Virtual Roundtable: Tracking Small Business Recovery

At Ocrolus, we are committed to supporting the lending community in its understanding of systemic credit risk.  As we gather information on the effects of the pandemic on small businesses, lending experts from Lendio, QED Investors, NYU Stern, Grant Thorton and Ocrolus, discussed perspectives on the macroeconomic environments that borrowers operate in. 

Snippet of Virtual Roundtable Transcript

 

Scott Monaco:

 

One of the first questions we ask ourselves in thinking about tracking small business recovery is, how can we accurately measure, in real-time, the resilience of a small business in a post-endemic environment? 

 

It’s a question that many of you are grappling with, and it’s a tough one to answer for a lot of different reasons. Two in particular stand out.

 

Scott Monaco:

 

First is the unprecedented level of market volatility, which has made it such that understanding what a status quo looks is very difficult. And the second is the insufficiency of credit data whereby the usual market signals and credit metrics that have defined creditworthiness have been obscured, and, in some cases, just made useless, kind of overnight. And that’s, of course, through the pandemic, but it’s also due to the government’s heavy involvement to step in and help millions of borrowers defer debt payments on mortgages and other loan products.

 

Scott Monaco:

 

We live in a world now where millions of Americans have skipped debt payments, yet at the same time, average credit scores are at an all-time high. And so to help us kind of understand this dichotomy, we really wanted just to create a framework for understanding the nature and the resilience of small business recovery, with the underlying assumption that recovery is going to be uneven on a geographic and industry basis.

 

Scott Monaco:

 

So that’s exactly what we did, we built the Small Business Recovery Index. It’s a relative scoring that looks at a combination of external data sources that includes macroeconomic indicators from housing and employment to consumer foot traffic and credit card spend, along with internal Oculus data that provides a nice micro foundation down to the individual borrower level, where we have a unique view on things like application volumes and average daily balances and cash flow, that’s based on our wealth of bank statement data.

 

The combination of these two allows us to create this index that provides a timely and accurate pulse of the market. And so Tim, if you move to the next slide, we can start to see some of the results of the small business recovery scores.

 

Scott Monaco:

 

Here as a County level animation of small business recovery scores that’s based on a month-over-month change since the start of the pandemic. And we can see real differences in recovery as the months lead into the summer and into the current winter. The dark shades of blue in this map indicate lower small business recovery scores compared to the lighter ones.

 

Scott Monaco:

 

Tim, if you move us to the next slide. We can see small business recovery scores on an industry basis just for a handful of industries, and right away, we can see that this recovery is actually following a very different pattern, a very different path, from previous recoveries. And that’s due to the unusual nature of the downturn.

 

Scott Monaco:

 

Of course, previous major recessions have tended to originate with high-interest rates in the construction and manufacturing industries, which are also typically the first to rebound as rates fall. But that’s not exactly what happened here, as you all well know. The parts of the economy that were hit hardest are the ones in which services are provided in person. And so this just goes to show that this recovery is just following a very different path than previous ones, and therefore we think it’s important to be able to integrate new perspectives of the economy in it’s resulting in recovery.

 

Scott Monaco:

 

Just to wrap up before I pass it off to Sabrina, the Small Business Recovery Index allows us to talk about what a K shape recovery actually means and provide some context around it, and so we can see we started to see some correlations with the index to some recent outcomes such as the most recent presidential election and in COVID case and death rates. And so going forward you may have in that County graph that there are certain pockets of the country, in particular, the coastal areas and high-density urban areas that have been hit hardest, but we’re really excited to capture going forward some real differences in recovery, especially as vaccination rates increase and level of government stimulus continues to deploy.

 

Scott Monaco:

 

There’s an abnormally high level of savings in the country right now, which suggests that there’s a large amount of pent-up consumer demand for goods and services. And so with that, I’ll pass it off to Sabrina, who will talk about the effects of FinTech on PPP.

 

Sabrina Howell:

 

Hi, everyone. It’s great to be here. I want to take a few minutes to introduce you to research relating to the small business recovery, or lack thereof, which I’m doing with colleagues at NYU Stern, as well as David Snitkof, who’s here with us today.

 

Sabrina Howell:

 

Our research highlights the power, I think, for economists like me to do our job of learning about the economy by leveraging large data sets from FinTech startup, which of course are often companies that are built around novel data and around competencies to process and analyze them.

 

Sabrina Howell:

 

This project in particular uses data from Lendio, Ocrolus, Middesk, and in future work will incorporate data from Enigma and Kabbage as well. Next slide, please. Our project starts from the observation that during the COVID-19 crisis minority and especially black-owned small businesses closed at much higher rates than white-owned businesses. And partly in response to this catastrophe, Congress created the Paycheck Protection Program to provide forgivable loans to small businesses.

 

Sabrina Howell:

 

Although these loans were guaranteed by the government, they were processed first by private lenders. Media reports quickly raised concerns that minority-owned businesses were struggling to access PPP loans. So, seeing this, we decided to ask whether lenders differ in their propensity to extend PPP loans to minority-owned businesses, and if so, why?

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