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Centro de ayuda del coronavirus: herramientas para ayudarle a superar los desafíos y aprovechar las oportunidades actuales

Securing Financing for Your Small Business

Learn about the different types of small business financing options available to you during the coronavirus pandemic and as well as lender options and how to prepare for a loan.
Women discussing business loans

Note: This article includes updated information from July 13 to reflect the closure of the EIDL Advance Program (No. 2 below) following the depletion of funds. Additionally, updates were made June 17 on the EIDL program (No. 2) and June 9 on the Main Street Lending Program options (No. 3). 

Applying for a loan can be a stressful experience on any given day, but is especially so now, as more and more business are facing financial hardships as a result of the COVID-19 pandemic. Though the Paycheck Protection Program has provided the largest stimulus in U.S. history for small businesses, with 30 million businesses eligible for loans under the program, applying for these loans has proved challenging, especially as the authorized funds are quickly exhausted. The deadline to apply for a PPP loan recently was extende by law to Aug. 8, 2020.

To improve your business’ chances of obtaining the financing it needs during this difficult time, consider these PPP loan alternatives.

What Are Your Small Business Financing Options?

Small business owners have a variety of creative financing options to keep their businesses well-funded and operating smoothly. Traditional lenders have expanded their application processes to approve business funding that would have been rejected in the past, and other nontraditional lenders are taking advantage of emerging technology to offer financing in ways that weren't prevalent even 15 to 20 years ago.

Business owners should research solutions that apply to their unique business and industry, but most small business financing options can be grouped into the following categories:

  1. Term loans
  2. SBA loans
  3. Main Street Lending Program options 
  4. Business lines of credit
  5. Personal loans
  6. Merchant cash advances
  7. Equipment loans

1. Term Loans

The traditional loan process involves securing a term loan from a bank. Funds from term loans are borrowed under very specific terms at the outset. The bank outlines in the loan contract the interest rate at which the funds are borrowed and the repayment schedule that the borrower must adhere to. Any deviation from the terms typically results in penalties and additional interest. A borrower who can no longer adhere to the terms may also have to refinance the loan under new terms or face serious damage to their business credit. Depending on the amount financed, loans can be either short-term or long-term.

Long-term loans

Long-term loans are a type of traditional term loan that is expected to be repaid over a year or longer; most long-term loans are generally issued for periods between three and 10 years. Long-term loans typically have lower interest rates than short-term loans, which is due to more stringent credit and approval requirements associated with long-term loans. These loans are more difficult to obtain, and the longer repayment schedule allows lenders to recoup a significant amount in interest, even at a lower interest rate. Borrowers can also secure more capital through a long-term loan, so they are ideal for well-established companies that need large amounts of capital for major projects or purchases.

Short-term loans

Short-term loans are another type of traditional term loans, but these are generally expected to be repaid within a year or less. Short-term loans have less stringent credit and income requirements, but these can come at a cost. Short-term loans have higher interest rates and less flexible repayment options. These loans are ideal for businesses that need a modest amount of capital quickly.

2. SBA Economic Injury Disaster Loans (EIDL)

The Economic Injury Disaster Loan (EIDL) provides low-interest federal disaster loans for eligible businesses that have been negatively impacted by COVID-19. The Small Business Administration (SBA) also was offering an EIDL Advance Program. however, the funding has been deleted and is not expected to be renewed.

On June 15, 2020, the SBA re-opened the process that had been halted since April 15 and began accepting EIDL applications from qualified small businesses and U.S. agricultural businesses. Agricultural businesses are defined as “businesses engaged in the production of food and fiber, ranching, and raising of livestock, aquaculture, and all other farming and agricultural related industries” (section 18(b) of the Small Business Act (15 U.S.C. 647(b)).

All businesses who previously submitted their applications will continue to have their application processed on a first-come, first-served basis. For agricultural businesses that submitted an EIDL application through the streamlined application portal prior to the legislative change, the SBA will process these applications without the need for re-applying.

In order to be eligible for the loan, businesses will have to show injury to their business began in February or March 2020. However, certain types of entities, such as businesses in the cannabis industry, are exempt from the program entirely.

