The growing uncertainty surrounding the coronavirus pandemic has created a surge in demand for financing from commercial firms, according to the latest Federal Reserve Senior Loan Officer Survey and to proprietary research recently released by RSM.
The Fed’s survey showed that demand for loans from large and medium-size firms, as well as small firms, increased during the early weeks of the pandemic.
Further data reported by the Fed showed that commercial firms tapped into their banks for liquidity well in advance of the launch of government-backed liquidity programs included in the CARES Act.
The increase in demand is also reflected in the latest results from the second-quarter Middle Market Business Index, which indicate that an increasing number of respondents either sought special financing during the survey period or are planning to seek special financing over the next six months.
This was especially true in the smaller end of the middle market, or companies with $10 million to just under $50 million in annual revenue. Of those companies, 54% said they had sought special financing to ensure liquidity, and 43% planned to see such financing.
For the larger companies in the middle market, or those with $50 million to $1 billion in annual revenue, the figures were 34% and 28%, respectively.
The results were based on a random survey of 416 senior executives, conducted from April 8 to April 23, including respondents in manufacturing, retail, technology and fintech.
Fueling the uncertainty is how long the pandemic will last and whether government-backed liquidity programs will be enough to support businesses that have essentially been shut down since mid-March. The longer it takes for the economy to recover, the more likely that businesses will continue to need additional liquidity.
The challenge may then become, how willing will my bank be to lend to my company given how bad things have become?
The growing pressure on businesses is unlikely to subside soon. Although the prospects of a bank becoming more reluctant to lend are scary to a business stakeholder, one must remember that it is much more likely the bank will work with a borrower during such an uncertain time to weather the storm.