Jovita Carranza, head of the Small Business Administration, listens during a round table with governors and small business owners.
Alex Wong / Getty Images
The Paycheck Protection Program is ending, which means sick small businesses will have to look elsewhere for financing.
But where to go?
While there are other options that may be helpful to entrepreneurs during the coronavirus-induced recession, they are limited and may not have favorable conditions for borrowers, according to experts.
“When you go into a recession, the capital flow cools down,” said Chris Hurn, CEO of Fountainhead Commercial Capital, a non-bank commercial lender.
“I don’t know how prevalent some of these things will be right now depending on the credit markets and where they are,” Hurn said of sources beyond government-backed loans like the PPP.
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The Small Business Administration has approved nearly 4.8 million forgivable small business loans through the Paycheck Protection Program since it opened in early April.
The loans, created by the CARES Law, can be converted into grants if they are used according to certain parameters established by the federal government.
Applications must be approved by 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.
Other government loans
The first place that entrepreneurs should generally seek help once the PPP approval window closes is the alternative loans offered by the SBA.
The economic injury disaster loan program, for example, offers up to $ 150,000 in aid, plus an emergency grant of up to $ 10,000 for small businesses.
That program has been plagued by delays and changes in the rules on loan amounts and potential applicants.
The SBA appears to be “increasingly demanding than it was before in the [disaster loan] program, “said Brooke Lively, president of Cathedral Capital, which serves as CFO for small businesses.
The government agency also has something known as the 7 (a) program, which is generally used for things like working capital and commercial debt refinancing, Hurn said.
And his 504 loan program is often used for commercial real estate and heavy equipment purchases, he said.
Both types of loans generally offer up to $ 5 million in funds.
The Federal Reserve also created a main street loan program for small and medium businesses. The minimum loan available through this program is $ 250,000.
According to Roger DaSilva, founder of Realm Startup Advisory, another outsourced CFO firm for small businesses, many traditional forms of financing beyond delinquent federal loans will be limited for struggling businesses.
“The reality is that there is nothing for them,” said DaSilva.
That is in part because lending institutions are restricting their credit or focusing on other loan programs like PPP, he said.
But many will need additional financial assistance.
Nearly half of small businesses that received a PPP or disaster loan anticipate that they will need additional funds over the next 12 months, according to a survey by the National Federation of Independent Business, a trade group.
According to the survey, about 44% expect to need more than $ 50,000.
Such companies should go to their bank and ask about obtaining a loan or line of credit (or increasing an existing line of credit), Lively said.
In general, getting a line of credit is preferable because it is often more flexible than loans, and borrowers end up paying less interest, he said.
Companies must be cautious about taking on more debt, Lively warned, especially if the borrower has to sign a personal guarantee to get a loan or if the company had been struggling even before the coronavirus pandemic.
Business owners can also explore options such as income-based financing, DaSilva said.
Under this agreement, a bank generally presents money to produce a good or service, which the borrower pays once the business recovers. But there are risks: For example, companies may not return as quickly as expected.
A last resort could be to get a loan through a credit card company, Lively said.
A loan made by American Express, for example, would be paid by losing a percentage of each AmEx charge until the loan is canceled, Lively said. But the interest rate is often high, and borrowers can’t control the repayment term, he said.
Businesses in cash crises may also use “tried and true” methods other than loans, such as trying to renegotiate supplier contracts to secure better prices.