There are plenty of good reasons to take out a business loan. Maybe you’re looking to purchase new equipment, expand operations, or even increase your working capital over a period of time. With the right planning and reasoning, a business loan is often a necessary step that most business owners will have to take at one point or another.
But how does a financial crisis change that? If you find yourself exploring the possibility of taking out a loan now or whenever the market happens to be down, your outlook is probably very different. Your sales are down, you may be struggling to pay operational expenses, and the future is more uncertain than ever. In this instance, taking out a loan isn’t meant to help grow your business but to help it survive.
Applying for a business loan in a crisis
Now there’s a good chance that you’ve looked into specific COVID-19 loan programs such as the Paycheck Protection Program (PPP) and COVID Economic Injury Disaster Loans (EIDL). You might have already even applied or are in the process of applying for the second round of PPP funds. These programs have obvious benefits, like the potential for loan forgiveness, up-front grants, and low-interest rates that are meant to help you manage the financial impact on your business.
It all sounds great in theory, and while the SBA continues to find new ways to make these EIDL and PPP loans available, there are some unfortunate problems to be aware of.
Problems with the PPP and EIDL loans
The SBA EIDL program has been around for a long-time and is designed to help small businesses affected by economic and environmental disasters. But the COVID-19 variation of the program and the PPP are both brand new initiatives meant to simplify the application process, increase available loan funds, and minimize eligibility requirements. Just by nature of being new, these initiatives have run into their fair share of operational hiccups.
Numerous applicants and limited funds
Possibly the biggest issue with these programs is the massive number of businesses applying for a limited amount of available funds. Both the EIDL and PPP ran out of money within 2-weeks, and even with the expansion and limitations placed on larger businesses, most analysts foresee them running out again.
Confusing requirements and application process
The requirements to apply for a traditional EIDL are fairly well documented and consistent. The transition to a COVID-specific version somewhat muddled this in favor of simplifying the application. Similarly, the first round of the PPP came so suddenly and urgently, that most companies and lenders alike weren’t prepared.
The requirements have been clarified with the extension of the program, but even still it can be difficult to understand what improves your chances of being approved. To help navigate this tricky process, we’ve put together a list of things you can do to improve your application based on first-hand experience.
Websites and online applications have gone down, applications are stuck in the approval cue and a number of other issues have popped up due to the massive number of applicants. Depending on where you apply or tried to apply, the process can be slow or mismanaged simply because no one was prepared for how popular these programs would be. For businesses looking for immediate funds, this slow approval process just won’t cut it.
Should you apply for a SBA or PPP loan?
Difficulties aside, you may still want to consider applying for one of these programs. But as you prepare your application, you need to ask yourself if it actually makes sense for your business. To help you answer this, here are 6 reasons why you may not want to take out a crisis business loan.
Your business can survive without it
Before you even think about applying for a loan, you’ll want to revisit your budgets, forecasts, and cash flow statements. Not only are these necessary for most loan applications, but going through them can help you better understand the health of your business.
As you revise your budgets and forecast you can adjust for lost sales, a decrease in production costs, etc. and how that will affect your business over the next 3, 6, 12 months. Immediately you have a snapshot of the sustainability of your business and how drastically the crisis has changed your outlook for the rest of the year.
The other piece of this is the overall liquidity of your business, or how much cash you have available. This is where reviewing your cash flow statement and understanding your burn rate and runway comes into play. With your updated sales numbers are you currently spending more than you’re bringing in? Have your costs gone down?
Reviewing these can help you determine if a loan will be necessary to keep your business afloat. You may come to find that cutting costs, adjusting terms for accounts receivable and other incremental changes may be enough to maintain your business. Adding a loan into the mix may not be necessary at this point, and if it does become necessary you now have the documentation in place to quickly submit an application.
You don’t want additional debt or can’t make loan payments
Possibly the simplest question to ask yourself is do you want the debt after the crisis is over? If a small business loan wasn’t part of your business plan before the crisis hit, you may not want to make such a sudden decision. This doesn’t mean you can sit idly by and not make adjustments, but you can treat a loan as a last resort rather than an inevitability.
