Helping Small Businesses Navigate through COVID-19

March 30, 2020
Kasam (center) helps young Bangladeshi women as they are being trained at the Savar EPZ training center in Dhaka, Bangladesh on October 13, 2016. Photo © Dominic Chavez/World Bank

By Elizabeth Gibbens

In many parts of the world, the COVID-19 pandemic has badly hurt companies of all kinds—but particularly those with smaller operating margins, such as micro, small, and medium-sized enterprises (MSMEs). Business and liquidity have dried up, jobs have been lost, and entrepreneurs have dramatically curtailed if not closed their businesses—at least temporarily.

How can small businesses and financial institutions recover? The answer is critical: Small businesses account for two-thirds of the globe’s jobs and half of its GDP.

Sam Taussig, Head of Global Policy for Kabbage, a U.S.-based online lending platform for small enterprises, said that businesses in the United States with 20 or fewer employees can meet an average of just 10 days’ operating expenses after they suddenly lose income because of a catastrophe, such as severe weather, war, or disease. In emerging markets, the upended supply-and-demand cycle hurts businesses even more gravely, multiplying the disease’s economic impact.

“This is an unprecedented situation. The key will be to ensure that businesses are returned to their state before the crisis," said Taussig during an online discussion sponsored by the SME Finance Forum—an organization established by the G20 countries and managed by IFC. Held on March 26, the webinar was the first in the SME Finance Forum’s rapid-response effort by to help small businesses and financial firms struggling with the effects of COVID-19. The organization’s network, including more than 77 financial institutions, 46 fintechs, and 24 development finance institutions, gives it the convening power to address the massive business losses the virus leaves behind.

Keeping companies solvent is key to saving jobs and limiting economic damage. (Photo taken in 2017) 

Private and public players are rapidly introducing initiatives to support financial institutions and MSMEs in the face of the virus’ fallout, said IFC principal investment officer Momina Aijazuddin. Lessons learned from Asia point to the need to inject liquidity in the system, including to affected regions and MSMEs hard-hit by closures and disruption in supply chains.

Mobile-finance platforms such as M-Pesa are increasing daily transaction limits for small-business customers from $700 to $1,500. Other financial institutions are waiving fees for online fund transfers. IFC is also working actively with clients in the MSME space to explore needs for liquidity and best practices to deal with the swath of economic decline that trails COVID-19 from region to region.

Different countries are taking different approaches. In Nigeria, for instance, the government has demanded that small businesses be granted a one-year moratorium on all principal repayments. Several Asian countries have introduced emergency loans to support MSMEs and flexibility for repayments of existing loans. Banks and microfinance institutions are promoting debit-card usage to limit bank visits and the handling of “dirty” cash.

Micro, small, and medium-sized companies are usually the hardest hit in times of economic crisis. (Photo taken in 2017) 

Taussig and Aijazuddin said that, given we are in uncharted economic territory, nimble tech platforms and fintechs can play an important role in providing financial services, with branchless institutions and remote access via mobile and digital channels. Human-driven lending processes cannot cope quickly enough during an unprecedented collapse like the current one, thus increasing the importance of new partnerships among government, financial-technology players, and traditional financial institutions. In the United States, for instance, the alternative-lending community—in the shape of fintechs such as Kabbage—have become partners in the government-relief program and will offer free platforms to banks to speed disbursement.

Importantly, with historical data from their customers’ accounts, fintechs are working with traditional financial institutions to determine the health and creditworthiness of businesses before the downturn started. This enables governments and the private sector to understand which businesses stand to hire more workers in healthier times. Although regulation can slow turbo-charged fintechs, they can help government agencies access massive amounts of data, which the agencies can use to diagnose the longstanding prognosis of a business or industry. Big data from fintechs also enable banks to issue loans, many backed by government guarantees, and help facilitate banks’ regulatory compliance. Fintechs can also help entrepreneurs get loans in time to avoid bankruptcy.

“Very few of the businesses receiving emergency loans during this crisis will get checks in the mail,” said Kabbage’s Taussig. When bills and due dates threaten business failure, digital payments make all the difference.

Published in March 2020