Why Small Business Loan Approval Rates Dropped To Record Lows In April 2020
The April 2020 loan approval index did not bring good news for America’s banking industry. After a record-breaking high of 28.3% in February 2020, the percentage of small business loan applications fell to 8.9% in April, the lowest approval rate since 2011.
In early 2020, the lending market was exceptionally strong. Small businesses felt confident about the outlook and were comfortable with taking on debt to fund investment and expansion. The coronavirus pandemic disrupted the matrix entirely.
After falling to less than 4% over the past two years, unemployment skyrocketed to Depression-era levels. Quick action by the federal government resulted in the passage of the CARES Act, which provided millions in relief to workers and small businesses. Lending shifted to PPP loans that are approved by the SBA. For struggling business owners, read on to learn more about possible financing options in the changing lending landscape.
Common Issues Faced By Small Businesses At This Time
The pandemic has created many hardships for small businesses, chief among them being the following:
- Access To Capital: Funds available through the CARES Act were quickly depleted. Going forward, you will need to look beyond traditional lenders given their anxieties about funding small businesses.
- Employee Safety: You may need to redesign interior space to keep employees safe from one another as well as from customers.
- Supply Chain Disruptions: You are ready to open, but your supply chains are still shuttered. Take advantage of all opportunities to purchase in bulk. Find alternative distributors until previous suppliers come back online.
- Customer Concerns: The most important thing now is to reassure customers that you are doing everything possible to ensure their safety. If possible, shift more business online so consumers can avoid coming to your physical site.
- Insurance: Check-in with your insurance carrier to determine the extent of benefits available due to government shutdowns and loss of business.
- Increased Sanitation Costs: You will need to enhance your sanitation procedures and train your cleaning staff on how to deal with the new reality.
- Shifting Marketing Strategies: Your previous marketing strategy may not be as successful in the post-COVID-19 world. Focus on safety and acknowledge your consumers’ concerns.
- Looking Forward: The coronavirus is one example of how suddenly the landscape can change. Now is a good time to strategize to effectively manage future disruptions.
COVID-19 Funding Options
To protect the small business community, four main programs were created under the CARES Act:
- Paycheck Protection Program: These are low-interest loans that help you keep your employees on the payroll. If you keep them on the payroll for eight weeks, the loan is forgiven. You can also use PPP funds to pay your mortgage or rent and utilities.
- EIDL Loan Advance: Economic Injury Disaster Loan Advance is intended to provide economic support for businesses that are experiencing a temporary loss of revenue due to COVID-19. Currently, eligibility is restricted to agricultural businesses engaged in farming, ranching, food and fiber production, or aquaculture.
- SBA Express Bridge Loans: The SBA Express bridge loan quickly provides up to $25,000 to cover the gap while you wait for your Economic Injury Disaster Loan funds to come through.
- SBA Debt Relief: If you have outstanding SBA microloans, 7(a) loans, or 504 financings, and have been impacted by COVID-19, you will receive a six-month loan deferment. The SBA will pay the principal, interest, and all associated fees. This will happen automatically without application, and your lender has already been notified.
How To Maximize Your Chances Of Getting Approved
With the quantity of SBA loans online right now, you may be wondering ‘how can I get an SBA loan?’ Here are some ways to maximize your chances of approval.
- PPP Loans
- Make sure your application is complete.
- The criteria for loan forgiveness are complicated. Before submitting your application, ask your lawyers and accountants to review it.
- Be sure to include all supplementary documents including:
- Bank accounts or third-party payroll service reports documenting your payroll.
- Payroll tax forms (typically 941) and state quarterly wage and unemployment filings.
- Canceled checks, bank statements, or payment receipts that prove your contribution to employee health insurance and retirement plans.
- Traditional SBA 7(a) loans
- Make sure you meet the SBA size requirements and have a good credit history.
- If you have prior government loans, be sure they are paid or in good standing.
- Write a strong business plan that includes an overview of your company and product/service, corporate structure, mission statement, industry analysis, and financial statement. Be sure to explain how the SBA loan funds will help you improve your bottom line.
The coronavirus pandemic created unprecedented disruptions for the lending and small business communities. Small businesses face new operating realities that will create more of a burden on cash flow. Accordingly, SBA financing, especially via PPP, can be a lifeboat for small businesses seeking to weather this storm.