How much can businesses borrow as part of the program?

The SBA is offering up to $2 million in assistance to eligible businesses as part of its EIDL program. Loans may be used to pay fixed debts, payroll, accounts payable, and other bills that can’t be paid because of the coronavirus’ impact. The SBA is offering loans with long-term repayments to keep payments affordable, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay. Currently, the SBA is offering the option to defer payments in the first year, although businesses that choose to do this should note that interest would accrue during this time.

How do you apply for the EIDL program?

The SBA has an application process that allows businesses to register and apply online at: https://disasterloan.sba.gov/ela/Account/Login.

As part of the application, businesses are also required to submit IRS Form 4506, which will allow the SBA to access their tax returns. Businesses that use a PEO might have to provide alternate Form 941 information, as well. The SBA will also check the business’s credit to look for assurance that the business can afford to pay off the loan.

It’s highly recommended that businesses apply online, rather than using the paper form. Online processing may be faster, and allows the business to receive automated status updates.

If you experience any service issues, you can reach the SBA disaster assistance customer service center at: 1-800-659-2955 or via email: disastercustomerservice@sba.gov.

3. Main Street Lending Program

The Federal Reserve established a Main Street Lending Program (MSLP) to support lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. The program will operate through three facilities: the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), and the Main Street Expanded Loan Facility (MSELF). On June 8, 2020, the program was expanded to increase the scope and eligibility to continue to support small businesses.

The expansion of MSLP includes for the following:

  • Lowering the minimum loan size for New and Priority Loans
  • Increasing the term and maximum loan size for each MSLP loan option
  • Extending the repayment period for loans made under MSLP
  • Increasing the deferment period on principle balances to two years, interest payments will continue tio be deferred for one year
  • Raising the Reserve Bank's participation to 95% for all loans

Additional changes include the following:

MSLP Loan Options New Loans Priority Loans Expanded Loans
Term 5 years
(previously 4 years)
5 years
(previously 4 years)
5 years
(previously 4 years)
Minimum Loan Size $250,000
(previously $500,000)
$250,000
(previously $500,000)
$10M
Maximum Loan Size The lesser of $35M, or an amount that, when added to outstanding and undrawn available debt, does not exceed 4.0x adjusted EBITDA
(previously $25M)
The lesser of $50M, or an amount that, when added to outstanding or undrawn available debt, does not exceed 6.0x adjusted EBITDA
(previously $25M)
The lesser of $300M, or an amount that, when added to outstanding or undrawn available debt, does not exceed 6.0x adjusted EBITDA
(previously $200M)
Risk Retention 5% 5%
(previously 15%)
5%
Principal Repayment Principal deferred for two years, years 3-5: 15%, 15%, 70%

(previously principal deferred for one year and 33.33% repayment due in years 2-4)
Principal deferred for two years, years 3-5: 15%, 15%, 70%

(previously principal deferred for one year and 15%, 15%, 70% repayment due in years 2, 3, and 4, respectively)
Principal deferred for two years, years 3-5: 15%, 15%, 70%

(previously principal deferred for one year and 15%, 15%, 70% repayment due in years 2, 3, and 4, respectively)
Interest Payments Deferred for one year Deferred for one year Deferred for one year
Rate LIBOR + 3% LIBOR + 3% LIBOR + 3%

SOURCE: Federal Reserve 

In each of the above lending facilities, borrowers should make commercially reasonable efforts to maintain payroll and retain employees during the time the Eligible Loan is outstanding.

NOTE: The Federal Reserve is currently working to create the infrastructure necessary to operationalize the program. Once the program is operational, small- and medium-sized businesses interested in the program should seek to apply for program loans from an eligible lender. A description of eligible lenders can be found in the program term sheets. For more information about the Main Street Lending Program, visit the Federal Reserve website.

4. Business lines of credit

While traditionally structured loans may work for many businesses, some companies may be looking to secure funds that may not be needed immediately. If your business needs more flexible funding options, a business line of credit may be ideal. Business lines of credit are opened for a certain amount — $100,000, for example — but the business may draw upon those funds as needed. Once the line of credit is opened, the monthly payments and interest are determined based on how much of the open line of credit is used. This small business financing option is ideal for companies wishing to improve cash flow management or be better positioned to handle surprise expenses.

