When the Paycheck Protection Program (PPP) stopped accepting new applications on May 31, 2021, many small business owners have been left wondering where they can find funding to support their struggling companies until business picks up again. Whether you tried to get a PPP loan last year and missed your shot, or you are simply a business owner looking for a source of financing, keep reading to learn how traditional loans, state programs, and new federal programs may be able to help you fund your business.
The Paycheck Protection Program
Before we get into alternative sources of funding, let’s review what the Paycheck Protection Program was, and why PPP loans made it into the vernacular of nearly every adult American last year.
During the coronavirus pandemic, consumer caution and state and local restrictions put many small companies out of business and left countless more struggling just to keep the doors open with a minimal staff. The Paycheck Protection Program was a $953 billion federal program that Congress established through the CARES Act designed to provide covid-19 relief to small businesses, nonprofits, sole-proprietors, independent contractors, veterans organizations, tribal businesses, and even some who were self-employed. The Small Business Administration (SBA) implemented the program, which enabled applicants to seek low interest rate loans equal to two and a half times their monthly payroll costs (although the loans could also be used for rent, utilities, and interest), with the maximum PPP loan amount being $2 million. PPP loan applications were submitted to approved lenders, including credit unions and banks, with first draw PPP loans having an initial deadline of June 30th, 2020 that was later moved to August 8. Successful borrowers were able to apply for additional PPP funds with a second draw PPP loan equal to the same amount as their first loan.
In addition to having a low interest rate of only 1%, PPP loans also allowed eligible borrowers to have the loans partially or fully forgiven. PPP loan forgiveness was based on how the loans were spent, and whether or not employees had been paid and retained. Loan forgiveness also applied to second round loans.
What brought paycheck protection program loans so much public attention was not only the fact that millions of Americans work for small businesses that were affected by the pandemic, but also that there was some controversy over who received the loans, and whether or not the loan program was an effective way to stimulate the economy.
Alternative Sources of Funding
Just because PPP is no longer accepting applications doesn’t mean that your business can’t get a loan with a good rate. In fact, one of the silver linings of the pandemic is that many business owners are taking the time to learn about the options available to them for the first time. What follows is a non-exhaustive list of alternative sources of funding.
1) The Small Business Administration
Established in 1953, this federal agency supports underserved entrepreneurs and small businesses through access to funding, contracts, and coaching. The Paycheck Protection Program, while perhaps the most significant program in the history of the SBA, is not the only program they administer. Applicants can work with the SBA to apply for business loans that are made through lenders, including banks and credit unions. To be clear, the SBA does not loan money directly to businesses, it merely acts as a guarantor on behalf of your business so that you can access more competitive rates. The 7(a) Loan Guarantee Program is the most popular resource available to small businesses, as it makes loans of up to $5 million available that are guaranteed by the federal government. You can learn more about these loans, including who is eligible, here. The advantage of these SBA loans is that they typically offer the best rates, require lower down payments, have longer terms, and are easier to qualify for than standard bank loans.
Another popular loan from the SBA is the Economic Injury Disaster Loan (EIDL). These low-interest loans are available for businesses with up to 500 employees who have been negatively impacted by a natural disaster or the coronavirus pandemic. Unlike PPP loans, EIDLs are not forgivable loans and must be paid back.
When it comes to getting a business loan, banks are probably the first lenders that come to mind for most people. Whether you work directly with a bank to secure your loan, or start with the SBA and let them help you navigate your loan with a bank, getting loan capital typically requires applicants to have good credit and to have been in business for at least two years. However, if you have low cash reserves, or are still growing your business and have low sales, it may be difficult to secure a loan from a traditional bank. If you are hoping to receive funding directly from a bank in the near future, it is a good idea to set aside financial reserves now, so that you can show a strong free cash flow when it comes time to apply. Banks typically offer the following sources of financing:
These unsecured lines of credit offer flexible financing that can be used for any business needs and do not require collateral. However, like any unsecured loan, the interest rate is likely to be higher than that of a secured loan. Monthly payments of a business credit line are frequently tied to the loan balance.
Like business credit lines, business term loans may be used for any business needs and do not require collateral. The primary difference between the two is that with a term loan, the payment amount is fixed over the life of the loan.
Business auto loans are available to purchase company vehicles, with loan terms frequently between 48 and 72 months.
- Commercial real estate loans
These popular loans can be used to purchase the land or buildings your business needs. Rates vary depending on the market, and typically your business must have existed for at least two years and have at least $250,000 in annual revenue.
As the name implies, equipment loans can be used for the tools and equipment your business needs to function. Loans are typically secured with business assets and require your business to have been operating for at least two years and have $250,000 in annual revenue.
Secured business loans have a lower interest rate than a business term loan because they are secured by collateral. Collateral includes, for example, business assets or CDs.
- Secured Business lines of credit
Secured business lines of credit provide flexible cash flow and are secured either by a lien on assets or a CD. While still offering better rates than unsecured lines of credit, rates for these funding sources are likely to be higher than for a secured business loan.
- Healthcare practice loans
Eligibility for these specialized loans requires being a healthcare professional, including doctors, dentists, and even veterinarians. Loans can be used to start or grow healthcare practices, with requirements and rates based on what you intend to use the loan for.
Regardless of the type of loan you seek, it is recommended that you shop around for the best terms and rates for your business. Some institutions also provide coaching and business assistance, while others offer discounts to special groups, including military members.
3) Online Lenders
Online lending has been around almost since the advent of the Internet, and there are quite a few options for business owners and entrepreneurs who decide to go this route. One of the big differences between online lenders and traditional banks is that the approval process can be much faster, often in less than a day, although interest rates may also be significantly higher because the loans offer are typically unsecured. While there may be less rigor involved in getting a loan, as with all financial transactions, make sure you know what you are signing when seeking financing, so that you can be sure that the ROI will be sufficient to warrant the loan.
Online lenders like Paypal are not banks. Banks are licensed to both receive deposits and make loans, they are regulated by the federal government, and money deposited in banks is insured by the Federal Deposit Insurance Corporation (FDIC), up to $250,000 for individuals and $500,000 for joint accounts. While online lenders do offer loans, and you can store money in digital accounts, but these accounts are not insured by the FDIC and they earn no interest. One advantage that some prefer with fintech lenders like Paypal is the ability to pay back small business loans automatically. For example, paying the loan back through a set percentage of every customer transaction, rather than making traditional monthly payments.
Another advantage of some online lenders like Biz2Credit is that if their standard offerings do not meet your needs, they have the ability to find the best option for you and connect you with solutions that do meet your needs.
The PPP program may be over and done with, but there are still plenty of great options for financing your business growth. Whether you work with the SBA, go directly to a bank, or find the solution you need at an online lender, remember to shop around until you find the right mix of product and service that meets your business needs. And if you’ve never taken out a business loan before, be sure to educate yourself before committing. But don’t wait too long: Rates are low right now due to the Fed’s pandemic recovery measures, and as the economy heats up, those rates are likely to rise.