Credit Risk in the Post Covid Era.
The light at the end of the COVID-19 tunnel has never been brighter. The world is beginning to return to normal. Most small business operations are resuming their pre-pandemic operations. Government aid was a huge reason some businesses survived during the pandemic. They provided relief packages giving small businesses the funds they needed to keep employees on their books. As well as make repayments to leases and loans. The government aid is ceasing as things return to normal. We hope to see business revenue return through sales quickly and begin to thrive again.
For some small businesses, access to finance has become more difficult post-Covid due to their inability to provide lenders with positive financial earning statements. This and the possibility of defaulting on some repayments has increased their credit risk and reduced their credit rating. In this article, we will discuss what credit and credit risk is and how Covid has impacted on this. We have also included common loan types for small business owners.
What is Credit?
Credit is provided by a financial institution and is loaned to an individual or business. With an understanding that the debt will be paid within an agreed period. The debt repaid will usually accrue interest. The interest charged by the financial institution is how the lender makes their profit. Financially speaking, you will create a credit score from your credit history. This is how often and regularly you pay bills and make repayments on time. It also includes any credit cards, loans and financial products you have used over the years.
What is Credit Risk?
Risk within a loan can come in multiple forms. The first instance of credit risk is the possibility of defaulting on your debt repayments. When choosing an unsecured loan that has been approved, the risk is held by the lender. With a secured loan, the borrower is holding the risk. This is because the borrower will use something tangible like an asset to secure the loan amount. Secondly, the credit risk to the borrower comes in the way of losing secured assets. When a borrower defaults on repayments they can impact their credit score negatively. When a credit score is low it can restrict their ability to obtain borrowed funds in the future.
What is the risk to business owners?
The Covid-19 crisis impacted many small businesses everywhere and resulted in changes in creditworthiness, which is required as documentation and financial statements. We know that businesses differ by sector and industry, and no two years can be identical, let alone pandemic years. Certain industries, such as some food distributors and operators found they performed really well in the crisis. Reporting that they even struggled to keep up with the demand of consumers. Industries such as telecommunications, pharmaceuticals, and education saw growth over the Covid and post Covid era. As we all know, certain industries such as transportation, travel, tourism, and hospitality are still yet to recover.
Some of these businesses may have found themselves needing extra cash flow to avoid closing the doors. The post Covid era has created more credit risk for small businesses. Challenges small businesses may face post Covid when applying for loan solutions include;
- Creditworthiness that has been impacted by Covid whereby a business might have defaulted on loan or bill payments increasing credit risk.
- Requiring more information and documentation to approve loans than previously required.
- Periods of low or no income in the past 24 months earning history impacting the financial earnings.
- Banks or lenders not understanding the needs of small business owners and not offering tailored solutions or flexibility.
A small business may consider a financial solution such as a loan. We have included some of the most popular loan types below;
Line Of Credit
A business line of credit is an excellent flexible loan that may suit your business needs post-Covid. Think of a line of credit working in a similar way to a credit card. Once funds are approved, the credit will be available to your business until you decide to access it. Interest charges will not occur until the funds are debited. If you choose to use a portion of the funds, $10,000 out of $30,000 available credit, you will only make repayments on the $10,000 that was debited. Once the balance is repaid in full, the interest repayments will stop. The borrower can continue this cycle of drawing down on the credit and repaying it for the entire life of the loan which is typically 5-7 years.
Small business unsecured loan
An unsecured loan can be an excellent way to get your hands on extra cash flow and no collateral is required. It can be used to help the business pull through times of reduced cash flow. An unsecured loan can also be used in times of business growth, enabling a business to take advantage of opportunities. Lumi can provide borrowers with up to $300,000 for an unsecured loan. The application process is fast and if approved, the funds can even be provided the same day or within 24 hours.
A secured loan is a loan that has an asset used to guarantee that the borrower will repay the debt. The assets used to secure collateral include property, a vehicle, or an expensive piece of equipment. This type of loan is typically used when larger sums of money is needed. Borrowers are able to ask for larger amounts of money, say up to $500,000. Here the borrower will wager either property, a vehicle or another expensive piece of machinery to secure the loan.
A unique benefit of choosing Lumi as your loan provider is that Lumi now offers Australia’s first interest free Payment pause. This enables you to pause your repayments on your loan, you can do this for 4 weeks interest free. This way if you are experiencing a low cash flow period you have more flexibility and control over your loan.