In 2020, many small businesses applied for and benefited from the Federal Paycheck Protection Program (P3). This forgivable loan provided much needed financial assistance to struggling businesses that wanted to keep their employees on the payroll during the pandemic.
With the second round of PPP loans now available, small business owners may wonder if they qualify and, if they are, if the funds they receive will be enough to keep them afloat.
While PPP is a huge factor in the overall economic recovery during COVID-19, it is not the only option for businesses in need of a financial boost. Here is an overview of the steps businesses can take if receiving a P3 loan is not enough.
How does the Paycheque Protection Program work?
In March 2020, President Donald Trump signed the CARES Act, a $ 2 trillion stimulus package for COVID-19 relief. In this bill was the Paycheque Protection Program, which provided government-backed forgivable loans to businesses to help cover payrolls and the cost of facilities. These loans could represent up to 2.5 times the company’s monthly payroll costs, with loans capped at $ 10 million.
Another round of PPP loans under the Paycheck Protection Program was enacted on December 27, 2020. These loans are now capped at $ 2 million per loan, instead of the original $ 10 million.
Companies that have already benefited from a PPP loan can apply for a “second draw” loan, as long as they have used (or plan to use) the full amount only for the permitted uses, and they still meet the eligibility criteria.
To apply for a PPP loan on the first or second drawdown, companies must complete the following conditions:
- Companies must have fewer than 300 employees.
- Companies must demonstrate a 25% reduction in their quarterly revenue between comparable quarters in 2019 and 2020.
- Companies must have been operational by February 15, 2020.
- Businesses must meet other Small Business Administration (SBA) requirements.
- Individual owners, independent contractors and self-employed persons are eligible.
What if my PPP loan was not enough?
Receiving a PPP loan can be extremely helpful for struggling businesses, but it is not a quick fix. The loan can only be used for payroll and other qualifying operating expenses if business owners want a discount. Many companies have found that P3 funds are not enough to help them stay open and keep growing.
Fortunately, there are other financial solutions that business owners may find more flexible or useful to supplement their P3 funds. These loan products can also be a useful solution if your business does not qualify for a first or second P3 loan.
Taking out a term loan allows a small business to borrow money and repay it on a specified repayment schedule with a fixed or variable interest rate. These loans can last from 18 months to 25 years, depending on the lender you are working with and the amount you are borrowing. These loans are generally repaid on a monthly or quarterly repayment schedule. You can combine a term loan with your PPP loan to cover costs that are not included in the PPP.
A line of credit is a predefined borrowing limit that a business can enter into with a financial institution. The borrower can access line of credit financing at any time, as long as it does not exceed the maximum amount, and repay it as they can. If your business doesn’t already have a line of credit, applying for one can be a smart and flexible financial solution to complement your P3 loan.
Businesses aren’t the only ones struggling right now, and many are dealing with customers and clients who haven’t been able to make timely payments. Through the invoice factoring process, businesses can sell their unpaid invoices to a third party who will advance 70 to 90% of the invoice to them in advance, the balance being sent to settle the invoice (less a commission for the factoring company). If your customers are having trouble making their payments because of COVID-19, invoice factoring can help you with your cash flow until your invoices are paid.
The coronavirus has caused companies to make certain changes to their operations, some of which require additional equipment to meet new security measures. Small business owners can take out loans specifically to finance these expensive equipment purchases.
Capital of the bridge
A bridge capital loan is a short-term loan that is used as funding until a person or business obtains stable funding or removes an existing obligation. Small businesses are turning to bridging loans as an alternative to traditional loans because of their quick application and funding process. Bridge loans, however, tend to have higher interest rates and shorter terms.
SBA loan 7 (a)
An SBA 7 (a) loan is useful for small businesses; it offers no down payment, low interest rates and longer repayment terms. It is partially supported by the SBA and has flexibility in how the funds are used. If you are a young business and need more than the PPP loan to improve your cash flow, it is worth considering applying for an SBA 7 (a) loan.
How to Apply for a Business Loan
While each lending institution may look at different criteria for different types of loans, there are a few common things that everyone will look for. No matter what type of loan you apply for, you should have the following documents prepared and ready before apply for a loan:
- Two to three years of financial statements and tax returns
- Accounts Receivable Reports
- At least three to six months of bank statements
- A business plan
- Proof of business ownership
Wondering what are your chances of getting approved? Here are some factors that typically influence a small business’s chances of getting a loan:
Lenders will look at your personal finances, including your personal credit score. Since lenders seek personal debt collateral, good creditworthiness can increase your chances of being approved for a loan.
Lenders will look at your sales, income, and expenses to make sure you can meet repayment obligations. A positive cash flow statement for your previous year gives a potential lender confidence that you will be able to make your payments on time and in full.
Lenders will not want to lend to heavily indebted businesses. They generally prefer to see a debt-to-income ratio of less than 30% for new small business loans.
Some lenders require collateral, such as real estate, to protect their loan. This gives them an asset that they can take control of in the event the business defaults on its loan.
What to look for in a commercial lender
If your small business is looking for a lender, here’s what to look for:
- Experience lending to businesses in your industry. Evaluate lenders using your own eligibility criteria. Make sure they have experience in your industry so they understand how the economy affects business and can be flexible when needed.
- Positive customer reviews. Small businesses want to work with lenders who provide positive experiences for their borrowers. Find and read reviews online for the lenders you are looking for, reading both positive and negative reviews to get the big picture. Ask other business owners which lenders they’ve worked with and recommend them.
- SBA approval. Any commercial lender that you evaluate must be approved by the SBA. You will know that you are working with a reliable and trusted supplier who has been approved by this organization.
- Transparency on products and loan conditions. Some lenders may charge a fee if you prepay the loan, or they may not disclose that interest rates may rise. Have a direct conversation with potential lenders. Ask them to be transparent about the approval and reimbursement process and if there are any additional expenses that are in the fine print.
Finding small business lenders with access to financial products will help fuel the economic recovery in 2021 and beyond. Many small businesses and startups are reluctant to take out loans. However, with the right lender, the process can be both straightforward and fair for you and your business.
If you are looking for a commercial lender who can provide a personalized, user-friendly experience for small businesses, consider SBG funding. SBG has solutions to help your small business grow, including all of the above financial products and its own. COVID-19 relief resources.