October 26, 2020
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COVID-19 has brought about an unprecedented economic downturn. The looming question in front of policymakers and business executives is: What can be done to facilitate financial recovery?   

The Translational Research Center (TRC) brought together research and industry experts—Benjamin Collier, assistant professor in the Department of Risk, Insurance and Healthcare Management at the Fox School, and William Kitsch, vice president of agricultural lending at Ephrata National Bank—to share their insights on different aspects of financial recovery. 

Prevent before needing a cure

While most companies look for financial solutions when a crisis hits them, prevention is better than a cure. Collier, who studies organizations’ response to crisis situations, has found that though insurance could help prevent significant financial losses from natural disasters, such as hurricanes, most organizations do not buy such coverage and thus are unable to get payments for business interruption related losses. “Many businesses end up borrowing,” says Collier. This leads to a significant credit constraint, putting businesses, especially small and medium-sized enterprises, at the risk of bankruptcy. 

When insurance cannot be a prevention tool, businesses need to think of other ways of being financially prepared. Kitsch points out that companies need to prepare for economic depletion, which is a real possibility—whether or not it seems that way. 

“In the good times, let’s build that equity,” Kitsch advises. Companies could take different steps to weather upcoming financial storms, such as diversify their revenue streams, lower their fixed costs, create a disaster fund or prioritize paying off the high-interest debts. 

Help small businesses succeed

Small businesses are the lifeblood of the U.S. economy. Kitsch notes that small businesses are more willing to take risks than larger ones. One reason is that young businesses are typically more entrepreneurial. Small businesses are also more likely to employ marginalized members of the community, thus bringing social benefits in addition to their economic contributions to society. 

Kitsch points out that though small business owners are typically experts in their respective technical domains, they are not well educated about the business principles that could help them succeed. “So, part of supporting them is not only access to capital or modern banking tools, but it’s also an education,” says Kitsch. 

Offer the right recovery tools

Loan programs, such as the Paycheck Protection Program (PPP) or the Economic Injury Disaster Loans, are key financial recovery tools offered by the government to cope with the current crisis. While such loan programs offer lower interest rates, not all businesses benefit. Collier says, “There’s a certain segment of firms for which loans are a good fit. There are other firms that are really unwilling to take on that additional debt. Then there are businesses that simply aren’t going to qualify. They don’t have the cash flow in place to repay a loan.” This is especially true for small businesses, who need the most help. Collier suggests that grants, which allow businesses to stay afloat in the short-term crisis without jeopardizing their future, might be a more effective tool for such businesses.  

Ensure the effectiveness of loan programs

The failings of the PPP loan disbursement demonstrated how a lack of preparedness can affect a post-disaster recovery process. It also raises important questions—should loan programs be targeted, so that the loans benefit those who need it the most? Or should loans be given to anyone who applies? Targeting has its merits. However, loan officials need to properly implement a strategy for it to be effective. 

PPP missed the mark for many reasons, which should be noted when designing future financial recovery tools. First, the program, for the most part, did not require any sort of economic impact certification. Kitsch says that “So, the more sophisticated businesses got there first.” Second, it was implemented by banks, community-based financial institutions and other such lending institutions without any supervision. Thus, larger banks made fewer, bigger loans—many of these made to their existing customers, leaving out many needy small businesses. Finally, the PPP failed to specifically address the needs of underserved communities, such as Black and Latinx-owned businesses, who have historically experienced lender discrimination. Because policymakers did not track PPP funds by race or ethnicity, it is not clear if minority-owned small businesses received adequate support. 

Roadmap to recovery

Kitsch offered the three steps for recovery. 

  1. Readjust your balance sheet to benefit cash flow, which is as important as cash. Remove any artificial constraints and understand refinancing options to ensure that the cash flow is not restrained. 
  2. Adjust the cost structure of your income statement. Reduce the break-even point to reflect the new crisis situation. Focus on the balance between fixed and variable costs. 
  3. Tap into your community resources. Unfortunately, business owners don’t talk to other business owners, who likely face similar issues. Create a network of small business owners to gain important information about the community.  

The current pandemic is one major crisis; the fires in the western U.S. have made it amply clear that this is not the only one we need to worry about. While the three steps for a climate crisis might look different, Collier passionately suggests that we need to think of a proactive strategy. 

“Uncertainty is not a justification for inaction,” Collier warns. Any astute leader knows that reactive strategies don’t give time to plan, leading businesses to lose out on many opportunities.

Monica Wadhwa is an associate professor in the Fox School’s Department of Marketing and Supply Chain Management. Her research focuses on understanding the motivational and affective determinants of consumer decisions making. She is also the research impact director for the Translational Research Center.

Benjamin CollierCOVID-19Ephrata National BankFinancial LiteracyPaycheck Protection ProgramRiskRisk Insurance and Healthcare ManagementTranslational Research Center