Impact of COVID-19 on the Commercial and Industrial Loans
Introduction
This term paper will mainly focus on small businesses. According to U.S. Small Business
Administration (SBA), it defines small businesses by firm revenue (ranging from $1 million to
over $40 million) and by employment (from 100 to over 1,500 employees). Getting a
Commercial and Industrial Loan has a similar process to getting a personal loan. The most
important aspect of getting a commercial loan is to have a great Business Credit score which is
determined by the Business Credit Bureaus. The Business Credit Bureaus create a credit report
which can help lenders decide if the business is a good fit for a loan. However, COVID-19 had a
big impact on C&I loans as well as consumer loans. The Paycheck Protection Program (PPP)
was one of the most important contributors to C&I loans during the pandemic.
Business Credit Bureaus
Dun & Bradstreet, Experian Business, and Equifax Small Business are three major credit
bureaus for small businesses. Experian and Equifax are also very well known as consumer credit
reporting agencies. A credit bureau must get important information about the business in order to
create a credit report. The relationship with suppliers, creditors, and other companies is one of
them. Paying all the credit card debts, paying the suppliers on time, and having a good
connection with other companies help the credit bureaus to create a more accurate credit report.
The credit bureaus also look at liens and bankruptcies. If the company has a bankruptcy, it can
have a negative impact on the credit report. Creating a business credit report also includes state,
city, and county business registration and if the company is compliant with all the required
regulations for the businesses-specific industry. News/media stories have a great impact on the
credit report. Positive news about the business can help the business thrive and help build a
positive credit report. Including all the above information, credit bureaus also look at federal
government contracts, grants, and loans. Some credit bureaus do self-reported data such as
interviewing and investigating the company principles such as the CEO, President and in some
cases the stockholders.
Similar to personal credit scores, there can be many different business credit scores. The
three most popular business credit scores used by the lenders are the PAYDEX score used by
Dun & Bradstreet which ranges from 0-100, Intelliscore PlusSM used by Experian business
which also ranges from 0-100 and FICO LiquidCredit Small Business Scoring Service used by
FICO, which ranges from 0-300. As a business owner, having an excellent credit score will have
no impact on the business credit score. However, when a business is started initially, lenders
have no information about the business so as a last option, they look at the owner’s credit history
as well as their credit report. There are more additional aspects used by lenders while considering
commercial loans. The three other aspects lenders consider are the loan’s collateral, the
creditworthiness of the entity, the business plan and financial projections for the next three to five
years. Firstly, a loan’s collateral can be anywhere from assets to equipment the business buys.
For example, a trucking company is trying to buy a new truck. The lender will assess the price of
the truck and keep the new truck as collateral. However, if the business owners cannot payback
the commercial loan, they can rightfully take away the truck and sell it to any buyers willing to
pay. Secondly, when starting a business and applying for a commercial loan, lenders look at the
creditworthiness of the entity (or principals/owners), including three to five years of financial
statements and income tax returns. Having an excellent credit score as an individual during the
initial step of starting a business helps the lender assess risk management. Thirdly, lenders look
at the business and financial projections which helps the lender know that the business has a
plausible cause to get the commercial loan.
One of the most interesting undertakings of a business credit report is that they are not
private. For a consumer credit report, a business must have a “permissible purpose” under the
Fair Credit Reporting Act before the credit bureaus can grant access to a consumer's credit file.
However, a business has no such right. The credit bureaus can legally sell the business's credit
file to anyone willing to pay for it. This suggests that all business owners should be wary of
the fact that any company at any time can check the business credit without the business owner’s
permission. This lack of privacy is also a reason for a business owner to keep a healthy business
report.
Consumer loans and Commercial Loans
With the increase in cases of COVID-19, more restrictions were put in place during the spring of
2020. Due to this, business owners had to take out new loans to sustain the business, resulting in
C&I loans spiked to 29% in May 2020. PPP has had a big impact on this as well.
