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It’s difficult for many small-to medium-sized businesses (SMEs) to navigate through various loan programs and debt-consolidation opportunities, especially during an unprecedented global pandemic. Unlike consumers who are protected by the Consumer Financial Protection Bureau (CFPB), business owners are not often covered by the same guidelines, presenting individuals with less protections and new alternative-funding companies that don’t always provide the helping hand needed.
Therefore, consumers are often looking for the liaisons who can help them navigate through the application and approval process, while providing them with the fundamental education necessary on how to receive inexpensive capital with product education.
According to the Biz2Credit Small Business Lending Index, small business loan-approval rates have slowly been climbing this year — with approval percentages at big banks rising from 14.2% last November to 14.3% in December. However, during that same period, small banks’ approvals increased from 19.9% to 20.1%.
Here are how SMEs have had to find new, alternative paths to capital, allowing business owners to access funds faster than before — and without the headache of trying to navigate through the tedious legalese of paperwork.
Raise debt first before selling equity
During the beginning stages of the pandemic, many business owners would be told by hedge funds, private-equity groups and venture-capital firms that they were approved for loans. This after many months spent negotiating term sheet deals, frequently more than 100 pages long, only to find out later that they wouldn’t be receiving the funds until several months after signing their loan documents. Others would simply receive vague decline reasons or a lack of correspondence entirely, and calling the Small Business Association (SBA) would only keep you on hold for hours before someone would tell you to wait for an email response.
Some companies sell their equity away prior to raising the debt, taking on immediate investors with immense amounts of pressure from the get-go. Many companies believe that initially investing into the flashy technologies and top-shelf CRMs will set the business off in the right direction and keep it attractive to the market.
Wrong. One of the biggest strategies a newly launched business can have for itself is preparing for the worst-case scenario of when it happens (not if), which in this case means starting off lean, mean and looking for ways to keep expenses to a minimum.
Networking and the Chamber of Commerce are your friends
How many business owners do you know that understand the difference between factoring and a merchant cash advance? In most cases, these owners want quick-working capital with an affordable payback. If you don’t have the necessary web of connections and network, that’s where joining your local Chamber of Commerce comes into play, as well as attending trade conventions and local business groups.
Small- and medium-sized businesses, self-employed individuals and minority-owned businesses have been repeatedly left out throughout history. Unfortunately, the pandemic only exacerbated this problem. Paycheck Protection Program and EIDL government-backed loans were set up to help small businesses, but were initially, widely distributed to companies like Shake Shack and TB12.
According to the New York Times, data collected on the PPP allocation’s racial breakdown has been scarce, illustrating New York as a problematic zone where lenders were not required to collect demographic details on their borrowers. Ultimately, economists have consistently found signs of gaps here.
Additionally, an analysis by the Federal Reserve Bank of New York noted that some counties with large numbers of Black-owned businesses — most notably the Bronx, Queens and Wayne County, MI (which includes Detroit) — had strikingly low concentrations of the relief loans — of the 996,000 loands that included information on the borrower’s race, 71% of the dollars went to white-owned businesses.
More than half of the roughly $525 billion in loans given out through November 2020 went to just 5% of the more than five million recipients, as revealed by an analysis of the SBA data by The Washington Post.
Caution your reliance upon government-provided funding
Congress approved billions of dollars in aid for small companies to help them keep their employees covered during the pandemic, but a large portion of these businesses never saw the funds. When the PPP was first initiated in April 2020, banks quickly moved towards bigger loans and more established businesses, because in their world, they were more lucrative. According to The New York Times, the program’s largest lender (JPMorgan Chase) refused to even make loans of less than $1,000.
Forbes went on to report, “…from April 2020 to May 2021, the PPP provided millions of loans to help keep businesses afloat during Covid-19. Since the rollout in 2020, over 11.8 million PPP loans totaling almost $800 billion have been approved, according to data from the U.S. Small Business Administration in May 2021. While many of the earliest PPP borrowers have already applied for and been granted loan forgiveness, SBA data shows that as of the end of July, 18% of 2020 PPP loan borrowers had not submitted forgiveness applications.”
Small- and medium-sized businesses are still struggling with the uncertainty of government loans, and with inflation rising, so have typical operating costs. The SBA EIDL loans were originally capped at $150,000 in 2020. The SBA increased this amount to $500,000 in April 2021 to help businesses that were still struggling.
With the PPP gone, SMEs should look towards taking chances again and growing their company. Small businesses still don’t know where to turn, so having private groups that understand how to provide customer-focused solutions that help educate small-business owners on the best financing available will only serve to provide SMEs with alternative financing that doesn’t set business owners up for failure.