Options for Small Business Loans Beyond PPP
The Paycheck Protection Program is ending, meaning ailing small businesses will need to look elsewhere for funding. But where to turn? While there are other options that may be of help to entrepreneurs during the coronavirus-induced downturn, they are limited and may not carry favorable terms for borrowers, according to experts. “When you get into a recession, the flow of capital is chilled,” said Chris Hurn, CEO of Fountainhead Commercial Capital, a nonbank commercial lender. “I don’t know how prevalent some of these things will be right now based on the credit markets and where they’re at,” Hurn said of sources beyond government-backed loans like the PPP. The Small Business Administration has approved nearly 4.8 million forgivable loans to small businesses through the Paycheck Protection Program since it opened in early April. The loans, created by the CARES Act, may turn into grants if used according to certain parameters set by the federal government. Applications must be approved by the end of the day Tuesday to access the $130 billion that remains in the program. It appears there’s some last-minute demand from borrowers. Fountainhead, for example, approved 317 loans worth $56 million since Friday, Hurn said.
Other government loans
The first place entrepreneurs should generally go for aid once the PPP approval window closes are alternative loans offered by the SBA. The Economic Injury Disaster Loan program, for example, offers up to $150,000 in aid, plus an emergency grant of up to $10,000, to small businesses. That program has been plagued by delays and shifting rules around loan amounts and prospective applicants. The SBA seems to be “getting pickier than they were earlier in the [disaster loan] program,” said Brooke Lively, president of Cathedral Capital, which serves as a CFO for small businesses.
The government agency also has something known as the 7(a) program, typically used for things like working capital and refinancing business debt, Hurn said. And its 504 loan program is often used for commercial real estate and heavy-equipment purchases, he said. Both types of loan generally offer up to $5 million in funding. The Federal Reserve also created a Main Street Lending Program for small and mid-sized businesses. The minimum loan available through this program is $250,000.
Many traditional forms of financing beyond federally back loans will be limited for struggling businesses, according to Roger DaSilva, the founder of Realm Startup Advisory, another outsourced CFO firm for small businesses. “The reality is there’s nothing out there for them,” DaSilva said. That’s partly because lending institutions are tightening their credit or are focused on other loan programs like the PPP, he said. But many will be in need of additional financial assistance.
When you get into a recession, the flow of capital is chilled. Chris Hurn CEO OF FOUNTAINHEAD COMMERCIAL CAPITAL
Nearly half of small businesses that received a PPP or disaster loan anticipate requiring additional funds over the next 12 months, according to a survey from the National Federation of Independent Business, a trade group. About 44% expect to need more than $50,000, according to the survey. Such businesses should go to their bank and ask about getting a loan or line of credit (or increasing an existing line of credit), Lively said. Getting a line of credit is generally preferable because it’s often more flexible than loans, and borrowers end up paying less interest, she said. Businesses should be wary of assuming more debt, Lively cautioned, especially if the borrower has to sign a personal guarantee to secure a loan or if the business had been struggling even prior to the coronavirus pandemic.
Business owners can also explore options like revenue-based financing, DaSilva said. Under this arrangement, a bank generally fronts money to produce a good or service, which the borrower repays once business rebounds. But there are risks — for one, business may not come back as quickly as anticipated. A last resort may be getting a loan through a credit-card company, Lively said. A loan made by American Express, for example, would be repaid by forfeiting a percentage of each AmEx charge until the loan is paid off, Lively said. But the interest rate is often high and borrowers can’t control the repayment timing, she said. Businesses in a cash crunch can also use “tried and true” methods other than borrowing, such as attempting to renegotiate contracts with vendors to secure better pricing.