If the last year-and-a-half has taught us anything, it’s that small business owners need to be resilient. As the pandemic raged, they had little choice but to embrace the internet and get creative when raising capital. Business owners have come to realize that they are facing a different lending landscape as they continue to navigate the COVID-19 pandemic – one in which it’s hard to get a bank loan, despite low interest rates and an expanding economy.
Big banks, which typically offer the best interest rates, only accounted for 13.6% of approved small business loans in June of 2021. They are still lending, but if you want to secure a loan, you’d better have years of profits and sales growth, as well as valuable collateral. Insufficient collateral is a common reason why small business borrowers are turned down for a loan.
The good news is that banks aren’t the only option in the post-pandemic lending environment. The U.S. Small Business Administration (SBA), alternative lenders and crowdfunding platforms have stepped up, enabling small business owners to take advantage of interest rates that are expected to stay low for the foreseeable future.
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Small business funding options
Today’s small business owners have many places to turn to for a loan.
The Small Business Administration should be the first resource you turn to when evaluating funding options. The SBA’s disaster loans, including the COVID-19 Economic Injury Disaster Loan (EIDL), give small business owners with fewer than 500 employees access to low-interest loans they can repay over long periods. Outside of the SBA’s disaster loans, borrowers can access funding through the SBA’s other loan programs, such as its SBA 7(a) loan, SBA Express loan and SBA 504 loan.
Banks may be stingy when lending to small businesses, but alternative lenders aren’t, accounting for 24.5% of approved small business loans in June. These nonbank lenders are more than willing to work with borrowers who have questionable credit or who lack a lot of collateral. For instance, Rapid Finance doesn’t require collateral at all. Meanwhile, Balboa Capital will work with borrowers with decent (rather than outstanding) credit scores. Learn more about these top lenders in our Rapid Finance review and our review of Balboa Capital.
Buyer beware when borrowing from an alternative lender. Your credit score dictates the interest you’ll pay on the loan. The lower your score is, the more expensive borrowing will be.
The pandemic forced small business owners to get creative when raising capital, with many turning to crowdfunding for help. After all, lockdowns meant business owners had more time to craft an effective campaign. At the same time, investors became more comfortable investing on these platforms. Crowdfunding revenue doubled to more than $200 million in 2020. This year, it has already surpassed that amount.
Since March 2020, regulations have focused on helping small business owners manage through the pandemic. The Paycheck Protection Program provided small business owners with forgivable loans if they kept their staff on the payroll, which proved to be a lifeline during the pandemic. This year, business owners who took advantage of the program will begin paying back the loans if they do not receive forgiveness.
The SBA has made repayment easier, setting up a website where business owners can apply directly, bypassing the need to go through their lender. In all, the SBA awarded nearly 12 million PPP loans, totaling $798.7 billion, to small businesses. As of the end of June 2021, only 4.1 million ($349.6 billion) had been forgiven.
COVID-19 EIDL gets an upgrade
The COVID-19 EIDL plan is another loan program designed to help small business owners survive the pandemic. Under President Joe Biden’s COVID-19 plan, small business owners can borrow up to $2 million in long-term, low-interest loans. They don’t have to start paying the loans back for two years.
The Biden administration recently raised the amount you can borrow under the SBA’s COVID-19 EIDL loan program to $2 million. Previously, you could only borrow a maximum of $500,000.
CFPB weighs in
It’s not just the White House that wants to help small businesses access capital. The Consumer Financial Protection Bureau, a government watchdog agency, recently proposed new rules that would require lenders to collect more data on business borrowers. The aim is to determine if the nation’s lenders meet the needs of small businesses, including women- and minority-owned enterprises. The data collection requirements would cover term loans, lines of credit, merchant cash advances and credit cards. Lenders would be expected to acquire the following data:
- The type of credit small businesses seek
- Demographic information about the borrower
- How applicants are informed about their denial and approval
Fintech and increased convergence
Financial technology companies have disrupted every aspect of financial services, including small business lending. With innovative business credit cards and alternative lenders that can approve and fund a loan in the same day, technology has had a significant impact on the lending sector. During the pandemic, many alternative lenders played a crucial role in getting PPP loans into the bank accounts of small business owners. Credit scores still matter, but artificial intelligence and machine learning technology enable lenders to use different criteria to approve loans. That provides more opportunities for small business owners to get funding.
Alternative lenders aren’t the only entities providing small businesses with access to capital. Many top credit card payment processing companies are helping their customers get loans as well. Expect payment processors to play a bigger role in small business lending going forward. By processing payments for millions of small businesses, they have access to a wealth of information that can help them underwrite a loan. For example, the payment processor Square’s service, Square Capital, has extended over $6.8 billion to more than 340,000 merchants. Meanwhile, Clover also has a small business lending program. Through Clover Capital, you can turn future credit card sales into working capital. Learn more in our Clover review.
Payment processors are relatively new to the small business lending market. They extend capital and provide flexible terms, often based on future sales.
The next few years hold promise for small businesses looking to get funded. As the lending industry continues on its path of disruption and as regulators step up their efforts to help, small businesses stand to benefit immensely from increased access, quicker loan approvals, and a better overall small business funding environment.