have not been spread evenly. The leisure and hospitality industries have been hit the hardest, with revenues down 62% from January 2020, according to the Economic Tracker from Opportunity Insights, a nonpartisan, nonprofit research team based at Harvard University. Revenues are down 33.6% for education and health services, 32.3% for retail and transportation and 21.8% for professional and business services.

“It is really a function of what specific sector you’re in,” Merski says. “Entertainment services and anything with travel and leisure are impacted quite severely.”

Geography will also play a role in recovery, including the industries the area relies on whether states or local governments have mandates limiting business activity.

In Idaho Falls, Idaho, an influx of telecommuting homebuyers from California, Oregon and Washington has invigorated the economy, creating a boom in both real estate and construction lending, according to Jeff Newgard, president and CEO of $575 million-asset Bank of Idaho. “We joke around here that we see more California plates than Idaho plates,” he says.

Demand for building supplies is so great that some project bids are only good for one week. Even hotels and restaurants have done well, surprising Newgard, since vacationers were drawn to Yellowstone National Park and Idaho’s wide open spaces.

“We have a customer with cabins near Yellowstone [that they] initially designed and targeted to the Chinese tourism industry … but they just pivoted. They were able to do well on the domestic tourism coming in,” Newgard says.

Small businesses in Idaho have done particularly well. Nationally, small business revenue decreased by 33.1% between January 2020 and February 2021, according to Opportunity Insights, but Idaho businesses maintained revenue, increasing by 0.1%.

That’s translated into strong small business loan growth for Bank of Idaho. Small business lending grew 34% in 2019 and 24% in 2020—without counting PPP lending. Credit quality continues to improve, and the community bank’s pipeline for small business loans is strong. “We’re seeing good requests come in with really good credit quality,” Newgard says.

Merchants and Planters Bank is in a rural agricultural market where economic success depends on farmers doing well and boosting ag-related businesses. Farmers have had favorable yields the past few years, and commodity prices are looking good. Gowen says he’s hopeful for a prosperous year.

“Most economic predictions are for a rapid, substantial recovery if vaccinations increase and COVID-19 numbers decrease. I agree and am hopeful that this year will be much better, but that’s if—and only if—we get COVID under control.”
—Jim Gowen Jr., Merchants and Planters Bank


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The Red Tie Meat Shop: Ready to expand

Red Tie Meat Shop

A gourmet butcher shop in northeast Arkansas may not seem like the type of business to thrive during a pandemic. But the Red Tie Meat Shop, a customer of Newport, Ark.-based Merchants and Planters Bank, had a great 2020 and is on track for another strong year in 2021, says owner Jorge Salinas.

The shop, which also carries vegetables, bread, prepared dishes and other groceries, saw a huge uptick in business in April, May and June as customers—worried about potential food shortages—stocked up on food. While the average buyer comes in for a few steaks, Salinas said some customers were buying 40 or 50 pounds of meat after the first round of stimulus funds came through.

“It was just wild,” says Salinas, who worked with a variety of wholesalers to limit supply issues and price spikes. “I was blessed to stay healthy and do what I needed to do to make my business work.”

Salinas was well positioned to adapt to contactless ordering, since his shop already had a drive-thru window in an area where delivery wasn’t a practical option. The window had been installed with the shop’s many
retired customers in mind. Plus, many of the shop’s customers were in good financial positions when the pandemic hit and continued spending.

So far, Salinas says, 2021 is a much calmer year, but the Red Tie Meat Shop continues to grow and expand, and he is considering adding another location.

“People are wearing masks better than ever. They feel confident to be out and shopping,” he says. “I feel very positive about my company.”


A swift recovery is possible

While recovery will vary from industry to industry and region to region, there’s one thing everyone can agree on: When the pandemic ends, recovery will come swiftly. “The past year has been dismal for the millions that have lost labor income,” Gowen says. “However, most economic predictions are for a rapid, substantial recovery if vaccinations increase and COVID-19 numbers decrease. I agree and am hopeful that this year will be much better, but that’s if—and only if—we get COVID under control.”

After months of social distancing, Americans are eager to resume a more normal version of life, eating at restaurants with friends and attending plays and concerts.

“Everybody is sick of doing nothing,” O’Connell says. “After all the privations during the pandemic, as it ends, it’s going to make a lot of things bounce back rapidly.”

He even believes it’s possible that businesses like restaurants will be overrun with demand for tables and will have to improvise and innovate to keep up. But it will also be hard to predict where and when people will feel comfortable going out again, making alternative data like geodata from cell phone carriers and credit card transactions more valuable for lenders when making credit risk decisions. “The overriding macro solution is an end to the virus,” says Merski, who believes pent-up demand will feed the recovery and boost demand for small business loans.

