Taking out a business loan can be risky. Depending on how much you’re borrowing, where it originates, and the economic climate — you may be approaching expensively dangerous waters. Specifically, watch for the interest and fees involved. But, there are times when it’s worth taking the plunge.
Some of the most common examples would be when you need to expand operations, purchase new equipment, or upgrade your physical location. Other times it’s to replenish your inventory, hire talent, or increase working capital. Or, maybe you want to explore a new opportunity that’s just too good to pass up.
A loan may also come in handy during unprecedented times, such as the COVID-19 pandemic. Perhaps you’ve had to pivot stay afloat or adjust. Or, maybe you could use the extra cash to help your team make the transition to working remotely.
Here’s the problem though. Many business owners wait until it’s too late. In other words, they only seek out financing when they need it.
Not only can this be stressful, but it can also prevent you from reaching your goals, taking advantage of an opportunity, or successfully navigating through a bank crisis. And, if this global crisis has shown us anything, it’s that you simply can’t predict the future.
What does that all mean? It may be in your best interest to be more proactive and plan for your financial needs today. Even if you don’t need the funds today, you may need them in the next 12 or 24 months.
Why Right is the Best Time to Take Out a Loan?
Again, taking out a loan can ensure that you’ll have the cash on hand to pay your expenses if you run into a rough patch. Because none of us have any idea on what to expect, this is valid logic. But, here are three other reasons why loans make sense right now.
Businesses are taking out fewer bank loans.
According to the non-profit new organization Marketplace, not as many businesses are borrowing money currently. That could mean that you aren’t competing with as many of your fellow business owners to secure a loan. But, why exactly is this the case?
“Companies drew every nickel of cash they could get out of their banks just in case,” said Karen Petrou, managing partner at Federal Financial Analytics. That was most-true during the first quarter. And, in the second, they have received Paycheck Protection Program loans.
“They didn’t need the credit lines they drew, so they paid it down,” explained Nate Tobik, CEO at CompleteBankData. But why has this trend continued? “A lot of commercial projects are just frozen because no one really knows what’s going to happen with retail demand, hotels, travel,” he said.
Instead, businesses are either paying back loans or focusing on existing businesses. “If my business is pretty much closed, there’s not a whole lot I can do, except to make sure that I can get my employees back and that I have a business in the future,” said Kent Belasco, who runs the commercial banking program at Marquette University.
Does this mean that you’re automatically guaranteed a loan? Of course not. Just like businesses all over the world, they may be tightening the reigns and bullying up reserves. “They’re looking ahead, and they’re a little bit concerned because I think they’re anticipating losses that are going to come out of this,” Belasco said.
Approval rates are improving.
Back in May, it was reported that small business loan approval rates plummeted to a record low in April 2020. Just how bad was it? Biz2Credit reported that “approval percentage for small business loan applications at big banks ($10 billion+ in assets) plummeted below double digits to just 8.9%, down from 15.4% in March and an all-time high 28.3% in February 2020.”
Additionally, “the approval rate at small banks has also plummeted, falling to 11.8% in April, down from 38.9% in March and 50.3% in February.” More worrisome was that this was also true of credit unions and alternative lenders. And, this continued into the summer with supply and demand for small-business loans idling.
It’s fair to anticipate this being the situation going forward. But, there is a silver lining. Data released on August 17, 2020, shows that bank loan approval rates are improving with an increase of 0.3%.
“While the loan approval rate rise appears incremental, the upward motion is still encouraging for small businesses in the US,” writes Gabrielle Pickard-Whitehead. In particular, it’s welcome news “for small businesses who may need such loans to stay afloat. Customer numbers and revenues are still down for many businesses, but hopefully, the upward trend will continue.”
Institutional lenders are ‘steadily climbing back up.’
“There was clearly an uptick in the economy, especially in the northeast in July,” Biz2Credit CEO and small business lending expert, Rohit Arora. “The big banks played a key role in PPP lending and are making other loans to their customers as some of them have exhausted their PPP funds.”
“It will be interesting to follow lending at big banks as coronavirus spreads through the south and west regions of the country,” he added. Arora also said that new customers have access to other types of loans at regional and community banks.
“The smaller banks are now in a good position to resume making SBA 7(a) loans and other funding requests,” added Arora. “Institutional lenders, like the other types of lenders, are steadily climbing back after disastrous results in March and April. They continue to play a strong role in small business lending.”
PPP and EIDL loan programs are there for the taking.
Back in April, the Small Business Administration (SBA) gave out more than $300 billion to assist small businesses during the coronavirus pandemic. “It is important for small businesses to apply for the loan and get the loan,” Scott Roelofs, a chartered financial analyst with RCG Valuation said at the time. “If you wait until you need it, the money may have run out and the application process and review may take longer than expecting.”
“The SBA is offering programs to help businesses with small loans up to 2 million dollars and they are low-interest rates and can be paid back over 30 years,” he explained. Additionally, the SBA offered $10,000 as an advance. And even the IRS was issuing loans.
“Even if you don’t think you are in trouble, even if you think you can make it through, these loans are for you,” Roelofs said. It turns out that he was right. These loans came and went with many businesses left out in the cold.
The SBA is here to save the day.
As a response, the Paycheck Protection Program was extended until August 8. But, if you missed out, the SBA offers other coronavirus relief options. These include:
- Economic Injury Disaster Loans (EIDL). The SBA states that these “proceeds can be used to cover a wide array of working capital and normal operating expenses, such as continuation to health care benefits, rent, utilities, and fixed debt payments.”
- Express Bridge Loan Pilot Program. If you have a previous relationship with the SBA, you may be eligible to access up to $25,000 quickly.
- SBA Debt Relief. “As part of our coronavirus debt relief efforts, the SBA will pay 6 months of principal, interest, and any associated fees that borrowers owe for all current 7(a), 504, and Microloans in regular servicing status as well as new 7(a), 504, and Microloans disbursed prior to September 27, 2020.”
Look beyond EIDL and PPP programs.
Even if you do not qualify or miss out on these relief options, the SBA is still backing traditional loans through its vendors. Beyond the SBA, there is also:
- The Save Small Business Fund from the U.S. Chamber of Commerce.
- A Main Street Lending Program via the Federal Reserve.
- Loans and grants from states, cities, and municipalities, such as the Disaster Relief Loan Guarantee Program in California.
- Programs established by private lenders like Huntington Bank and JPMorgan Chase.
I can’t stress this enough. With so much uncertainty right now, it’s wise to prepare for tomorrow. And, with so many affordable and accessible options, it just makes sense to take advantage of them while you can.
What are your other funding options?
Just because you didn’t meet the requirements, or missed a deadline, with the options listed above, you can still borrow money from:
- Borrowing money from friends and family.
- Direct lenders like BlueVine and Kabbage.
- Peer-to-peer loans from LendingClub, Prosper, or Funding Circle.
- Traditional l brick-and-mortar banks and credit unions.
- Business credit cards.
- Invoice factoring.
- Selling or renting assets, such as equipment or office space.
- Merchant cash advances (MCAs).
And, as a last resort, you may have no other choice to close your business and declare bankruptcy. Just remember to go through the legal process instead of verbally shouting like Michael Scott.
Before you get there, get your finances in order by evaluating your cash, creating a budget, and thinking outside the box to generate multiple streams of revenue. Most importantly remain calm and determine what your specific needs will be in the future. You can do this by talking to your team, crunching the numbers, and examining data through resources like microTracker.