The COVID-19 crisis that has been shaking the very foundations of the world is a major threat to the global economy. Stock markets are slowly recovering after the record-breaking crash that happened in March. However, this is a small consolation for the majority of small business owners who are on the brink of bankruptcy. In fact, the number of bankruptcies has already skyrocketed, and the situation will only get worse.
Globally businesses and entrepreneurs are struggling and they are deprived of the only thing that could help, which is financing. Lending has almost stopped and without grants and other support from the governments, millions of businesses will collapse.
How Bad Is the 2020 Economic Crisis, Really?
According to experts from the International Monetary Fund, this crisis is the worst since the Great Depression. And that economic downturn was so devastating, it destabilized political governments and entire societies. The result of that instability was the rise of extreme totalitarian regimes that eventually started World War 2. That’s how much of an impact a global economic crisis can have.
This current crisis might be the worst in history as it has yet to end. Therefore, right now, it’s impossible to evaluate the scope of the damage it deals to the world. But possible fallout is nothing short of nightmarish.
That said, the world of today is very different from the 1930s, during which the Great Depression peaked. Therefore, we have a better chance of averting the catastrophe and dealing better with this economic downturn.
One very important factor that must be noted is that some industries today are developing rapidly. The Great Lockdown fuels them because they are essential for working around its restrictions. Technology and healthcare are the industries that are booming despite the global economic recession.
The importance of healthcare in the global pandemic is obvious. Therefore, it’s only natural that this sector is getting the bulk of funding right now. The production of medicine, sanitation products, and various essentials is also on the rise. In fact, some of the manufacturers today are rapidly changing their product lines to account for the rising demand for some products. Also, to stay in business even if their main offering doesn’t generate sales right now.
The technology sector is another thing entirely. The Internet has changed the world and right now technology can enable many people to keep their jobs even in spite of restrictions.
But this will be enough to save the global economy from a collapse?
Can Small Business Survive the Coronavirus?
It might be called “small business”, but it’s the biggest player in the global economic market. International Federation of Accountants reports that SMEs make up 90% of all businesses in the world. Therefore, they basically are run the global economy. And it’s these businesses that are now struggling the hardest in this crisis.
According to Statista, even in Sweden, the number of SME bankruptcies has surged after February. And that’s the country renowned for how efficiently it managed to contain the pandemic and minimize its effect on business and social lives. If this is what’s happening in Sweden, what chance does the rest of the world have?
Realistically, the situation isn’t looking good. Lockdowns hit SMEs at an unprecedented scale. Considering that the majority of small businesses run “paycheck to paycheck”, losing regular income immediately put them deep into debt. This means that financing has become even more of a priority for small businesses.
Seeing the problem, governments of the world responded by doing their best to contain the COVID-19 crisis fallout. They started multiple financing and relief programs and started offering grants and other types of monetary aid to businesses and individuals alike. There is no doubt that this initiative saved and will continue to save many livelihoods.
However, money is a finite resource and these programs ran out of funding quite fast. Moreover, there are consequences for pulling billions out of reserve and the biggest of them is the growth of debt. These necessary steps caused a drop in equities adding to the turmoil of the global investment markets.
On top of that, experts currently warn about the dangers of ending these financial relief programs prematurely.
The Problem of Business Financing During and After the COVID-19 Crisis
As the situation stands, the pandemic is sure to last into the next year. Therefore, more lockdowns will occur. Even if the scale of it won’t be as big as the Great Lockdown of March, the impact on small business will be huge. Without the support of financing, millions of SMEs won’t make it.
But government funding is already running dry and other lenders have stopped giving out loans a while ago. Smallbusinessloansaustralia.com reports that in Australia private lenders are no longer initiating loans and what business funding remains is limited. Reuters.com says that in parts of the US, mass-closure of small businesses has already started as the aid and financing run out. And according to theguardian.com, less than 2% of small businesses in the UK that applied for loans under the Coronavirus Business Interruption Loan Scheme were successful.
That’s what’s happening in countries that had some of the biggest COVID-19 crisis relief budgets for SMEs. In smaller and developing countries the situation is much worse. Many governments have already run out of options to support small businesses and are desperately trying to restart their economies. However, the second wave of the pandemic has already started and those economies might be forced back into lockdowns again.
Even if some countries manage to avoid this, getting the economy back to the pre-pandemic level will take a while. It will take even longer to make up for the damage. And small businesses left without financing will fail. This means that there will be fewer companies working to get the economy back on its feet. So, the whole process will go even slower.
What About the Future of Small Business Lending?
Right now, lenders have the power to make a massive change in the course of the global economy. However, due to exceedingly high risks, lending always drops during economic recessions. This one is so big that lending has already almost stopped globally.
Will lenders be brave enough to restart? Will they go against their usual pattern and actually facilitate loan application processes?
Doing this will save millions of small businesses, which means helping the global economy as a whole. But historic precedent indicates that this is highly unlikely. For example, small business lending took years to recover after the economic recession of 2008. In fact, it was only in 2018 that startup and SME loans became easier to get.
Unfortunately, at the moment, it’s impossible to predict which route lenders will take. Their fear is definitely justified because risks are very high. Even with financing, there is no doubt that many SMEs will fail. This means that they will default on their loans putting the survival of lenders themselves at risk.
This is a vicious cycle and government aid might be the only thing capable of breaking it. However, the question is whether it will be enough. Unfortunately, only a few economies today are able to provide the support necessary to keep their SMEs in business.
Another important factor to consider is that the life-saving relief programs have never been run on this scale. And this pandemic showed that strategies behind them are highly inefficient. Whether due to corruption, poor management, or both a huge part of the funds didn’t reach SMEs it was supposed to finance. This only compounds the problem and reduces the chances of battling this global economic downturn successfully.
Post-Coronavirus World, What Will It Be Like?
Changed.
This is the best and possibly the only way to describe the post-COVID-19 world. This pandemic has put the global economy under a stress test of unmatched proportions. Many experts already state that we failed to stand up to this challenge.
The most important thing to focus on now is how exactly the world will change. But forecasting any outcomes of this crisis is extremely difficult because of the unique circumstances.
Some things are easy to see even now. For example, investors will have to develop new strategies to adapt to stock and FX markets volatility and eventual changes. As the volatility will persist a while, they will need to redesign their portfolios to maximize stable returns.
Usually, a downturn like this would be a good opportunity to buy quality stocks cheap and capitalize on crashing currencies. However, right now the future is too unpredictable. Even leading corporations that seem like a good investment might fail. Yet investing in promising startups isn’t an option because no financing means no startups.
The situation with SMEs is even more dire. There is no doubt that such enterprises will continue to exist in this changed world. Also, it’s highly likely that they will keep running the bulk of the global economy. However, it’s also clear that a huge number of SMEs will fail and go bankrupt. Therefore, the economy will be completely revamped.
What kind of shape it will take is still a mystery. Hopefully, this crisis will show both governments and businesses how to develop more resilient and efficient strategies. As this is the world we are living in now, we shall see exactly how it goes.
