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Caring for Borrowers Outside the CARES Act: A Closer Look at Privately Held Loans

Most textbook economic theories do not apply here, so we decided to take a first principle approach and start from a few simple questions:

What does the world look like for the small business owner in Shawinigan (or Kelowna, or Mississauga, or Lethbridge) as she begins to sweep the dusty floors of her shuttered business? What challenges will she face then, and what difficult decisions will need to be made? What support will she require at that time, and who will provide it?

Niels Bohr, the famous quantum physicist said that “prediction is very difficult, especially if it is about the future”. Recognizing the risk of the exercise, we laid out our predictions in order to follow Gretzky’s prescription “to skate to where the puck is going”, and to prepare ourselves to be effective on the other side of the crisis, in a forever changed landscape.

In summary, we see five realities that will shape the post-COVID small business landscape in Canada:

  • Social emergence will be gradual, and small businesses will need to grapple with reformulating business models with lower revenue for at least one year
  • Most small business owners will need to contend with a consumer base with considerably less purchasing power, and a case of depressed consumption across the board even after the reopening
  • Changes in consumer behaviour and altered supply chains will create disruptive pressures and opportunities for tomorrow’s small businesses, and a new wave of start-ups and transformed businesses will emerge to address new market paradigms
  • Many small businesses that survive the crisis will face a daunting prospect of digging themselves out of a mountain of crisis-accrued liabilities, and for many bankruptcy may be the only option
  • Increased government intervention in the small business economy will be necessary for some time

Small Business Through COVID

Our company’s internal data suggests small business payment terminal sales are off 60% from a baseline week in early February. Already, one-third of small businesses in Canada are unsure if they will ever be able to reopen, according to the Canadian Federation for Independent Business.

It’s hard to overstate the calamitous impact such statistics forewarn for the Canadian economy. Canada’s 1.2 million small businesses generate more than 40% of private sector gross domestic product. They employ 7 out of 10 people in the private sector workforce, according to Statistics Canada. We’re already seeing the staggering early effects of their shuttering, with millions of unemployment applications filed since the onset of the COVID-19 crisis.

Very appropriately, the government has enacted stimulus measures to buoy the small business economy in the near term, highlighted by the Canada Emergency Wage Subsidy, the Business Credit Availability Program, and the Canada Emergency Business Account. These programs are extending necessary payroll relief, and ensuring debt capital is available to bridge small businesses through an indeterminate period of full or partial closure. They are among the best tools available, but the toolkit is incomplete.

The magic bullet to complete the arsenal is likely months or years out, and will come from the medical and research community, not the economic one. Consensus has not yet been reached as to the efficacy of potential therapeutics, and the best estimates for the timing of widescale vaccine distribution is sometime in late 2021.

In the interim, and assuming a gradual emergence from near-complete social lockdown within the next 3–4 months, governments worldwide will attempt to walk a delicate line. As outlined by Tomas Pueyo in his widely read Medium article “Coronavirus: The Hammer and the Dance”, governments will likely attempt to optimize a formula of allowable societal engagement that points the viral trajectory downwards, but the re-opening of the economy will not bring linear growth; rather it will be characterized by ups and downs for quite some time.

1. Gradual Emergence

To draw from Mark Twain, we believe reports of the restaurant industry’s death have been greatly exaggerated. Restaurants in various forms have existed for centuries, and we can count on the gregarious nature of the human spirit to draw us back together to break bread. Delivery will simply be no long-term substitute.

However, it will take time to get back to a new normal.

While the order is challenging to predict, one could expect a gradual turning-back-on of industries and activities, balancing both their social and economic importance, and propensity to propagate infection.

We anticipate in chronological order:

i. Construction, trades, and other industries critical to societies’ function begin to reopen in June

ii. Small gatherings permitted in June or July

iii. Restaurants reopen on a controlled and limited basis in July or August

iv. White-collar workplaces start bringing back a portion of the furloughed employees in July or August

v. Retail slowly returns through the second half of 2020

vi. Schools reopen in September

vii. Clubs, sports, leisure and other high-density activities begin to reopen in 2021

viii. International travel begins to ramp back up by mid 2021

Foodservice establishments, like many other small businesses, will need to operate in world where consumers only slowly regain trust in the safety of their establishments. Businesses will likely be regulated to lower patron density levels, if consumer demand doesn’t effectuate that naturally. Every business will need to re-evaluate their financial viability with lower run-rate revenue, and adjust their cost structures accordingly.

2. Depressed Consumption

Adding further challenge to small businesses across most economic sectors, is that lingering economic and social effects will continue to depress business activity even after the reopening.

Consumer spending is likely to remain muted for some time. According to a recent McKinsey survey, 44% of US consumers reported they were delaying discretionary purchases given the uncertain economic outlook. Wherever the unemployment rate ultimately peaks, it will likely hover at elevated levels long after the pandemic is suppressed. For many Canadian workers, the businesses that employed them will no longer exist. Businesses that do survive will likely be hesitant to staff back up immediately, as they will be short on cash flow and economic confidence, and fearful of future social distancing measures.

Many consumers, even if and when their jobs do come back, will have several months of deferred rent and mortgage payments to catch up on. It is fair to assume discretionary spending will continue to be significantly curtailed, as cash-strapped consumers prioritize essential purchases. Businesses that trade in discretionary goods and services, such as premium retailers, will need to contend with a customer base with considerably less purchasing power.

2. Behavioural and Structural Changes

Retail, an industry facing existential threat before COVID-19, will be further hampered by changes in consumer behaviour catalyzed by the crisis. According to the McKinsey survey, 15% of consumers in the US have begun turning to e-commerce for staple purchases like groceries. While some consumers may return to in-store purchasing once the crisis abates, for others the switch to e-commerce will stick, and going to the grocery store will become a thing of the past.

Some businesses, like those built on e-commerce or who manage to build a strong online presence through the COVID lockdown, will likely ride considerable tailwinds out of the crisis. Restaurants with strong delivery distribution will likewise benefit from a society that, at least temporarily, continues to prefer to eat at home.

The collective realization that our global supply chains are more fragile than we thought will likely drive a wave of supply chain diversification. This will mean the repatriation of certain manufacturing operations, especially those of critical goods. The government-owned Development Bank of Japan has already announced plans to subsidize relocation costs of companies that bring production facilities back to the country. The propagation of this trend in Canada will create considerable opportunity for entrepreneurial small and medium sized businesses that are able to capitalize on a new desire to supply local. 

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