Business and professional services (BPS) firms borrowed more Paycheck Protection Program loans through June than all but four segments of the U.S. economy. Industry executives took advantage of federal assistance in an effort to maintain their capabilities and client relationships by retaining their people. And considering that, according to Bloomberg, service companies accounted for approximately 44% of U.S. gross domestic product in the first quarter of 2020, the strength and pace of the nascent recovery largely depends on their success.
It is clear why PPP loans are so appealing to BPS firms. Workforce is their primary income-generating asset, while job retention is the key factor in determining loan forgiveness. A closer look, meanwhile, at the recently publicized loan data shows noteworthy trends that underscore how diverse the segment is and why it means so much to the recovery.
Show me the money
Loan size leans toward the low end of the range with approximately 58% of BPS firms receiving loans between $150,000 and $350,000. Less than 1% of recipients received over $5 million. This aligns with the fragmented nature of the BPS ecosystems.
Who took out the loans?
The BPS industry captures a myriad of subsectors serving all corners of the U.S. economy. The business services subsectors (as defined by North American Industry Classification System code) that took greatest advantage of the program were landscaping, veterinary, janitorial, marketing consulting and employment placement agencies.
A total of 5,625 loans were issued to businesses classified under NAICS 541990 – “All Other Professional, Scientific, and Technical Services.” This category includes businesses providing services relating to appraisal, consumer credit, business brokerage, mediation (excluding law firms), energy infrastructure inspection, and others.
Another 2,464 loans were issued to businesses classified under NAICS 561499 – “All Other Business Support Services.” This includes businesses providing services related to fundraising campaign organization services, teleconferencing and videoconferencing services, bar code imprinting services and mail consolidating and presorting services.
These categories, as well as a few others, are catch-all buckets that represent a variety of services and end markets.
The professional services subsector was led by law firms, which took out of 30% of the approved loans. Engineering, management consulting, accounting and architecture firms made up the next 50% of loans.
Liquidity sources going forward
BPS firms continue to seek liquidity by drawing down on their revolving credit facilities, tapping existing term loans and taking advantage of the PPP. There is still time for BPS firms who have not taken advantage of the PPP to do so, given the extension of the program until Aug. 8.
Companies needing to supplement further with a bridge lending facility should consider the Federal Reserve’s Main Street Lending Program. Loans issued under this program are not forgivable, but it does offer an attractive rate relative to typical bridge financing facilities.
BPS companies that provide recurring or long-term contractual project-based services are likely seeing a delayed impact from COVID-19 as project backlogs run their course. Companies providing short duration, transactional services have felt the effects in real time. Maintaining liquidity while retaining talent and capability will be front-of-mind for BPS executives going forward.
The trajectory of the U.S. real economy hinges on the health of the services industry and its ability to continue to employ many Americans. Fiscal relief and stimulus programs, like the PPP, are helping to support these businesses as they navigate a year of significant uncertainty.