The Federal Reserve Banks publish an annual small business credit survey report. The 2020 SBCS Report on Employer Firms is based on survey responses of small business owners from the second half of 2019. These responses show the current challenges of business financing and credit that small businesses face, and these challenges are only exacerbated by a pandemic and recession.
How Would a Decline in Revenue Affect Small Business?
According to small businesses in the second half of 2019, 17% of firms would have to close if they experienced a two-month revenue loss. 86% of businesses reported they would need to find financing or cut expenses if they experienced a two-month revenue loss. And about half of business owners would use personal funds to deal with losses.
- 17% of firms would close due to a two-month revenue loss
- 86% of businesses would need financing or cut expenses due to two-month revenue loss
- 47% business owners would use personal funds to cover two-month revenue decline
How Has a Decline in Revenue Actually Affected Small Business?
A mid-June survey by the National Federation of Independent Business showed that revenue dropped by more than 50% for nearly a third of businesses. Almost a quarter of small businesses could be closing permanently, and even businesses with PPP funding will be forced to lay off employees to survive. COVID-19 has been brutal for small businesses and shows no sign of letting up.
How Are Small Businesses Facing Financial Challenges?
Two-thirds of employer firms had financial challenges from 2018 to 2019. The two biggest financial challenges to small businesses are covering the costs of operation (including payroll) and finding credit. Despite revenue generally increasing in 2019, tighter profit margins from increased business costs meant more challenges to overcome.
The most alarming insights from the SBCS is the lack of separation between business finances and owner finances. An overwhelming amount of businesses rely on an owner’s personal credit score to finance their business, and more than half have relied on funds from friends, family, or their personal accounts to fund their business.
- 88% of businesses rely on an owner’s personal credit to secure business financing
- 56% of owners have used funds from friends, family, or personal accounts to support their business
How Can You Finance Your Small Business Right Now?
When it comes to financing, the greatest challenges with bank loans are the length of time for approval/financing and the difficulty of the application process. Small businesses have less cash reserve than larger businesses. While three of the largest banks in America (JPMorgan Chase, Citigroup, and Wells Fargo) collectively put $25 billion into their rainy day funds during the second quarter of 2020, the majority of small business owners have 28 days or less of cash reserve. This only reinforces that the speed of financing and the difficulty in applying to financing are huge factors for small business owners.
Small Business Stimulus Programs
Many business owners are taking advantage of small business relief programs like the Paycheck Protection Program and the Economic Injury Disaster Loans. Hundreds of billions of dollars were distributed to small businesses, but business owners that have already used their funding are now struggling to find additional capital.
49% of businesses applying to financing do not receive the full amount of financing they apply for
Are Banks Lending to Small Businesses Right Now?
It is harder to obtain a bank loan during periods of recession. Banks are hoarding cash, less likely to lend to small businesses, and become more risk averse. Even if you do get approved for a loan, you may not get the full amount of financing you are seeking. Online loans that rely on an algorithm for underwriting are having to reevaluate as well. Almost half of applicants for business financing do not receive the full amount of financing they apply for. There are two main causes for this.
- Lender Denies Credit
- Applicant Declines Funding
In the areas of credit denial, the financing company turns down the applicant for some or all of the financing. This will be due to the amount of existing debt an applicant holds, credit score, collateral, business performance, and other credit determinants. Sometimes, the applicant will decline the funding offered by the financing company. This is typically because the cost is too expensive, but also the repayment terms could be unfavorable, the collateral requirements could be too high, or the funding amount was too small.
One financing solution that does not judge approvals based on high credit requirements is invoice factoring. In short, invoice factoring puts cash in your business’ hands the same day you make a sale. Factoring eliminates the waiting period caused by selling B2B on credit terms. If you have outstanding receivables that you are waiting to collect payment on, you will benefit from invoice factoring services. You need to have cash on hand in order to protect your business. Leaving working capital tied up in your A/R is only going to hurt your business.
Factoring services, otherwise known as accounts receivable funding, uses your invoices as collateral. It is a debt-free financing solution that works to improve your cash flow while saving you time throughout the invoicing and collections process. Factoring solutions can work in tandem with other financing solutions including the Paycheck Protection Program.