Regardless of whether you run a retail business, a manufacturing business, or a tech company, the coronavirus outbreak is going to alter your ability to obtain affordable financing. It may also put you in a cash crunch bind that can send you spiraling toward default, if you're not careful.
Here's what I think you can expect and what to do about it, at least for the foreseeable future.
1. Buckle down and remove nonessential costs.
Now is not the time to tie up your money in investments. Save the cash that you have on hand and do your best to remove nonessential costs, hopefully just temporarily. Spending on travel for work, for example, should go out the window anyway. Spending on team perks, or experimental marketing tactics, should also go on pause.
This is especially true for retail businesses that depend on foot traffic--such as shops, restaurants, and bars. Lenders may extend less to these businesses, which means you'll need to hunker down to survive on your current savings.
2. Asset-based lending will be preferred.
Collateralized lending is always a safer bet in the eyes of banks. In uncertain times, that goes double.
Asset-based lending such as equipment financing and invoice factoring will become the preferred lending options. In the former, a lender extends the exact amount of capital needed for a business to purchase a piece of equipment, such as a van or truck. In the latter, an outstanding invoice is essentially sold to the lender in exchange for a portion of what's owed up front. In both cases, the object of the loan itself acts as collateral for the loan.
Lending is not going to stop in its entirety--but it will shift toward businesses with less risk. If your business is a riskier bet, but you still have financing needs, this kind of self-secured financing (inventory financing is another example) is worth exploring.
3. Maintain your strong relationships.
If you already have a loan out with a lender, keep something in mind: It is always in their best interest that you do not default on your loan. This situation will be no exception.
It's worth taking the time to get in touch with your lender, explain your circumstances, and see what kind of deferments and exceptions they can make to your repayment schedule. Generally, proactivity shows responsibility here. Lenders will be aware of the extraordinary circumstances and will be more willing and able to work with you if you take the initiative rather than wait to miss payments.
4. Expect and budget for changing terms.
If you've been researching and planning for a certain kind of loan, it's time to re-evaluate. Expect higher interest rates, lower loan amounts, and shorter terms. This is particularly true if you were planning to work with an online lender, but all lenders will likely tighten their credit boxes in the weeks and months to come.
One possible exception to this is Small Business Administration loans. The federal government is gearing up to provide potentially tens if not hundreds of billions of dollars to the SBA for its various loan programs.
First, look into the SBA's Economic Injury Disaster Loans (EIDL) program. These loans will become available to virtually every state in the country soon. EIDLs provide up to $2 million in assistance to help you meet necessary financial obligations after a disaster.
In addition, as the federal government decides how exactly to fund and allocate requests for more SBA funding, one proposed piece of legislation introduced by Sen. Marco Rubio (R-Florida) would waive upfront guarantee fees for all borrowers, increase the guarantee on all SBA 7(a) loans to 90 percent, and increase the Express maximum loan amount.
While that legislation hasn't passed yet, expect that the SBA will likely move to make all lending more accessible and affordable for small businesses. If you qualify for an SBA loan, look into this option. Of all the loan products that your business may need to take on while awaiting further aid, an SBA loan is the best.
There will be tough times ahead for small business owners across the country. Taking steps now to cut costs, explore alternative financing options, and maintain or build strong relationships with lenders will be key to making it through to the other side.