“Community banking has really found itself with a mission. We really stepped up and continue to step up for small businesses, and it doesn’t stop there.”
—Jeff Newgard,Bank of Idaho

Demand at Merchants and Planters Bank is currently flat, but Gowen believes that once most of the PPP funds have been depleted and COVID-19 numbers decline, small business lending will pick back up. “I think adjustments to business models amid the pandemic sparked ideas for improvements or expansions, and businesses will need funds to execute these visions,” he adds.

Merski also thinks there will be a steady increase in traditional small business loans. “A lot of the loans were PPP loans or extending credit to support businesses through tough times,” he says. “In the second half of the year, I think we’ll see a growing number of new loans and small business startups.”

Beyond the pandemic, Merski says there are other potential challenges small businesses may end up facing, including two of the biggest line items at any small business: labor and taxes. Deficit spending to battle the pandemic could result in increases in business, corporation or capital gains taxes. That would increase the cost of doing business and harm the viability of small businesses, he says.

There’s been discussion of raising the national minimum wage. While at least 28 states have higher minimum wages than federal law requires, a nationwide increase would increase payroll expenses for many businesses.

Regardless of the circumstances, community banks will be there for them. “Community banking has really found itself with a mission,” Newgard says. “We really stepped up and continue to step up for small businesses, and it doesn’t stop there.”


Dr. Kelly McKinney: PPP was a ‘lifeboat’ for my business

Dentist with patient

After a year of operating at a dramatically reduced capacity, Dr. Kelly McKinney’s dental practice is finally recovering. In January and February, patient visits to the Newport, Ark.-based dentistry were on par with visits in the first two months of 2020, before the pandemic hit.

It comes as a huge relief to McKinney, who bought the practice in 2016 with a bank loan. The Arkansas health department has eased requirements, allowing the dentistry to use all of its patient rooms, which is a huge improvement from when McKinney was only allowed to perform emergency work. Patients who put off routine visits are returning as the rate of COVID-19 decreases and vaccination rates increase.

“We got hit pretty hard in November and December [2020],” McKinney says. “We’d call to confirm a patient and they’d be in quarantine. A few members on staff got it, and then we had to quarantine the office, because we didn’t want to endanger patients.”

A Paycheck Protection Program (PPP) loan from Newport-based Merchants and Planters Bank enabled McKinney to keep all of her eight employees, as well as the lights of her business on, even as she had to spend thousands of dollars on personal protective equipment.

“The PPP loan was a lifeboat for my small business,” says McKinney, who is working with the community bank on loan forgiveness and a second round of the PPP. “I never would have thought, when facing a global pandemic, that my local bank would be so important, but they are the ones that helped me stay open.”


How ICBA is advocating for pandemic relief

Everyone agrees that small businesses need help to survive the COVID-19 pandemic, but not everyone agrees on the best way to help them.

ICBA is working with Congress to ensure the community bank perspective is heard, making recommendations that were developed in consultation with community bankers from across the country representing rural, suburban and urban markets.

Steve Keen, ICBA’s vice president, congressional relations, says ICBA’s recommendations include new approaches, as well as fixes to existing provisions. These include:

  • Allowing borrowers who have received Paycheck Protection Program (PPP) first-draw loan forgiveness to be eligible to receive a first-draw loan increase
  • Creating a percentage-based de minimis test to define a level of spending on ineligible PPP expenses that would not disqualify a borrower for a second-draw loan
  • Permitting live-action venues eligible for Save Our Stages grants to apply for PPP loans while waiting to find out if they will receive a grant
  • Extending the PPP Lending Facility that was set to expire March 31
  • The Small Business Administration purchasing any remaining balance on a PPP loan at par from originating institutions after the forgiveness amount of the loan has been determined

ICBA is also pushing for tax proposals to support agricultural lending and preserve and extend net operating loss provisions of the Coronavirus Aid, Relief, Economic Security (CARES) Act and to promote forbearance for banks and their farm and ranch customers, among other provisions.

The American Rescue Plan Act, the $1.9 trillion stimulus package passed this past month, included key provisions like the expansion of PPP eligibility for nonprofits, an additional $15 billion for the Economic Injury Disaster Loan (EIDL) program, a $28.6 billion Restaurant Revitalization Fund (including $5 billion for the smallest businesses), nearly $10 billion in financial assistance for homeowners, and the extension of the Employee Retention Credit from June 1 to Dec. 31, 2021, among others.


Kelly Pike is a writer in Virginia.

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