In 2020, many small businesses applied for and benefited from the federal Paycheck Protection Program (PPP). This forgivable loan offered much-needed financial assistance to struggling businesses that wanted to keep employees on payroll during the pandemic.
With the second round of PPP loans now available, small business owners may wonder whether they're eligible to apply, and if they are, whether the funds they receive will be enough to keep them afloat.
While the PPP is a huge factor in overall economic recovery during COVID-19, it's not the only option for businesses that need a financial boost. Here's an overview of what steps businesses can take if receiving a PPP loan isn't enough.
How does the Paycheck Protection Program work?
In March 2020, President Donald Trump signed the CARES Act, a $2 trillion stimulus package for COVID-19 relief. Within that bill was the Paycheck Protection Program, which gave government-backed, forgivable loans to businesses to help cover payroll and the cost of facilities. These loans could be up to 2.5 times the company's monthly payroll expenses, with loans having a cap at $10 million.
Another round of PPP loans under the Paycheck Protection Program was signed into law on December 27, 2020. These loans are now capped at $2 million per loan, instead of the original $10 million.
Businesses that previously received a PPP loan can apply for a "second draw" loan, so long as they have used (or plan to use) the full amount only for authorized uses, and still meet the eligibility requirements.
To apply for a first or second draw PPP loan, businesses must meet the following conditions:
- Businesses must have fewer than 300 employees.
- Businesses must demonstrate a 25% reduction in quarterly revenue between comparable quarters in 2019 and 2020.
- Businesses must have been operational as of February 15, 2020.
- Businesses must meet other Small Business Administration (SBA) requirements.
- Sole proprietors, independent contractors and self-employed individuals are eligible.
What if my PPP loan isn't enough?
Receiving a PPP loan can be extremely helpful for struggling businesses, but it's not a silver bullet solution. The loan can only be used for payroll and other eligible operational expenses if business owners want to qualify for forgiveness. Many businesses have found that PPP 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 PPP funds. These loan products can also be a helpful solution if your business doesn't qualify for a first or second draw PPP loan.
Term loans
Taking out a term loan allows a small business to borrow money and repay it over a specified repayment schedule with a fixed or floating interest rate. These loans can run from 18 months to 25 years, depending on the lender you work with and the amount you're borrowing. These loans are typically paid back on a monthly or quarterly payment schedule. You can combine a term loan with your PPP loan to cover costs that are not included in the PPP.
Line of credit
A line of credit is a preset borrowing limit that a business can arrange with a financial institution. The borrower can access funding from the line of credit at any time, so long as they do not exceed the maximum amount, and pay it back as they can. If your business does not already have a line of credit, applying for one can be a smart and flexible financial solution to supplement your PPP loan.
Invoice factoring
Businesses aren't the only ones struggling right now, and many are dealing with customers and clients who have been unable to make timely payments. Through the invoice factoring process, companies can sell their unpaid invoices to a third party that will advance them 70 to 90% of the invoice upfront, with the remaining balance sent when the invoice is paid off (minus a fee for the factoring company). If your clients are struggling to make their payments because of COVID-19, invoice factoring might be able to help you with your cash flow until your invoices are paid.
Equipment financing
The coronavirus has caused businesses to make certain changes to their operations, some of which require additional equipment to meet new safety precautions. Small business owners can take out loans specifically to finance these expensive equipment purchases.
Bridge capital
A bridge capital loan is a short-term loan that is used as financing until a person or company secures stable financing or removes an existing obligation. Small businesses turn to bridge 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 7(a) loan
An SBA 7(a) loan is helpful for small businesses; it offers no down payments, low interest rates and longer repayment terms. It is partially backed by the SBA and has flexibility as to how the funds are used. If you're a young business and you need more than the PPP loan to improve your cash flow, it's worth looking into applying for an SBA 7(a) loan.
How to apply for a business loan
While every lending institution may look at different criteria for different types of loans, there are a few common elements each will look for. No matter what type of loan you're applying for, you should have the following documents prepared and ready before applying for a loan:
- Two to three years of financial statements and tax returns
- Accounts receivables reports
- At least three to six months' worth of bank statements
- A business plan
- Proof of business ownership
Wondering what your chances of approval are? Here are a few factors that typically influence a small business's odds of getting a loan:
Credit score
Lenders will examine your personal finances, which includes your personal credit score. Because lenders look for a personal guarantee on debt, having good credit standing can increase your odds of being approved for a loan.
Cash flow
Lenders will examine your sales, revenue and expenses to ensure you can meet the repayment obligations. Positive cash flow statements for your previous year gives a prospective lender reassurance that you'll be able to make your payments on time and in full.
Debt-to-income ratio
Lenders won't want to give a loan to companies with significant debt. They usually prefer to see less than a 30% debt-to-income ratio for new small business loans.
Collateral
Some lenders require collateral, such as real estate, to protect their loan. This gives them an asset that they can take control over in case the business defaults on its loan.
What to look for in a business lender
If your small business is looking for a lender, here's what to look for:
- Experience lending to businesses in your industry. Assess lenders using your own eligibility criteria. Make sure that they have experience in your industry so that they understand how the economy affects business and can be flexible when needed.
- Positive customer reviews. Small businesses want to work with lenders that provide their borrowers with positive experiences. Search for and read reviews online for the lenders you're looking into, reading both positive and negative reviews to get a holistic view of them. Ask fellow business owners which lenders they've worked with and recommend.
- SBA approval. Any business lender you assess should be approved by the SBA. You'll know you're working with a reliable and trusted vendor who has been vetted by this organization.
- Transparency about loan products and terms. Some lenders may charge fees if you repay the loan early, or they may fail to disclose that interest rates may increase. Have a direct conversation with potential lenders. Ask them to be transparent about the approval and repayment process and if there are additional expenses that are in the fine print.
Finding small business lenders with access to financial products will help fuel economic recovery in 2021 and beyond. Many small businesses and startups are wary about taking out loans. However, with the right lender, the process can be both straightforward and fair to you and your company.
If you're looking for a business lender that can offer a personalized and small business-friendly experience, 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.