According to the World Bank, the COVID-19 pandemic will plunge the world economy into the worst recession since World War II. Such a recession stands to take a devastating toll on small businesses.
In the U.S., pandemic-specific government programs like the Paycheck Protection Program (PPP) have all but dried up, and Congress has yet to extend the program or offer an alternative. Facebook’s State of Small Biz report found that 44% of small businesses expect cash flow to be a challenge in the next few months, a number that will only increase if the government fails to offer funding options.
The new economic normal will be difficult for small business owners. In an unpredictable recessionary economy, consumer spending habits change quickly and income your business once relied on can dry up fast. If a small business doesn’t need some sort of financing now, they very likely will in the coming year. Now is the time to start thinking about the new normal and how your business will navigate it.
Fortunately, you don’t have to wait for Congress to get the influx of cash your business needs. Whether you’re looking for money immediately, or just want to be mindful of opportunities for when you hit a cash crunch down the road, here we’ll look at some of the best financing options that businesses can utilize in the new normal.
1. EIDL program
First off, not all government aid is expired. Although the PPP is done for now, the Small Business Administration (SBA) is currently accepting new applications for Economic Injury Disaster Loans (EIDL).
EIDLs provide economic relief to businesses experiencing a temporary loss of revenue due to unforeseen circumstances like natural disasters or pandemics. Congress authorized emergency funding for this program at the beginning of the pandemic and recommitted funding to support more businesses in June. Now, small businesses can apply for an EIDL through the SBA to receive loans of up to $2 million. Some eligible applicants can receive a cash advance of up to $10,000 within three days of applying.
EIDLs, like other small business loans, can cover a wide array of expenses, from employee benefits to office rent. EIDL loans carry a 3.75% interest rate and may require collateral based on the size of the loan. To receive an EIDL, you must also let the SBA review your business tax records.
2. Traditional SBA loans
The SBA has a variety of non-disaster loan products that are great options for small businesses, as well.
Traditional SBA loans are typically longer-term and have lower interest rates than loans that you’d get directly from the bank, and especially from those through online lenders. They also have only a few restrictions for how you can use the money. To get one, though, you need strong credit or a positive loan history.
The 7(a) loan program is the SBA’s biggest and most popular loan program. Most small businesses looking for financing during the pandemic would apply for the Standard 7(a) loan program, which provides up to $5 million in funding.
3. Community lenders and small banks
Community lenders stepped up during the pandemic to help small businesses stay afloat. Small banks have a vested interest in the community and the businesses that make that community what it is. If the businesses go, so will some people, and so will the money that those banks depend on to operate. Community banks are interested in helping small businesses because they’re vital for the economic health of the neighborhood.
You may not find the best rates at your local bank, but you’ll likely find some of the best service and the people most willing to help you find financing that works for your business. Especially if you use online banking for your business, it’s worth paying your local bank a visit if you’re in need of capital to open a new branch, hire new employees, or simply pay off debt.
When you think of crowdfunding, you might think of a community raising money to send the youth baseball team to Florida. Well, it’s also a viable business financing method these days. When the pandemic began, Indiegogo reported that daily funds raised on the platform were up 24% compared to the previous year, thanks in large part to the platform’s response to the pandemic. Indiegogo’s Local Business Relief Program waives the platform’s fees for local businesses in the service industry.
Kickstarter reported similarly strong funding numbers, discovering that the percentage of successful campaigns between January 1 and April 3, 2020 was nearly 58%, well above the lifetime success rate of 38%. Kickstarter has also connected small businesses and entrepreneurs with financial resources and advice for free.
More than 100,000 small businesses have closed permanently due to COVID-19. People love supporting the local businesses in their communities may be willing to open their wallets to save their favorite businesses.
More ideas for funding options for small businesses during COVID-19 can be found here.
The bottom line: funding options for small businesses
The economy is in recession and it may be quite some time before the next boom. Whether you’re in need of funding now, or you want to be aware of your options if your business takes a turn for the worst, this guide should help.
Check out these resources on OpenWeStand.org for more business lessons and strategies you can use to get through these tough times.