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Many small and medium-sized businesses (SMEs) are finding it difficult 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 often not subject to the same policies, giving individuals less protection and opening up new alternative financing companies that don’t always offer the helping hand needed.
As a result, consumers often look for contacts who can help them navigate the application and approval process while providing them with the essential education needed to obtain cost-effective capital with product training.
According to the Biz2Credit Small Business Lending Index, small business loan approval rates have been rising slowly this year — with approval percentages at big banks rising to 14.3% in December from 14.2% last November. However, over the same period, small bank approvals increased from 19.9% to 20.1%.
Here’s how SMBs have had to find new, alternative routes to capital that allow business owners to access finance faster than before – and without the headache of navigating lengthy legal paperwork.
Related: So You Want Your PPP Loan Forgiven? Be sure to submit this application
Take on debt first before selling equity
In the early stages of the pandemic, many business owners from hedge funds, private equity groups and venture capital firms were told they were approved for loans. This was after months of negotiating term sheet deals, often more than 100 pages long, only to find out later that they would not receive the funds for several months after signing their loan documents. Others received only vague reasons for rejection or a complete lack of correspondence, and a call to 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 before taking on the debt and immediately take on investors under immense pressure from the start. Many companies believe that the initial investment in flashy technology and top-notch CRMs will steer the business in the right direction and keep the market attractive.
Not correct. One of the greatest strategies a startup business can have for itself is to prepare for the worst-case scenario, if it happens (not if), which in this case means starting lean and mean and looking for ways to seek to keep expenses to a minimum.
Networking and IHK are your friends
How many business owners do you know who understand the difference between factoring and a merchant cash advance? In most cases, these owners want fast-working capital with an affordable payback. If you don’t have the web of connections and networks necessary, this is where joining your local chamber of commerce, attending trade conventions and local business groups comes in.
Small and medium-sized businesses, the self-employed and minority-owned businesses have historically been left out. Unfortunately, the pandemic has only exacerbated this problem. The Paycheck Protection Program and government-backed EIDL loans were set up to help small businesses, but were initially widely distributed to companies like Shake Shack and TB12.
According to that New York Times, Data collected on the racial breakdown of PPP allocation was sparse, presenting New York as a problematic zone where lenders were not required to collect demographics of their borrowers. Ultimately, economists have repeatedly found gaps here.
Additionally, an analysis by the Federal Reserve Bank of New York found that some counties with large numbers of Black-owned businesses — notably Bronx, Queens, and Wayne County, MI (including Detroit) — had strikingly low concentrations of the relief loans – From of the 996,000 loans that contained information about the borrower’s race, 71% of the dollars went to white-owned businesses.
More than half of the approximately $525 billion in loans issued through November 2020 went to just 5% of the more than five million recipients, an analysis of SBA data from revealed The Washington Post.
See also: 4 ways businesses can avoid loan fraud and predatory lenders
Be careful when relying on government funding
Congress approved billions of dollars in aid to small businesses to help them keep their employees safe during the pandemic, but a large chunk of those businesses never saw the funds. When the PPP was first initiated in April 2020, banks quickly moved to bigger loans and more established companies because they were more lucrative in their world. Corresponding The New York Timesthe program’s largest lender (JPMorgan Chase) refused to lend even less than $1,000.
forbes went on to report: “…from April 2020 to May 2021, the PPP provided millions in loans to keep businesses afloat during Covid-19. Over 11.8 million PPP loans totaling nearly $800 billion have been approved since inception in 2020, according to US Small Business Administration data as of May 2021. While many of the earliest PPP borrowers have already applied for loan forgiveness and granted to them, SBA data shows that at the end of July, 18% of PPP loan borrowers in 2020 had a loan and had not applied for forgiveness.”
Small and medium-sized businesses are still grappling with sovereign credit uncertainty and rising inflation, so they have typical operating costs. The SBA’s EIDL loans were originally capped at $150,000 in 2020. The SBA increased that amount to $500,000 in April 2021 to help companies that were still struggling.
After the PPP is gone, SMEs should seize opportunities and grow their business again. Small businesses still don’t know who to turn to. 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 offer SMEs alternative financing that doesn’t lock in business owners doomed to fail.