The Paycheck Protection Program (PPP) helped a lot of small businesses keep employees on the payroll over the past couple of months--but there were even more small-business owners who were failed by the PPP.
The PPP's failures don't all fall at the feet of the SBA, though. Some of the issues were with SBA lenders and some were even with many of the small-business owners themselves. Here are five lessons all business owners can learn from the chaos of the PPP, to help you get through the current situation and be better prepared for next time.
Lesson 1: You Credit Profile Matters
Even though the SBA relaxed credit requirements to qualify for a PPP loan, it didn't mean borrowers with bad credit would slip through the cracks.
The SBA doesn't make PPP loans--they guarantee them. These loans are underwritten by banks and other SBA lenders who risk losing the ability to make SBA-guaranteed loans if they approve too many high-risk borrowers who eventually default. Your credit profile enables a lender to make decisions about what you will do in the future based upon what you've done in the past. A bad credit profile doesn't give lenders confidence your business will successfully make loan payments.
The PPP loan process should serve as a wakeup call to small-business owners who previously ignored their personal or business credit. Lenders take your credit profile seriously and you should too.
Lesson 2: Your Financial Institution Matters
You experienced just how much your bank mattered first hand if you were a Wells Fargo customer. The number of loans they could make was under a cap, meaning, at least according to the class action lawsuit, their biggest customers got financed first and the rest had to find a PPP loan someplace else.
Because every small business has banking relationships, make sure your bank has a clean slate and isn't under scrutiny from the feds. Additionally, regulators are all over financial institutions this time to ensure they are doing things like treating all businesses the same, making capital available to every creditworthy borrower, and not charging extra fees when they can get away with it--which I think is good for small businesses.
As a young business owner, I had a bad experience with my first bank during another downturn in the economy. Although I had a healthy business with more than $300,000 in my business checking account, my bank lowered the limit on my business credit line, making it difficult for me to borrow, in an effort to reduce their exposure generally. Their knee-jerk reaction made it more challenging to do business, despite my having a healthy cash flow and a healthy business. The takeaway: Your financial institution post-pandemic will matter.
Lesson 3: Use More Than One Bank
As a result of my first banking relationship, I don't rely on any single financial institution anymore. I'm convinced you should have at least two banking relationships, one with a local bank and another with a national bank. I don't want to risk another overly cautious banker arbitrarily pulling a credit line or reducing my credit limit. I'm also an advocate of online lenders who tend to be more willing to lend to smaller small businesses. Multiple banking relationships more than doubles the odds I'll have access to the capital I need--when I need it.
There isn't much administrative burden on my end to maintain the added banking relationships, so I don't see a lot of downside. If you decide to do this, make sure both banks are FDIC-insured and SBA-approved (if you're looking for an SBA loan) lenders.
Lesson 4: You Have to Have Accurate Records
Many small businesses couldn't qualify for PPP funding because they didn't have accurate financial records. What's more, if you did qualify for a PPP loan and plan on applying for forgiveness, you'll need to make sure your accounting ducks are in a row. Accurate financial records have never been more important.
When you apply for forgiveness, lenders will go through your financial records with a fine-toothed comb. Make sure you dot all your i's and cross all your t's regarding how you spent the money, how much you've spent, and how you are accounting for it.
If it were me, I'd probably set up a separate account just to keep track of the funds. I'd also be working with my accountant to make sure we were doing it right. Forgiveness isn't automatic and I wouldn't be surprised to find out a lot of lenders will be looking for reasons to say no.
Lesson 5: Vendor and Supplier Credit Is Undervalued
I can't overstate the value of the payment terms offered by vendors and suppliers. In times like these, your vendors will be less likely to reduce your credit limits overnight and will be the last creditors to cut you off. I know it's not a $100,000 small-business loan, but 30- or 60-day terms are valuable credit every small-business owner should be taking advantage of. Often, you can get payment terms from your suppliers just for asking.
What's more, I know of more than one small-business owner who is able to pay a big chunk of his or her payroll with the discounts offered by suppliers for paying invoices early.
This is also a powerful way to build or improve your business credit profile. What's more, spending time learning about how these tactics will improve your credit just makes sense. Business owners are 41 percent more likely to get approved for financing if they understand their business credit.
It's been a rough couple of months for small businesses all across the country, but these five valuable lessons I've learned over the years may be a good fit for you and your business too, and may help you navigate the post-pandemic world and be better prepared for the next financial crisis.