The other question to ask yourself is can your business make the monthly loan payments? The goal is to use the crisis loan to extend the runway of your business, but if the terms of the loan require a heftier monthly payment than you can manage, it has the exact opposite effect. Make sure that taking out a loan is a sound investment for your business and that you know how it will affect you in the short-term.
What you plan to use the loan for doesn’t qualify for forgiveness
The most beneficial aspect of the PPP is the potential for 100% loan forgiveness. The catch here is that in order to get that forgiveness, you need to use the loan to cover payroll and other qualifying expenses. Not sure what qualifies? You can find a full list here.
As you layout, your allocation plan for the loan, keep in mind that if you don’t use at least 75% of it to maintain payroll, you may not be eligible for forgiveness. This basically means that you need to have a firm understanding of how you plan to use it. If it’s not to cover payroll, it may make more sense to find other, more viable options for funding.
You can pivot your business
Sometimes a crisis can directly lead to innovation. As you explore the state of your business you may find new opportunities to adjust your business model.
Do you traditionally have a physical storefront? Work on implementing an eCommerce solution for your products and services.
Own a restaurant? Allow for pick-up or delivery instead.
Unfortunately not every industry or business will have an obvious solution for how to generate additional revenue streams but don’t rule out the possibility. If anything you may find some remote options that work just well enough to provide service for current customers and may potentially expand into long-term solutions down the road.
You have other funding options available
While the PPP has been the poster child during the COVID-19 crisis, there are still other funding options worth exploring. In a volatile economic climate, the changes in the following funding options are extremely beneficial for those looking to start a business, but they may also be useful to those currently in business.
Chances are that banks and credit card companies are lowering interest rates on current credit options. This means you could more easily acquire a higher credit limit with less risk of major penalties. If you find yourself just needing a small amount of funding in order to maintain your business, this may be a better option for you than pursuing a larger loan.
You also may be able to find outside investors that are looking to take money out of the market in favor of more stable ventures. Similar to applying for a loan, you’ll need to have the necessary planning and financial documents, including a robust executive summary, ready to demonstrate why they should invest in you.
Lastly, although a downturn in the economy generally affects everyone, you can always turn to friends and family for support. Again, if you’re only looking for a small amount of money to help maintain your business, this may be a reasonable option that can be applied more quickly and with fewer strings attached.
There’s no guarantee that you’ll qualify
If you went through the processes described in the previous points and find that a loan will benefit your situation, you still need to consider that even if you apply you may not qualify. As mentioned before, the overwhelming quantity of applicants and limited funds have left many businesses unable to apply or waiting in the perpetual pending stage. Even if your application makes it through, some missing paperwork or poor credit statements may lead to your application being rejected and then you’re back at square one.
The worst thing you can do in this situation is to rely on the loan as your saving grace. If you do and expect to be approved, you may end up without additional funding and with far less time to make adjustments.
View the loan as a potential extension to your safety net instead and run through the process of actively reviewing your cash flow and forecasts. Keep identifying ways to cut non-essential costs, test new revenue streams, and even cut payroll for a time if you have to.
Still need to apply for a loan? Now you’re prepared
After walking through these options and building your crisis plan, you may still find the need to apply for a traditional or emergency loan. Luckily, through the process of exploring the health of your business, you’ve actually prepared the majority of the documentation you’ll need to apply. Now if you haven’t started updating your budgets and forecasts or found the process to be a hassle you may want to consider using a tool like LivePlan.
LivePlan keeps all of your planning documents in one place and easily allows you to make adjustments, test multiple forecasting scenarios, and actively review the current health of your business with one simple dashboard. If you’re not quite ready to make that jump we also have plenty of free business planning resources available:
Whatever way you choose, just be sure to update your plan and forecasts to find effective reasoning to apply for a loan. You’ll be more prepared to apply, identify potential adjustments without a loan, and ensure you know how to allocate the funds if you do apply.