Do you need a business loan? Inflation is leading to more debt in Main Street

SAN FRANCISCO, Calif. – APRIL 28: Deanna Sison takes a break from preparing pre-ordered lunches to check the status of her federal small business loan application at the Little Skillet restaurant in San Francisco, California, Tuesday, April 28, 2020. Most Financial Aid at Covid for small businesses is now completed, but the need for more funds remains.

San Francisco Chronicle / Hearst Newspapers Via Getty Images | Hearst Newspapers | Getty Images

Price increases have been challenging for Superfit Hero, an independent active clothing brand in plus sizes. The Los Angeles-based company typically buys fabric from a local supplier who imports the material from Taiwan and then works with a local factory. But since the pandemic, “the whole process has been disrupted,” said Micki Krimmel, founder and CEO.

Like many other companies, the company closed operations in the spring of 2020, but when things reopened, the factory that Superfit Hero used closed forever. Meanwhile, the price of drugs rose by 20%. Krimmel eventually found a new manufacturer, but between higher manufacturing and material costs, prices have tripled since 2019. At the same time, supply chain disruptions meant that the company had to store more material and goods to ensure a supply of products to customers.

“For small businesses, it means having to invest in so much stock that our cash flow is tied up. We can not spend on marketing. It’s just a real pressure from all sides,” she said.

To ease the pressure, Krimmel applied for the Covid Economic Injury Disaster (EIDL) loan, $ 150,000 in the first round and half a million in the second round, which the company used to turn things around, stock up on fabric, buy extra furniture and pivot with some new products.

“EIDL is the only reason we’re still in business honestly,” Krimmel said. With the cash infusion and new products on the way, “I’m more optimistic now than I was last year,” she said.

But the EIDL loan program has ended, while higher costs due to commodity inflation, supply chain struggles and rising wages are all still issues that challenge the economic picture for small business owners.

Inflation is at its highest in 40 years, and in the latest CNBC | SurveyMonkey Small Business Survey for Q1, 47% of small businesses said they passed on price increases to customers, a further 32% state that they will soon have to raise prices if inflation continues (they think so) and only 33% described business conditions as good. Other recent studies by the National Federation of Independent Business and Goldman Sachs have presented a similar portrait of the Main Street outlook in an inflationary economy.

To deal with higher costs, more companies are taking out loans.

In a survey by the U.S. Chamber of Commerce, nearly half, or 45%, said they have taken out a loan to deal with higher costs caused by inflation. According to the SBA, 29.3% of small businesses have applied for EIDL loans since May 2020, while 9.5% applied for bank loans.

Small businesses historically rely heavily on credit cards or family and friends for capital, said Tom Sullivan, vice president of small business policy at the U.S. Chamber of Commerce, but the pandemic changed that with the Paycheck Protection Program and EIDL loans.

The SBA distributed nearly $ 416 billion in emergency aid to 6 million small businesses through the PPP program, the Restaurant Revitalization Fund, the EIDL program, and other programs in 2021. Now that those programs are over, some expect a turnaround toward more bank loans.

“Obviously, they’ve been getting a lot of money over the last two years,” said Rohit Arora, CEO of Biz2Credit, but “now that no other public money is coming in, their need for credit will grow from here. “

The end of the government’s Covid financial relief

Biz2Credit’s latest Small Business Lending Index found that loan approval rates rose in January – all kinds of lenders, from big banks to alternative lenders and credit unions approve more loans, even though approval rates are still about half of what they were two years ago.

In its most recent survey, Goldman Sachs 10,000 Small Businesses found that 48% of small business owners who said inflation was their biggest concern have less than three months of cash reserves on hand.

“Small businesses” will approach banks a little higher than they would in the normal historical context. … We’re going to see that relationship really, really tested in the next few months, “Sullivan said.

The increased appetite for bank loans comes as interest rates rise, and amid recent market volatility and the sudden flare-up of geopolitical tensions due to Russia’s actions in Ukraine, credit markets may tighten.

Most small business lending programs, including SBA, have variable interest rates. For companies that really need a cash infusion, it is also not an ideal time to get a loan because income statements from the last two years have probably been disrupted by the pandemic, supply chain problems, inflation and higher wages. The Covid EIDL program, in addition to offering an attractive fixed interest rate of 3.75%, looked at pre-pandemic figures.

“It’s basically like a triple push. So the storm just keeps getting more complicated and intense. In typical times, you don’t see companies using capital to balance macroeconomic conditions,” said Joe Wall, national director of Goldman Sachs 10,000. Small Businesses Program Voices. Despite the headwinds, 73% of small businesses said they are optimistic about the economic trajectory of their business in 2022, the Goldman survey of small businesses showed.

The EIDL program expired in late 2021, but there is hope that Congress can reintroduce it as part of a small relief package aimed at small businesses, though political experts are far from sure of its prospects on Capitol Hill.

What you need to know about lenders and debt financing

With public lending programs implemented in the foreseeable future, business owners will have to turn to the usual sources of financing. While loan approval rates are still about half of what they were before the February 2020 pandemic, they are rising in all categories of lenders, according to the Biz2Credit Small Biz Lending Index.

Here are a few tips from the debt experts for small businesses on how to navigate the current economy and increase the chances of accessing the capital a business may need to grow.

1. Check your credit score

The last two years have been tough for many small businesses, and lower credit scores are reflected in higher borrowing costs. Businesses, like individuals, also get a score that is affected by payment history, debt amounts and other factors. However, unlike consumer credit scores, payments to lenders are not always reported to agencies. Business owners can improve their performance by ensuring that their business is incorporated with a federal employer ID, opening a corporate credit card and a bank account and also working with vendors who report payments to corporate credit bureaus.

2. Get tax paid early

Businesses wishing to get a loan soon should make sure their 2021 taxes are completed. Given the inflow of government capital over the past few years via PPP and EIDL loans, most balances hold up, Arora said, but income statements are a different story. For those with weaker P&L statements, make sure there is a solid explanation for why, Arora said, adding that “most lenders know P&L is lower because of Covid.”

Apply for loans from a variety of sources

Banks are large lenders to small businesses, but not necessarily large banks. Community banks finance 60% of small business loans and 80% of agricultural loans, according to Sullivan. “I can not overestimate the importance of these relationships, and that is why community banks are so important in the financial ecosystem for small businesses,” he said.

Small businesses became more familiar with alternative digital lenders during the pandemic and may want to consider online options again if more funding is needed. Key Covid financial assistance programs such as the Paycheck Protection Program included fintech companies in the lending process given the unprecedented amount of loans granted by the SBA, which contributed to greater awareness of fintech as a loan source.

According to a May 2021 report from the New York Fed, fintech lending rose from as little as 2% to as much as 20% of PPP loans during the pandemic, and fintech lenders were most often accessed by business owners underserved by the traditional big ones. banking networks and lack of existing relationships with lenders. The NY Fed found that fintech lenders approved the highest percentage of applications from black-owned small employers.

4. Tap on free SBA resources and help

Sullivan suggested that small businesses should find resources through the Small Business Development Center or find a business mentor through SCORE. Both are public partnerships that do not charge for their services. The Small Business Administration launched a Community Navigator program as a result of Covid helping business owners in underserved communities, including with access to capital.

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