For obvious reasons, the Paycheck Protection Program (PPP) has been on the minds of all entrepreneurs and small business owners across the country. And I’m very happy to say that, ostensibly, the second round of funding has truly reached the small business community as intended.
Per the SBA website, the average loan size for an initial PPP recipient was $297,000, and the average loan size of the second tranche was approximately $73,000 (thru May 10th). And this is a very good thing. However, the PPP was intended to temporarily fix short-term employment issues. It is becoming more apparent with each passing day that there is going to be a more permanent impact on consumer behavior and how small businesses will service its clients and customers.
Given this, what financing options should small business owners explore now?
Currently, most financial institutions and fintech companies are not focused on providing conventional credit instruments, such as lines of credit or business loans. There are two additional programs that the government has supported that provide continued financial support in the immediate and long-term future.
Economic Impact Disaster Loans (EIDL)
Just like the PPP, this lending program was enhanced by the CARES Act signed into law in March 2020. The purpose of these loans is to assist businesses that have been impacted by wide-scale natural disasters. Administered by the SBA and backed by the federal government, loan terms include interest rates no higher than 3.75% and repayment periods up to 30 years. Unfortunately, as of May 16, 2020, this program is not accepting new applicants. If you’ve already applied, be on the lookout for an email from the SBA asking for further information; and if you haven’t applied, please check the SBA website regularly for updates.
Although the EIDL is not confined to just payroll costs like the PPP, spending is restricted for the following type of costs:
– Providing paid sick leave to employees unable to work due to the direct effect of COVID-19;
– Maintaining payroll to retain employees during COVID-19 business interruptions or substantial business slowdowns;
– Meeting increased costs due to COVID-19 supply chain interruptions;
– Making rent or mortgage payments; and
– Repaying obligations (such as accounts payable) that cannot be met due to revenue losses.
Main Street Lending Programs
The Treasury Department is administering this program in order to assist a wider number of companies impacted by the current pandemic. These lending programs are for companies with revenue up to $5 billion and employee sizes up to 15,000 (depending on the program).
Business fall into three categories based on profitability as defined by EBITA and the company’s current debt. Although the program has not been formally rolled out as of May 15, 2020, this program is designed to help companies have an increased number of conventional financing opportunities. While there are some restrictions about paying off existing debt with these programs, business owners have a lot more flexibility with fund allocation (although keeping and adding jobs is strongly encouraged). In order to qualify for lending under these programs, the company had to be profitable in 2019. Learn more about specific programs here:
Takeaway: Access to cash flow is a fundamental need for all companies — especially during times like this. Although the government is providing support, options get complicated and information is constantly changing and easily misinterpreted. For a free consultation on which option(s) are best suited for your company, please contact us at firstname.lastname@example.org.
Co-founders & Managing Partners