How to Save Your Small Businesses from Coronavirus
Loans and Grants for Now and Later
But the reality is that the small business sector is still in need of help—specifically financial help. If you are a business owner, here are the two major categories of finance that you can turn to, both during the COVID-19 crisis and after.
When people think of the word “loan,” they’re usually envisioning a standard term loan. A lender, such as a credit union, bank, or other lending institution, provides a principal to the borrower, to be repaid (plus interest) in installments over the length of the loan. Loan terms vary from as little as a year in length to as much as 25 or 30 years. Interest rates can be fixed or variable.
Contact your lender to learn more about this most traditional type of loan and what specific terms might be available to you.
Federal SBA programs
The Small Business Administration provides guidance and resources to small businesses across the country.
In addition to the highly publicized Paycheck Protection Program and Economic Injury Disaster Loan Emergency Advance, the SBA also provides several loan programs that are available outside of COVID-19.
The SBA’s primary lending program provides loans of up to $5 million for a variety of uses. In order to be eligible, you must be a for-profit small business operating within the U.S., have no outstanding debt with the government, have exhausted all other possible financial lenders, and demonstrate a sound business plan for using the funds. The loan doesn’t come directly through the SBA but through an SBA-approved lender, and ordinarily has a turnaround time of five to ten days.
The 504 Certified Development Company Loan program offers long-term, fixed-rate financing to help small businesses expand or modernize. 504 funds typically go towards hard assets such as real estate or large-scale equipment.
This loan has a unique structure involving three parties, each typically providing the following percentage: you, the business owner, contribute 10 percent of the loan for the down payment; your credit union or bank supplies a standard loan for 50 percent; and a Community Development Corporation, backed by the SBA, provides the remaining 40 percent.
What are Community Development Corporations, or CDCs (not to be confused with the Centers for Disease Control and Prevention)? These non-profit organizations provide programs and services to give communities a boost, including affordable housing developments, educational programming, and economic development initiatives such as small business loans.
According to Gregory Huysman, director of business lending and services at VSECU, 504 loans “will probably be most useful for small businesses as we emerge from the crisis and this economic slowdown.” Once the economy steadies and businesses can transition from short-term survival to long-term planning, loan requests may shift towards opportunities for expansion (real estate) and/or efficiency (equipment).
Express Loans are, as the name suggests, an expedited process for small businesses to access capital even faster. Through this SBA program, loans as great as $350,000 are approved within 36 hours, so small businesses and their lenders can begin the due diligence period and have funds that much faster.
These small, short-term loans average $13,000, with a maximum of $50,000, and terms no longer than six years. The SBA provides funds to non-profit organizations with lending experience, who then serve as an intermediary for small businesses to lend both funds and expertise in areas such as marketing, management, and technical assistance. All terms are negotiated directly with the non-profit intermediary.
For 7(a), 504, and microloans, the SBA is paying the principal, interest, and fees for six months to provide debt relief on both current loans and those issued before September 27, 2020.
While funding is currently in high demand, now could be an opportune time to secure favorable lending terms for your business.
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With the advent of the internet and the boom of venture capitalism, lending has expanded beyond financial institutions and the federal government. Here are a few non-traditional options for small businesses in search of funding.
Also abbreviated to P2P lending, this type of loan is exactly what it sounds like: a direct loan agreement between individuals, rather than between an individual and an institution. Started around 2005, the P2P lending industry was created to offer credit opportunities to those who might not qualify at credit unions or banks, though often with high interest rates.
Sites like GoFundMe and CrowdFunding allow many individuals to collectively fund a larger loan with small capital investments. Crowdfunding can serve as a mutually beneficial arrangement; it widens the circle of lending options for small businesses and entrepreneurs, and it lowers the risk for lenders and investors by dividing the loan into smaller amounts.
One such example is Kiva, which is offering crowdfunded loans of up to $15,000 with a six-month grace period for new borrowers.
Revenue-sharing can also provide an alternative source of funding—more an investment than a loan. A typical revenue-sharing agreement provides the business owner with an infusion of capital while, in exchange, the investor is entitled to a certain percentage of profits moving forward. Essentially, you’re selling shares of your company and splitting earnings based on the division of ownership.
When considering a revenue-sharing approach, it’s important to consider a few key elements. Will the investor play an active role in determining business plans or be more of a silent investor who provides capital and entrusts you with the business end? Are all parties in alignment on the future and direction of the business? How is revenue measured, to ensure that everyone agrees on the final figures? And of course, make sure any agreement is in accordance with the law and business regulations; it’s often wisest to consult a lawyer to protect everyone’s interests before entering any such arrangements.
Mainvest is an interesting model that combines crowdfunding with revenue-sharing. Businesses can raise capital from a community of investors in return for a share of future revenue.
The best part about grant funding? You don’t have to pay it back. However, grants are usually extremely competitive and require significant research and planning. You will not only have to find grants appropriate for your business, but compile a strong application.
Grants can come from a variety of sources, including federal and state funding, as well as private grants from corporations, companies, or even foundations and non-profits. Some grants are available only to support a specific owner demographic, such as women-, minority-, or veteran-owned businesses.
The U.S. Chamber of Commerce and NerdWallet have compiled lists of grant opportunities for small business owners, among other resources, that provide a useful starting point. No matter what type of business you own, it’s worth investigating what opportunities are available.
As with anything involving money, it’s important to do your due diligence. Here are two important steps to take as you research your options:
First, be sure the funding is coming from a legitimate source. This is particularly true with private lending or grant opportunities, which may not have the same level of federal insurance as the U.S. Treasury, a credit union (NCUA insured), or bank (FDIC insured). Be aware of fraudsters trying to push unfavorable terms or even steal your identity, especially during times of crisis—pandemic or personal.
Second, no matter how or where you secure your loan, negotiate terms that work for you. Speak to a financial advisor to make sure you understand everything, from the principal to the fine print, before entering into an agreement and making a significant financial commitment.
Just know there are options out there and people who want to help, in good times and bad.
The views and opinions expressed in this blog are those of the authors and do not necessarily reflect those of VSECU.