This too shall pass and chances are that when COVID shutdown comes to an end, you, like many other small business owners, will need a financial lifeline to help pull your business out of the tsunami caused by Coronavirus.
But, much like with most other industries, online lending as we know it has evolved to adapt to its new environment, one in which Coronavirus dictates how businesses should and can operate.
How difficult will it be to get small business financing after COVID?
The current economic climate has proven disastrous for both small businesses and lenders – something Become has been in a unique position to witness these past couple months. With thousands of business owners defaulting on their loan repayments, many online lenders have had to do what it takes to survive, some even going as far as to shut down their operations or freeze their lending activity.
For an industry that was soaring prior to this Black Swan event, it’s now uncertain as to what the lending landscape will look like in a post-COVID world. What is certain though, is that things will change and the strongest lenders will emerge like a phoenix out of the ashes.
Online or alternative lending has always prided itself on being an easier financing option for small businesses, which traditionally struggle to get loans from banks.
However, due to the strain caused by COVID, lenders will be forced to tighten their lending criteria, to limit the default risk that’s been exacerbated by the shutdown.
What are the best options?
The current best option for small business funding is the SBA’s Paycheck Protection Program (PPP), but once this pool of funds dries up there’s no guarantee that there will be another government COVID-19 financial aid program.
Small businesses will, however, have other funding options available to them, but which options will be viable? Prior to Corona, small businesses had an array of funding types available to them – SBA 7(a) loans, lines of credit, unsecured loans, and invoice factoring to name a few.
While the economic future is uncertain in a post-COVID reality, and no-one can know for sure yet which funding options and lenders will be operational, we do know that the following types of business loans are likely to be available to small businesses:
Merchant Cash Advances
A merchant cash advance (MCA) is a lump-sum amount that a business owner receives as a loan in exchange for a percentage of future debit and credit card transactions. While they do come at higher interest rates, their repayment period is shorter and payments are more frequent. Because these transactions serve as collateral for the loan, this loan type is likely to remain an option for small businesses.
An asset-based loan is a type of business loan which requires collateral to secure the loan. This collateral could be any asset such as business equipment, inventory, or balance sheet assets. It’s a less risky option for lenders as they have the option to recover the loan repayments by seizing the asset. Because of the lower risk, we believe that asset-based loans may be one of the first loan products that become available.
At this stage, it’s unclear what the status of the other funding options, such as lines of credit, unsecured business loans, invoice factoring and even SBA 7(a) loans, will be.
What are the qualification criteria?
The exact qualification criteria have not yet been determined, at the moment it isn’t even clear as to which lenders will survive, but we do know that it will be harder for small businesses to qualify for loans. But this is what we predict will happen:
- Lenders will focus more on the bigger picture, such as the effect of Coronavirus on the industry as a whole, for example, we know that certain industries like trucking, healthcare and e-commerce were not affected in the same way as restaurants and retailers.
- There will be less emphasis placed on personal credit score and more on revenue and general financial health.
- Lenders will probably ignore revenue from the lockdown months, instead focusing on revenue from pre-Corona months and from the months just following lockdown. If a business shows a good recovery from COVID-19 shutdown, it’s more likely to get funded.
How can SMBs improve their chances of getting financing?
The five C’s of credit always apply, even in these times. But, more likely than not, there will be less emphasis being placed on character (which is essentially credit score)and more of a focus on capacity and collateral.
In general, as long as financials demonstrate improvement, a business could be eligible for funding. A business with a post-COVID improvement plan could improve its chances of getting funding by showing:
- How the business will perform or generate more revenue over the next few months.
- How the business will resume activity, even if reopening partially.
- A plan for adapting its business model to align with Corona restrictions.
It’s no longer enough to just continue with business as usual. COVID-19 calls for an identity crisis in the way we conduct business – those businesses that follow a two-pronged approach are more likely to succeed after shutdown. Since we can’t predict what will be even 2 weeks from now, how can any business owner rely on traditional business to be the way of the future in a Coronavirus existence?
At the same time, you wouldn’t want to just abandon your current customers and business model that you’ve worked so hard to build. So by having a business identity crisis, by conducting business as usual while simultaneously pivoting and exploring new alternative products or services, you’re covering all your bases and making it more likely that your business will continue to succeed and also become eligible for financing.Having a #business identity crisis by conducting business as usual while simultaneously pivoting and exploring new alternative products or services makes it more likely that your business will succeed and meet lender’s eligibility… Click To Tweet