Business Funding: Is the Cure Worse Than the Disease?

COVID-19 has thrown all small business owners into a panic. 75% of small business owners have 28 days or less of cash reserve. An indefinite shutdown of business is terrifying when that’s the case. I am a small business owner. I know the fear of losing your business, but I work in the financing industry, so I also know that there are solutions out there. I also know that there are many options out there that are going to make your business worse off.

75% OF BUSINESS OWNERS HAVE 28 DAYS OR LESS OF CASH RESERVE

Small business closure is a disease during economic downturns. The government is working on a response that will enable small business owners to weather the COVID-19 crisis, but it is and will continue to take time for this small business cure to be produced. Time is of the essence when it comes to business funding. Traditional funding and even emergency relief methods will take time to process and approve. So, it’s worth asking, is the cure worse than the disease?

Should You Apply for an SBA Economic Injury Disaster Loan?

When comparing the alternative funding options for your business you have to look at the traditional funding options as well. This means bank loans and SBA Economic Injury Disaster Loan programs. If you can apply to an SBA EIDL, then do it. The time it takes to wait for approval is somewhere around 21 days according to their website. You will also need a credit score above 640, a few years in business, and a lot of official paperwork and financial statements to verify your business. If you can pull these things together and are a strong applicant for this program, then you absolutely should. The interest rates are lower than alternative lenders, and as long as you can afford to wait for approval then it is most likely your cheapest funding option.

What Will a Government Stimulus Mean to Your Business?

We are still waiting on the passed Senate stimulus bill to be approved by all facets of the government. This stimulus bill will expand small business lending assistance to more than $370 billion to help keep small businesses afloat. Part of the relief programs offered includes loan forgiveness if you are using the loan amount to cover payroll. It is still yet to be passed and once it is, you must use SBA approved lenders that then must go through the SBA to verify that there is sufficient collateral to match the loan amount. Federal regulators are encouraging financiers to loan small amounts to businesses independently of the stimulus loans because the process to be approved is at least 3 weeks and the surge of business owners needing funding may delay approvals further. Remember, time is still in short supply for 75% of small business owners who only have 28 days or less of cash reserve. Additionally, the process of loan approval requires paperwork that is notarized or otherwise official in the eyes of underwriting. Some states are approving workarounds for in person notarization to being online notarization to accommodate for the shutdown of businesses due to containing the spread of COVID-19. Still, normal business paperwork is trickier to produce, despite it being a requirement for these SBA backed stimulus loans.

infographic with eidl qualifications

What Financing Option Will Help Your Business During COVID-19?

The cure for small business closure is finding the right financing option that will help your business survive. If you plan on applying for an SBA EIDL then you need to plan on having enough cash reserve to cover the time it takes to be approved. You have to look at which financing options are best for your business. When you speak to a lender about their funding programs, ask for references from other customers. Read reviews online. See if they are part of any industry groups that require adhering to a code of ethics. Don’t sign the contract unless you can guarantee that they are reputable and not gouging your business during a global crisis. Don’t be fooled into thinking you have a cure when really it’s a disease in disguise. The most reliable funding partners will not only get you through this crisis and downturn but also help your business recover and grow on the other side of it. Financing options with flexibility and room for growth can afford your business the time and effort it takes to scale once the dust has settled from the COVID-19 pandemic.

Should You Look at Alternative Lending?

Alternative lending is a term used to describe the financing options outside of traditional bank loans or lines of credit. This includes equipment funding, invoice factoring, online loans, and merchant cash advances. These funding methods gained popularity during the 2008 Recession because banks stopped lending as much to small business owners. With all that said, should you look at alternative lending? Yes you should, and you should look closely. First, you should find a financing company that is comfortable operating in your industry. You want to work with a company that understands your industry and the financing needs specific to businesses in your industry. Next, you want to make sure that the financing option you choose will not hurt your cash flow. You need strong and healthy cash flow in order to keep making payroll, covering overhead, and even making more sales and purchasing supplies to fulfill those sales. A financing option that will hurt your cash flow should be avoided. I could write a whole article about why you should improve your cash flow above all else, and actually I did write it.

What Should You Be Aware of in Your Financing Agreement?

HIDDEN FEES! The most important thing to watch out for are all the additional costs to your business that are not upfront or accounted for in quotes to your business. These include administrative costs, funding release costs, holdbacks, late fees, early termination fees, and all sorts of other fees with all sorts of other names. You need to know the exact cost to your business, and if your financing partner cannot clearly show you why and where these costs are in place, RUN. You don’t have the time to stress about fees on top of the cost of your financing. Reliable business funding companies with good relations with their customers will not try to hide fees. The only way you will know whether or not there are hidden fees is to read the financing agreement yourself and ASK the lender any questions you may have about any confusing wording. Don’t let your pride prevent you from understanding your contract completely.

infographic of avoiding predatory lending

Next, you need to look at the reputation of the financing company you are wanting to work with. Everyone knows how to look at reviews, but are you looking for red flags in these reviews? Look out for paid review scams and see if the business owner is taking the time to respond to the reviews. Maybe there’s a bad review from a disgruntled customer but the owner added sympathy and an explanation to the issue. Use your time to evaluate the trustworthiness of the company yourself.

Finally, you should ask whether the financing company is a member of any specific financing industry groups. These memberships may be telling as to the reliability of the company itself. Again, typically there are a code of ethics that members will need to abide by. It adds a layer of trustworthiness to the company if they are a member of a financing organization with rules and codes to follow.

Will Your Business Survive the COVID-19 Crisis?

With the time it takes for an SBA backed loan to help your business, you may be scared about the fate of your business. We all are. Regulators are recommending that you find a financing method that will meet your needs until you can know whether you are approved for an SBA loan or not. It could be a month or two until those funds kick into your account, so if you don’t have the cash to cover that period, you need to find it. Short term financing methods are out there. They may be more costly to your business like a term loan from an online company, but it may be worth it if you can keep your business afloat. Merchant cash advances are a band-aid and not a long-term solution. Be incredibly alert when reviewing your potential contract with an MCA company right now. Keep in mind that many of these alternative lenders that offer fast funding at an exorbitant price have not actually weathered a recession themselves. Flexible financing options are a great solution if you are looking to improve your cash flow until you are approved for a government backed loan. Find a financing company that offers fast funding at a reasonable price and won’t prevent your business from getting the funding it needs now and tomorrow.

Could Invoice Factoring Help?

I am the owner of a small business that offers invoice factoring to other small businesses. Of course I am going to explain how invoice factoring can help small businesses. Invoice factoring services are simply immediate money in your bank account based on the value of the open invoices you have. This means that a factoring company pays you the invoice amount immediately then does the waiting until your customer can pay. Factoring services can come with all sorts of added benefits like increasing your credit risk protection and managing your receivables, but most importantly it offers financing flexibly to your business and grows with the amount in your invoices. Your cash flow will improve from factoring, and there are no repayments to make. If you need fast business funding to help keep your business afloat, then take a look at factoring.

invoice factoring timeline

We are not packaging any of our financing programs as a “COVID-19 relief program.” We are offering the same product we always have: improved cash flow to help cover your business expenses. With a team of finance professionals that have over 100 years in combined industry experience, we specialize in reliably improving cash flow, and we work with companies in good times and in bad times. We don’t cram any hidden fees in our funding, and we are happy to breakdown every aspect of our financing agreement with you. It benefits both parties when you have healthy cash flow. You don’t want to keep your business afloat only to bust it in 6 months because you’ve run out of cash to make repayments. You don’t want the cure to be worse than the disease.

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