Small businesses are finding it increasingly difficult to borrow over the past year. This is problematic given the impact of the COVID-19 pandemic on this group.
At a time when businesses need more borrowing options, the opposite seems to be happening.
Thousands of small businesses have struggled during the coronavirus pandemic, and for some the only way out has been to borrow money. But a new report reveals that loans for small businesses have been harder to come by over the past year. Talk about terrible timing.
Loan approvals are down
Small businesses routinely rely on loans to stay afloat during times of declining revenues and economic distress, but funding has been less available for local establishments over the past year. According to the Biz2Credit Small Business Lending Index, in January 2021, banks with assets of $10 billion or more approved only 13.2% of small business loan applications. That’s a slight increase from December when they approved 13.1%. But it’s also a steep drop from January 2020, when they approved a record 28.3%.
Smaller banks have seen a similar decline in loan approvals. In January 2021, they approved 18.3% of applications, compared to 18.2% in December. But in January 2020, they approved no less than 50.4% of applications.
The same is true for credit unions. In January 2021, they approved 20.5% of applications. A year earlier, they had approved 39.6%.
An understandable but worrying trend
It’s easy to see why banks may have taken a more conservative approach to lending throughout 2020. Once the pandemic hit, leading to a deeper economic crisis, lending became much riskier overnight. Additionally, as small business cash flow and revenues have declined, some owners may have turned to credit cards or other expensive means of borrowing to get through the crisis, hurting their own credit and made it more difficult to approve loans in the future.
An affordable option for struggling businesses
Small businesses that are struggling to get a loan may be eligible for a second Paycheck Protection Program (PPP) loan. Unlike traditional business loans, which are largely dependent on credit score requirements, eligibility for second PPP loans revolves around these factors:
- Have less than 300 employees
- Have exhausted all initial PPP funds
- Have experienced a 25% or more decline in revenue in at least one quarter of 2020
Businesses that meet these criteria can receive a second-draw PPP loan worth up to 2.5 times their monthly payroll costs for a total of $2 million. The amount is slightly higher for restaurants and other hard-hit industries, which can apply for loans worth up to 3.5 times their monthly payroll costs, but with the same $2 million limit.
PPP loans are completely forgivable if 60% of their proceeds are used to cover personnel expenses. And for those not eligible for the discount, the terms are very reasonable – the interest rate for second-run loans, like the first round, is just 1%, and borrowers have five years to repay them.
Of course, not all businesses will be eligible for a second-draw PPP loan, and it is these establishments that are at risk of going bankrupt in the absence of funding. Companies that have been refused a loan by the big banks could instead try their luck with community banks. Although these local banks do not have the same resources as larger lending institutions, they may be more likely to apply looser borrowing restrictions.
There are also small business grants available for certain targeted fields and industries. Some businesses may be eligible to apply for additional relief even after being approved for a second PPP loan. It pays to visit the SBA website for more information.