Your PPP loan is almost finished. And after?
Since its launch on April 3, the Paycheque Protection Program (PPP) has disbursed billions of dollars to businesses affected by the coronavirus pandemic. For many business owners, PPP has offered a crucial lifeline in uncertain times.
But according to a recent survey of 1,500 companies that participated in a Goldman Sachs training program, 84% of small businesses will have exhausted their PPP loans from the first week of August. Although Congress has extended the deadline for PPP applications to August 8, that means little to companies that have already depleted those loans. Worse, more than 60% of those polled said their income was still less than three-quarters of what it was before the pandemic.
PPP was never intended as a permanent solution. But with no end to the coronavirus pandemic in sight, many business owners are now caught in a difficult position. Banks know “PPP fatigueAnd Congress is struggling to roll out new loan programs that could save businesses.
However, all is not pessimistic. Your PPP loan may be nearing depletion, but your business has options. As Congress and the banks try to settle on a new relief program, small business owners should look into these alternative sources of finance.
Traditional SBA loans
During the PPP, the Small Business Administration (SBA) continued to partially guarantee low-interest loans to businesses administered by traditional banks.
SBA loans have long been a sought-after option for small businesses. With these loans, the SBA secures a portion of the bank’s small business loan, mitigating the risk for lenders. Because there is less risk, lenders are considering more small business owners for the traditional, longer-term, lower-rate financing that comes from banks. On the other hand, small business owners often need strong credit or a positive loan history to get SBA loans.
Typical SBA loans do not offer the same generous forgiveness policies as PPP loans, but they have other advantages. There are fewer restrictions on the use of the money, the repayment terms are longer, and the rates are still competitive.
There are a variety of SBA loan products available, but the best options for businesses looking for an alternative after PPP are SBA 7 (a) loans and SBA 504 / CDC loans.
7 (a) Loans
The 7 (a) loan program is the SBA’s largest loan program. Businesses typically use these loans as working capital for expansion, improvements, or other growth opportunities. Business owners often use them to refinance debt or as a seasonal line of credit.
Considering the volatility of our current economic conditions, 7 (a) loans are particularly attractive options because you can use them for a wide variety of business purposes. Loan Program 7 (a) offers the following loans:
- Standard loan 7 (a)
- Small loan SBA 7 (a)
- SBA Express Loan
- Express Export loan
- Export working capital
- International business loans
- SBA CAPLines line of credit
Standard 7 (a) loans are loans of up to $ 5 million partially guaranteed by the SBA. The Small Loan 7 (a) is suitable for loan amounts under $ 350,000, the Express Loan 7 (a) allows you to advance through the application process in exchange for a higher interest rate, and there are more nuanced programs for international export companies.
SBA 7 (a) loans are subject to a guarantee fee, interest rates varying by lender, and typically have repayment periods of up to ten years for working capital loans and equipment loans. , and 25 years for commercial real estate loans.
504 / CDC Loans
SBA 504 / CDC loans help homeowners purchase fixed assets or upgrade existing assets. Now the temporary 504 Refinancing program allows you to use funds to pay wages, rent, utilities, inventory, or pay off or reduce trade credit. If you’re struggling to pay rent or utilities for an office or storefront, these loans are worth checking out. Likewise, if you want to grow your business by purchasing real estate, 504 / CDC loans are for you.
With a 504, banks will provide half of the total loan amount, SBA-approved Certified Development Corporations (CDCs) provide 40% of the loan amount, and the borrower pays the remaining 10% as a down payment.
Interest rates on CDC / 504 loans are not set until about 45 days after your down payment because CDCs and banks have to weigh on them. Typically, they are around 5-6%. The fees are typically around 3% of the loan amount, and 10 and 20 year maturities are available.
National banks are not the only ones able to issue affordable loans. Especially during the first round of PPP financing, community banks made concerted efforts to finance both existing and new clients.
If you are using a large bank or an online bank just for your business banking needs, it is worth exploring the smaller banks in your community. Many community banks recognize the challenge of the pandemic for small business owners and are working to provide innovative lending options. If the first bank you contact can’t help you, they can always put you in touch with another viable loan option.
You may need to transfer your commercial banking services to a community bank to get a loan. But it can also be a good move anyway, to support your community in these uncertain times.
Alternatively, Community Development Financial Institutions (CDFIs) are private financial institutions that are 100% dedicated to providing responsible and affordable loans to help community businesses thrive. They support small businesses, nonprofits, commercial real estate and other community businesses in disadvantaged markets across the country.
CDFI loans have competitive interest rates, aim to minimize borrower risk, and often work with the borrower to improve their chances of success, both short and long term.
Online lenders are a good option if you need capital quickly. Online lenders often offer business loans at higher rates with less stringent requirements, but many stopped lending to small businesses or tightened their credit at the start of the pandemic.
Now some are coming back and may be a viable option for small businesses looking for a lifeline after P3 expires. If you’re left out of traditional lending options like bank and SBA loans, online lenders are a convenient, if often expensive, option. Yet new businesses or business owners with less than stellar personal credit may find that online lenders have what they need.
Finally, sometimes you can count on the kindness of strangers. Although many people don’t have as much disposable income these days, crowdfunding remains a viable form of finance.
Crowdfunding platforms like Kickstarter and Indiegogo provide a relatively easy way for small businesses to raise funds from their communities. During the second half of March, funds collected daily on Indiegogo increased by 24% over the previous year, largely due to its Local business assistance program. This program waives Indiegogo’s platform fees for local businesses in the service sector, such as restaurants and concert halls.
On Kickstarter, the percentage of successful campaigns is at 57.75%, well above its lifetime success rate of 37.65%, while campaigns conducted between January 1 and April 3, 2020 generated 38% more than the previous period in 2019 .
Before launching a crowdfunding campaign, however, be sure to read the fine print. Some platforms charge payment processing fees or force businesses to meet their goal of keeping some of the money.
There is a future after PPP
While PPP funds can dry up for many small businesses, there are still a number of viable sources of funding. Traditional SBA loans can provide small businesses with low interest, low risk relief, while community lenders, online lenders, and crowdfunding are all unique options. Depending on how Congress chooses to tackle the pandemic in the future, other loan options may be available soon. One thing is certain: there is a future for your small business.