May 11, 2022

Need a business loan? Inflation drives Main Street into more debt

SAN FRANCISCO, CA – APRIL 28: Deanna Sison takes a break from preparing pre-ordered lunches to check on the status of her federal small business loan application at Little Skillet Restaurant in San Francisco, California on Tuesday, April 28, 2020. The Most of the Covid financial relief to small businesses has now ended, but the need for additional funding remains.

San Francisco Chronicle/Hearst Newspapers Via Getty Images | Hearst Newspapers | Getty Images

Price increases have been difficult for Superfit Hero, an independent plus-size sportswear brand. The Los Angeles-based company typically purchases fabric from a local supplier who imports the material from Taiwan, then works with a local factory. But since the pandemic, “the whole process has been disrupted,” said Micki Krimmel, the founder and chief executive.

Like many businesses, the company closed in the spring of 2020, but upon reopening, the factory that Superfit Hero used closed permanently. During this time, the price of the fabric has increased by 20%. Krimmel eventually found a new manufacturer, but between higher manufacturing and material costs, prices have tripled since 2019. At the same time, supply chain disruptions have forced the company to stockpile more materials and articles to ensure a supply of products for customers.

“For small businesses, having to invest in so much inventory means our cash is tied up. We can’t spend on marketing. It’s just really pressure from all sides,” she said. .

To ease the pressure, Krimmel applied for the Covid Economic Injury Disaster (EIDL) loan, $150,000 in the first round and half a million in the second round, which the company used to turn things around, sourcing fabric, purchase additional inventory and pivot with a few new products.

“EIDL is the only reason we’re still in business frankly,” Krimmel said. With the cash injection and new products coming, “I’m more optimistic now than I was last year,” she said.

But the EIDL loan program has come to an end, while higher costs due to inflation of goods, supply chain difficulties and rising wages, remain issues that challenge the financial situation of the small business owners.

Inflation is at its highest level in 40 years, and in the latest CNBC survey | SurveyMonkey Small Business Survey for Q1, 47% of small businesses said they pass price increases on to customers, an additional 32% say they will soon have to raise prices if inflation persists (they believe this will be) and only 33% described the trading conditions as good. Other recent surveys by the National Federation of Independent Business and Goldman Sachs have presented a similar portrait of Main Street’s prospects in an inflationary economy.

To cope with higher costs, more and more companies are taking out loans.

In a US Chamber of Commerce poll, almost half, or 45%, said they took out a loan to manage higher costs caused by inflation. According to the SBA, 29.3% of small businesses have applied for EIDL loans since May 2020, while 9.5% have applied for bank loans.

Small businesses historically rely heavily on credit cards or family and friends for capital, said Tom Sullivan, vice president of small business policy at the U.S. Chamber of Commerce, but the pandemic changed that with the Paycheck Protection Program and EIDL Loans.

The SBA distributed nearly $416 billion in emergency relief to 6 million small businesses through the PPP program, Restaurant Revitalization Fund, EIDL program, and other programs in 2021. Now that those programs are over, some expect a shift towards more bank lending.

“Obviously they got a lot of money in the last couple of years,” said Rohit Arora, managing director of Biz2Credit, but “now, with no more money from the government, their need for credit is going to increase from here”.

The end of Covid government financial aid

Biz2Credit’s latest Small Business Lending Index found that loan approval rates rose in January – all kinds of lenders, from big banks to alternative lenders and credit unions, are approving more loans, although approval rates are still about half of what they were two years ago.

In its latest survey, Goldman Sachs 10,000 Small Businesses found that 48% of small business owners who said inflation was their top concern had less than three months of cash reserves.

Small businesses “are going to look to banks a little more than they would in the normal historical context. … We’re going to see this relationship really, really tested over the next few months,” Sullivan said.

The increased appetite for bank lending comes as interest rates rise, and amid recent market volatility and the sudden spike in geopolitical tensions due to Russia’s actions in Ukraine, credit markets could to tighten.

Most small business loan programs, including the SBA, have variable rates. For companies that really need a cash injection, now is also not the ideal time to get a loan, as profit and loss reporting for the past two years has likely been disrupted by the pandemic, the problems supply chain, inflation and rising wages. The Covid EIDL program, in addition to offering an attractive fixed rate of 3.75%, looked at pre-pandemic figures.

“It’s basically like a triple whammy. So the storm just keeps getting more complicated and intensifying. In normal times, you wouldn’t see companies using capital to offset macroeconomic conditions,” said Joe Wall, National Director of the Goldman Sachs 10,000 Small Businesses. Voice program. Despite the headwinds, 73% of small businesses said they were optimistic about the financial trajectory of their business in 2022, according to the Goldman Small Business Survey.

The EIDL program expired at the end of 2021, but there are hopes that Congress could reintroduce it as part of a small relief program targeting small businesses, although policy experts are far from confident about its prospects. at Capitol Hill.

What to know about lenders and debt financing

With government loan programs in place for the foreseeable future, business owners will have to turn to the usual sources of financing. While loan approval rates are still about half of what they were before the pandemic hit in February 2020, they are increasing across all lender categories, according to the Biz2Credit Small Biz Lending Index.

Here are some tips from small business debt experts on how to navigate today’s economy and increase your chances of accessing the capital a business may need to grow.

1. Monitor your credit score

The past two years have been difficult for many small businesses, and lower credit ratings mean higher borrowing costs. Businesses, like individuals, also get a score that is affected by payment history, amount of debt, and other factors. But unlike consumer credit scores, payments to lenders are not always reported to agencies. Business owners can improve their scores by ensuring their business is incorporated with a federal employer ID, opening a business credit card and bank account, and also working with vendors who declare the payments to corporate credit bureaus.

2. Do your taxes early

Businesses looking to get a loan soon should make sure their 2021 taxes are done. Given the influx of public capital over the past two years via PPP and EIDL loans, most balance sheets are holding up, Arora said, but profit-and-loss statements are another story. For those with lower P&L statements, make sure there’s a solid explanation for why, Arora said, adding that “most lenders know P&Ls are lower because of Covid.”

3. Look for loans from various sources

Banks are the main lenders to small businesses, but not necessarily the big banks. Community banks finance 60% of small business loans and 80% of agricultural loans, according to Sullivan. “I can’t overstate the importance of these relationships and that’s why community banks are so important in the small business finance ecosystem,” he said.

Small businesses have become familiar with alternative digital lenders during the pandemic and may want to consider online options again if additional financing is needed. Major Covid financial relief programs, such as the Paycheck Protection Program, have included fintech companies in the lending process given the unprecedented volume of SBA lending, which has helped greater awareness of fintech as a source of lending.

According to a May 2021 report from the New York Fed, fintech loans increased from as little as 2% to 20% of PPP loan amounts during the pandemic, and fintech lenders were most often consulted by business owners. companies underserved by large traditional companies. banking network and the lack of existing relationships with lenders. The New York Fed found that fintech lenders approved the highest percentage of applications from small, black-owned employers.

4. Tap Free SBA Resources and Help

Sullivan suggested that small businesses find resources through Small Business Development Centers or find a business mentor through SCORE. Both are public partnerships that do not charge for their services. The Small Business Administration launched a Community Navigator program in the wake of Covid to help business owners in underserved communities, including with access to capital.

To learn more and to register for CNBC’s Small Business Playbook event, click here.