PPP loans end. Here’s where small businesses can turn now
Jovita Carranza, head of the Small Business Administration, listens during a panel discussion with governors and small business owners.
Alex Wong / Getty Images
The paycheck protection program is ending, meaning struggling small businesses will have to look elsewhere for financing.
But who to turn to?
While there are other options that can help entrepreneurs during the coronavirus-induced downturn, they are limited and may not come with favorable terms for borrowers, experts say.
“When you enter a recession, the flow of capital is cooled,” said Chris Hurn, CEO of Fountainhead Commercial Capital, a non-bank commercial lender.
“I’m not sure how prevalent some of these things will be right now based on the credit markets and where they are at,” Hurn said of sources other than government guaranteed loans like PPP.
The Small Business Administration has approved nearly 4.8 million small business forgivable loans through the Paycheck Protection Program since it opened in early April.
Loans, created by the CARES Act, can turn into grants if they are used within certain parameters set by the federal government.
Requests must be approved before the end of Tuesday to access the $ 130 billion remaining in the program.
There appears to be a last minute demand from borrowers. Fountainhead, for example, has approved 317 loans worth $ 56 million since Friday, Hurn said.
The first place entrepreneurs should generally go for help after the PPP approval window has closed are with alternative loans offered by the SBA.
The Economic Injury Disaster Loan, for example, offers up to $ 150,000 in assistance, as well as an emergency grant of up to $ 10,000, to small businesses.
This program has been hampered by delays and changing rules regarding loan amounts and potential applicants.
The SBA appears to be “becoming more demanding than it was earlier in the [disaster loan] program, ”said Brooke Lively, president of Cathedral Capital, which serves as CFO for small businesses.
The government agency also has what is called the program 7 (a), typically used for things like working capital and commercial debt refinancing, Hurn said.
And its 504 loan program is often used for purchases of commercial real estate and heavy equipment, he said.
Both types of loans generally offer up to $ 5 million in financing.
The Federal Reserve has also created a Main Street loan program for small and medium businesses. The minimum loan available under this program is $ 250,000.
Many traditional forms of financing beyond federally guaranteed 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 that there is nothing for them,” DaSilva said.
This is in part because lending institutions are tightening their credit or focusing on other lending programs like PPP, he said.
But many will need additional financial assistance.
Nearly half of small businesses that have received a P3 or disaster loan plan to need additional funds over the next 12 months, according to a survey by the National Federation of Independent Businesses, a professional group.
About 44% expect to need more than $ 50,000, according to the survey.
These businesses should go to their bank and apply for a loan or line of credit (or to increase an existing line of credit), Lively said.
Getting a line of credit is usually better because it’s often more flexible than loans and borrowers end up paying less interest, she said.
Businesses must be careful not to take on more debt, Lively warned, especially if the borrower has to sign a personal guarantee to secure a loan or if the business had struggled even before the coronavirus pandemic.
Business owners can also explore options such as revenue-based financing, DaSilva said.
As part of this arrangement, a bank typically provides money to produce a good or service, which the borrower pays back once business turns around. But there are risks – on the one hand, business may not return as quickly as expected.
A last resort may be to get a loan through a credit card company, Lively said.
A loan made by American Express, for example, would be repaid by losing a percentage of each AmEx charge until the loan is repaid, Lively said. But the interest rate is often high and borrowers can’t control the repayment schedule, she said.
Cash-strapped businesses can also use “tried and true” methods other than borrowing, such as trying to renegotiate contracts with suppliers to get better prices.