2). Why would banks be hesitant to provide short term financing to businesses during this pandemic...

2). Why would banks be hesitant to provide short term financing to businesses during this pandemic even if that business was profitable in the past

Expert Solution

The pademic has led to a state of recession all over the world. Businesses are the worst hit as most of them are shutdown or working at half capacity. When a business would not run as per its potential then it will not generate the cash flows that will be required to keep the it running. Most of the businesses would look to fulfil its short term obligations in order to survive the current situation. Therefore they would require short term financing from banks in order to cater their needs. It is to be noted that short term financing should only be used to acheive short term objectives of the business. Most of these loans have chance of becoming bad since the businesses are not generating enough revenues in order to keep up with its expenses. Therefore the chances of default are higher as compared to times when there was no pandemic. Most businesses would want to get these financing at lower rates of interest which is also a loss for the banks. Past profitability of the banks would have little or less impact on the current situation as their repaying capability is hampered due to the pandemic.

Therefore the banks would be hesitant to provide short term financing to businesses during this pandemic even if that business was profitable in the past.

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