Small and medium businesses have long been the backbone of the American economy, creating two in three net new jobs and driving 44 percent of U.S. economic activity before COVID-19.
Still, well before the pandemic-induced recession, SMBs struggled to secure the financing necessary to stay afloat, with an 80 percent chance of seeing their bank loan applications rejected.
Now, as millions of businesses confront the prospect of going under amid the persistence of the pandemic and dramatically reduced foot traffic even after the easing of state and local lockdowns, SMBs are in dire need of a financial life raft.
The good news is that despite facing a Black Swan event of historic proportions, there are steps SMBs can take today to boost their chances of obtaining financing. Here are three tips entrepreneurs should follow to see their businesses through this uncertain post-lockdown period.
- Explore new products and services
When crisis strikes, businesses are often presented with a false dichotomy: Double down on business as usual or pivot the business model to focus on new products and offerings.
But to win lenders over, it’s smarter for SMBs to adopt a two-pronged approach. Businesses should do everything possible to retain existing customers and clients – and the revenue they bring – while also exploring new opportunities for revenue generation.
What that pivot looks like will differ from business to business. For some, it may entail shifting more business activity online to meet surging e-commerce demand. Others may find that their in-house talent and expertise is well-suited to delivering new products and services that meet the market’s needs in the era of coronavirus. A tech startup with robust AI capabilities may branch out into the burgeoning digital health field. Meanwhile, a local restaurant could pursue new ways of reaching diners – from meal kits to instructional videos – while social distancing guidelines keep dining room capacity low.
- Develop a post-lockdown business improvement plan
Sketching a detailed path to recovery is crucial to convincing lenders that an SMB is worthy of financing. In the current climate, traditional metrics like personal credit scores won’t receive the same emphasis as in the pre-COVID world. Instead, institutions will be most interested in whether a business has a viable strategy for maintaining or even increasing their revenue in the near term.
Given that millions of SMBs were shut down throughout the spring, lenders will understand that a business’s revenue likely plunged during lockdown. Their primary focus will be a business’s post-lockdown revenue trajectory compared with its pre-lockdown performance – which is why SMBs should devise clear business plans that outline how they will retain customers and diversify their revenue opportunities while operating in full compliance with ongoing social distancing restrictions and public health standards.
- Get smart about financing options
A business has opted for a two-pronged approach to recovery and has crafted a thorough plan for resuming activity in the shadow of the coronavirus – but what are the best financing options available?
SMBs have until June 30 to apply for funding under the federal government’s Paycheck Protection Program, which enables businesses to cover payroll expenses in return for maintaining existing employee and wage levels. While government relief programs like PPP may suffice for some businesses, others will require private financing – but with the near-term availability of traditional financing options like lines of credit and unsecured business loans very much an open question, SMBs should consider additional avenues.
Merchant cash advances are lump-sum loans under which a business provides the lender a percentage of future debit and credit card transactions. Such loans come with higher interest rates but shorter repayment periods and more frequent repayments. Another alternative is an asset-based loan, which requires a business to put up an asset as collateral – whether business equipment, inventory, or other assets. Because both merchant cash advances and asset-based loans provide collateral against the loan, they’re less risky from the lender’s perspective and are therefore likely to be more widely available to SMBs in the near term than other financing options.
In Closing (For Re-Opening)
While the coronavirus pandemic is precisely the kind of once-a-century crisis that can topple even large and established companies, millions of SMBs can hike up their positions with strategic flexibility, proper planning, and an informed approach to seeking financing. SMBs that have made it this far have already overcome frightening odds – and as they stare down the next phase of the pandemic, they shouldn’t have to face it alone.
Started his first company at the age of 16. Co-founded several internet businesses all of which were profitable, fast-growing and innovative. A few were acquired by larger companies and a few are still profitable and growing. Today, Eden is the co-founder and CEO of Become, where he brings the company his 14 years of experience in a variety of online businesses, marketing technologies, methodologies and platforms.