As shown in Figure 1, there is a big spike in commercial and industrial loans during the
peak of the pandemic. This was mainly caused by the increasing amount of Paycheck Protection
Plan (PPP) granted by the government with the help of banks. There was also a decline in
consumer loans during the pandemic. In May 2020, consumer loans dropped for the first time
since December 2011. There was a 1% fall in consumer loans and a decline of 6% in credit card
lending. This huge drop in consumer lending signified changes in consumer spending behaviour
induced by the pandemic. As households became less confident about the future due to the
economy in 2020, consumers began to save more and borrow less. However, during the financial
crisis from 2007 to 2009, consumer lending increased as income declined. There was also a 15%
increase in deposits and a 34% increase in personal savings in April 2020. This was due to the first
round of federal aid checks as well as the uncertainty for the future. This widely varies from the
Global Financial Crisis that happened in 2008. During this period the deposits and savings went down because of such low trust consumers had in banks. This consumer behaviour shows that
depending on the crisis consumer behave differently with their money.
The spike in commercial and industrial loans was because of Paycheck Protection
Program (PPP). PPP was established by the CARES Act and implemented by Small Business
Administration with support from the Department of the Treasury. This program provides
businesses with funds for up to 8 weeks of payroll costs. PPP can be used to pay interest on mortgages,
rent, and utilities. The maximum amount of money that can be borrowed is 2.5 times the average
monthly payroll costs and up to a maximum of $10 million. PPP loans have an interest rate of
1% to attract more business loans.
As shown in Figure 2, when the PPP was introduced, there was a huge spike in commercial loans.
This helped business owner protect their employees by paying them while not having a decent
revenue due to the pandemic. The PPP also encouraged people to stay employed and decreased
unemployment.
The Paycheck Protection Program Flexibility Act (PPPFA) was enacted on June 5, 2020.
This act would help business owners reduce their loans and in some cases 100% forgiven. In
order to qualify for this act, there were certain criteria that needs to be met. Firstly,
businesses must use at least 60% of the total loan amount for paying all the employees and the
rest 40% can be used for non-payroll costs such as mortgage interest, rent and utilities. Secondly,
the full-time employee headcount cannot decline. This will also help the decline in
unemployment during the pandemic. Lastly, employers cannot cut salaries or wages. This would
be unfair to workers who are willing to work during the pandemic. The government can help
stimulate the economy and increase employment using the PPP and the PPPFA. This caused
the C&I loans to go up but helped small business owners stay in business during the hard times
of the pandemic.
Outlook for the Future
With the pandemic coming to a steady slowdown, the commercial and industrial loan has
gone down. As shown in Figure 1, once the PPP came to a stop, the C&I loan came back down
exponentially. This is mainly to decrease the inflation caused by the PPP and the PPPFA on the
commercial loan side. However, banks reported anticipating stronger demand for consumer
loans. Overall, the banks were in good financial positions with capital and liquidity which helped
the business owners to get the required loan to get through the pandemic.
Reference:
“Bank Lending in the Time of Covid.” Federal Reserve Bank of Richmond,
https://www.richmondfed.org/publications/research/economic_brief/2021/eb_21-05.
Black, Michelle, et al. “Who Are the Business Credit Bureaus?” Nav, 28 Jan. 2021,
https://www.nav.com/resource/business-credit-bureaus.
“Commercial Loans Rise Sharply during COVID-19: St. Louis Fed.” Saint Louis Fed Eagle,
Federal Reserve Bank of St. Louis, 8 Oct. 2021,
https://www.stlouisfed.org/publications/regional-economist/second-quarter-
2021/commercial-loans-rise-sharply-covid19.
First Draw PPP Loan, https://www.sba.gov/funding-programs/loans/covid-19-reliefoptions/
paycheck-protection-program/first-draw-ppp-loan.
Henricks, Mark. “Paycheck Protection Program (PPP) Loans.” SmartAsset, SmartAsset, 24 Feb.
2021, https://smartasset.com/financial-advisor/paycheck-protection-program-ppp-loans.
Written by: Christy Rakoczy Bieber. “What Are the Business Credit Bureaus?” Credit Karma,
27 Oct. 2021, https://www.creditkarma.com/advice/i/what-are-the-business-credit-bureaus.
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