The Covid-19 pandemic hasn't been unkind to Stephen Schober's 35-year-old metal-supplies business. Several employees at Metal Supermarkets, which has 98 franchise locations in the United States, Canada, and the United Kingdom, did become ill but recovered; and the business itself was deemed essential, so it never had to close its doors.

"We're expanding," says Schober, whose Mississauga, Ontario-based company has more than 500 employees across the system, and booked $117 million in global 2020 revenue, up from $110 million in 2019. "We're quite attractive now as a franchise opportunity because we are an essential business that's been growing sales, and we're profitable."

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But Schober has a problem: Six of his newest American franchisees are having difficulty getting financing. Lenders, he says, are now requiring more rigorous due diligence for loans backed by the U.S. Small Business Administration--even though Metal Supermarkets' business model has been deemed eligible under the SBA affiliate rules and is listed on the agency's Franchise Directory.

Among other things, he says, lenders are now asking more questions, and some want higher down payments, more liquidity, and more outside income. They also require new businesses to hold off building out a location--even if the owner is using her own money--until all of the SBA documents are signed and sealed. "We now have franchisees who've signed the lease who are either paying the rent or are burning through the free rent period, and all they can do is sit there for an extra 30 to 60 days while the bank does the documentation," says Schober, who adds that the documentation itself is taking longer, too. "This is different banks, in different states," he says. "It's really getting to be a challenge.... My concern is that we're slowing up business creation that's going to be very important to a recovery."  

While the SBA is widely known for the Paycheck Protection Program, the now $284.5 billion forgivable loan offering, the agency has a number of longstanding programs meant to encourage lenders to underwrite loans. In the last few months, business owners across the spectrum are reporting signs of credit tightening within these programs--even as demand is surging.

"We're seeing some deals that used to take four to six weeks now take four to six months," says Evan Goldman, a partner and chair of the franchise and hospitality group at A.Y. Strauss, a law firm in Roseland, New Jersey. "Banks and lenders generally--whether SBA or not--are just being very cautious lending right now," he says.

The pandemic is still dictating the pace of loans, says David Nilssen, CEO of Guidant Financial, a Bellevue, Washington-based financial advisory firm, which also reports lending delays at some of its 8,000 small business clients across the country. The U.S. continues to log more than 100,000 cases of coronavirus per day. "That number needs to come down dramatically for banks to have confidence that they can make these loans happen," says Nilssen.

There is cause for some optimism, however. The recently passed $900 billion stimulus package sweetened the SBA's key programs--including its flagship 7(a) loan program for working capital loans, and the 504 loan program for business property loan funding. In addition to waiving fees on new loans issued after February 1, through the end of September, businesses will get six months of payment forgiveness for up to $9,000 a month, while funding lasts. The SBA also increased its guarantee to 90 percent of the principal, from 75 percent--giving banks a greater incentive to write the loans.

And lenders are now increasingly deploying technology to help speed loan acceptance. That's the case at Customers Bank, says Michele Vervlied, senior vice president and director of government guaranteed lending at the Wyomissing, Pennsylvania-based bank. Unlike during the first and second rounds of the PPP, through which the SBA authorized $525 billion in loans to 5.2 million businesses, many lenders--including Customers--are now automating their processes. That should give them more time to handle traditional SBA loans, says Vervlied. "We're trying to expedite financing for smaller-size businesses with smaller loan amounts so we can get funding out there quickly."

She adds that the bank is also changing its terms to account for 2020 being such an unusual and wretched year. "We're focused more on borrowers' business plans and projections and how they're coming out of the pandemic," says Vervlied. "It's a new world in underwriting 7(a)."

For its part, the SBA says it has been working overtime to help small businesses for months. "The U.S. Small Business Administration offers true lifelines to small businesses contending with the Covid-19 pandemic through the Paycheck Protection Program and traditional funding programs," the agency said in an emailed statement. "As the Administration ensures an effective and equitable reach of these programs, the SBA will continue processing and backing vital loans that help millions of businesses keep their doors open, employees on payroll and connected to their health benefits."

In reporting its fiscal year 2020 results at the end of October, the SBA said it supported approximately 42,000 7(a) loans totaling $22.55 billion, and more than 7,000 504 loans totaling more than $5.8 billion. The number and total value of 7(a) loans fell well below the agency's projections, while 504 loans outpaced them on both accounts. The SBA declined to provide estimates on the number of program loans it hopes to make in 2021.

In January, the SBA reported that since April it had made more than $7.1 billion in payments across 1.8 million loans on behalf of existing 7(a), 504, and Microloan program borrowers. While the SBA's debt relief authority was first authorized under the Cares Act, which passed last March, it was extended under the latest relief law.  

The increased capacity is good news, but demand is also surging, which may be gumming up the works. Business starts reached record levels in the third quarter of 2020, with 1.5 million new business filings, according to the Commerce Department, before falling back to a seasonally adjusted 1.1 million in the fourth quarter.

Loan requests are up, too, says Guidant Financial's Nilssen. Between last December and January, his company's loan application volume rose 71 percent. By contrast, he says, "last year, we helped put $262 million to work at small businesses across different [small-business] lending programs. That was down about 30 percent from the year prior." He notes that the stats don't include the company's role in helping clients access the PPP. The recent uptick, he adds, "shows that there is a lot of pent-up demand for small businesses." 

How lenders step up to meet the business community's needs over the interim is entirely consequential--and what's at stake is the economic recovery itself, says Ami Kassar, the founder and CEO of MultiFunding, a small-business loan adviser in Ambler, Pennsylvania. Businesses that have stayed flat or grown over this trying period will likely do the bulk of the hiring during the early part of the economic recovery. "And they'll need money to bring on what's liable to be a deluge of new workers," he says, noting that millions of Americans now on unemployment rolls will be looking for work when the pandemic subsides.

"There are so many businesses that are doing really well, but in order for them to continue growth, many of them need cash," says Nilssen. If they don't get it, he adds, some businesses "might find themselves in a position where they either have to slow their growth or find themselves in a significant cash crunch."

Still, as the vaccinations expand and the economy picks up steam, Nilssen expects lenders will gear up into recovery mode--and as a result, businesses could also see a loosening of terms. That's what happened in 2009 after the Great Recession, when passage of the Recovery Act authorized similar changes to the SBA's lending facilities and ushered in record small business lending. "By the end of 2009 and transitioning to 2010, we started to see a significant shift in the number of people that wanted to open a business and the appetite from lenders to deploy capital," says Nilssen. "As I look at the dynamics today, my assumption is we're going to see something similar occur toward the end of 2021 and into 2022."