5. Personal loans

Personal loans are structured much like business loans and have similar interest rates and application processes. But using a personal loan to finance your business is a fairly non-traditional approach to securing the capital you need. Nevertheless, there are some circumstances where a personal loan can be helpful, namely if your business is relatively new and can't provide income history, or if your business credit is not well-established. In these cases, you may want to consider using your personal credit history to get your business off the ground. However, use this option with caution, as the loan will be tied to your personal credit history, which allows lenders to come after your personal assets if the business can't repay it.

6. Merchant cash advances

If your company has consistent, documented income and a large portion of your income comes from credit card transactions, you may want to consider a merchant cash advance. Under this arrangement, a financing company provides you the cash needed and takes a portion of your daily credit card sales in return. Merchant cash advances typically offer a quick, easy approval process and less stringent credit and documentation requirements. Repayment is also painless, since it's typically automated through your credit card processor. Unfortunately, these advances are usually limited to $250,000 or less, making them undesirable for businesses looking to fund large projects. Companies should also expect to trade the easier application requirements and quick approval process for higher loan fees and less flexibility for refinancing.

7. Equipment loans

Companies in a variety of industries will need to purchase, upgrade, or replace equipment at some point during the lifetime of their business. Heavy machinery in the construction or farming industries, large medical devices, restaurant ovens, or commercial vehicles can all cost well over $100,000, making these purchases a severe burden on company cash flow. Equipment loans can help companies secure the equipment needed to continue business operations without allocating all the funds necessary for the new equipment up front. Equipment loans typically require a 20 percent down payment, and the repayment terms vary depending on the amount financed.

Different Lender Options Available for Financing Your Small Business

1. Financing through a big bank

According to an article in Forbes, big banks' approval rates for small business loans reached record highs of 27.3 percent in March 2019. But the types of loans granted by large banks may not be a good fit for every small company. Big banks provide solid financial backing and often become a trusted partner for growing companies.

2. Financing through institutional lenders

When shopping around for business financing, institutional lenders may not be the first funding source that comes to mind, but organizations such as insurance companies, hedge funds, and other non-bank lenders are increasing their small business loan volumes. Many lenders in this category offer attractive terms and longer payback periods than traditional banks.

3. Financing through small banks

For a more personalized approach to lending, try a local community bank. Often, the lending officers will take the time to get to know their clients personally. Small banks and credit unions also offer other helpful services to small business owners, such as checking accounts, business credit cards, and merchant services.

4. Financing through SBA loans

The core SBA loan program is the 7(a) loan program. Through this program, the SBA will guarantee loans up to $5 million, with no minimum amount. SBA 7(a) loans can be used for all business purposes, including working capital, real estate, equipment, and inventory. There are also specialized programs available under 7(a), such as the CAPLines program, which is frequently used by construction companies, seasonal service businesses, and manufacturers. CAPLines provides financing for the seasonal buildup of inventory or materials needed by companies in these industries.

5. Financing through an internet marketplace

The internet has increasingly become a source of business funding. Peer-to-peer lenders pair private investors with small businesses in need of financing. Newer lending companies are assessing small business risk by creating their own models, which differ from the typical credit scoring models used by banks. Online lenders also tend to offer smaller loan amounts and more flexible repayment terms along with quicker decision times, faster loan closings, and better customer service throughout the loan process.

As with any lender, it's critical to read the fine print carefully to understand the process, fees, interest rates, any prepayment penalties, and liens on your business assets. To compare options, use a resource center for small business loans that allows you to see online lenders for various types of loans, special circumstances (veteran status, for example), or types of businesses.

Looking for additional support on how to navigate disruptions caused by the COVID-19 pandemic? Visit our Coronavirus (COVID-19) Help Center for more information and updates on financial assistance, workplace health, business continuity, payroll processes, health insurance, financial assistance, new legislation, and more. 

 

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