Deal with Holiday Supply Chain Issues
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Fall is upon us. That means back-to-school, football, and pumpkin spice. Fall also means that Christmas and the holiday season are right around the corner, with family get-togethers, holiday shopping (including Black Friday), and gift-giving. To translate this for many small businesses: Your busiest season is about to start.

Why Aren’t Small Businesses Celebrating?

Small business owners and those with startups or new businesses faced extreme financial and operational challenges as COVID-19 changed the world last year. The pandemic made it difficult for businesses to survive as they dealt with shutdowns, backlogs, staffing issues, and significant losses in revenue

Despite programs put in place to help small businesses, many entrepreneurs helplessly watched their dream ventures fail. Many small business owners did not have the cash flow to remain operational, some reporting a new reliance on their business credit cards.

As we near the close of 2021, major supply chain issues are becoming the biggest hurdle in meeting business needs. Holiday business for most retailers depends on American consumers spending money, but new challenges continue to raise concerns about the availability of products as bottlenecked shipping ports create delays and shortages of merchandise.

President Biden recently responded in October of 2021, by instructing the Ports of Los Angeles and Long Beach to begin operating twenty-four hours a day. While increasing the working hours in the U.S. ports seems like a positive start, progress is slow, and freighters loaded with shipping containers from China and other countries continue to sit in long lines off the west coast. Importers do not have the manpower to get the cargo into the ports, so the shipping delays remain. The White House’s action is only a small step towards resolving a very big problem.

Small business owners are not optimistic that the supply chain disruptions will be solved fast enough to get their shelves stocked for the upcoming rush from the holiday shopping season. While retailers, including Amazon, Walmart, and Target, have major concerns about whether there will be products available to sell, that is not their only worry. Increased shipping costs and labor shortages are causing serious financial concerns for businesses everywhere.

The reality is supply chain bottlenecks may make it difficult for some companies to survive. Shipping delays may lead to an upswing in canceled orders that will chip away at profits and cause cashflow issues. As businesses are scrambling to find new short-term and long-term financing options, both to purchase increasingly expensive products and supplies as well as smooth out cash flow, many do not know what loan options are available to them. Even though there are several different types of financing available, information about how to qualify for a loan program can be confusing and it is difficult to know where to start.

If this resonates with you, keep reading, and we’ll cover the basic information you need to know about the loans that are available:

SBA Loan

The U.S. Small Business Administration (SBA) backs certain loans, making an SBA loan a long-term, low-fee financing solution that can be used for business purposes. The government partly guarantees SBA loans, so they carry less risk than other sources of financing. Any business looking for working capital to purchase equipment, inventory, or other business needs can benefit from this type of loan.

Qualifying for an SBA Loan

The Small Business Administration works with other financial institutions to provide business financing to primarily small business owners. This type of financing is especially helpful to small businesses because SBA loans often offer lower interest rates and longer repayment terms.

One benefit of Small Business Administration loans is that business owners who may not qualify for traditional bank loans or personal loans can often qualify for the SBA loan. The approval process means that the small business will need to meet certain borrower qualifications.

In order to get an SBA loan, the borrower needs to have some equity (ownership) in the business they are requesting funding for. The business must also be a for-profit business that operates in the United States. To get approved, the borrower also needs to have used up some of their personal funds or exhausted some other options.

Since the SBA is working with financial institutions to issue SBA loans, those lenders will offer specific information on their loan origination process. Most lenders want a borrower to have a personal credit score of 640 or higher before they will consider them. Lenders issuing SBA loans also require that a business has been operating for two years, so new businesses and startups are not qualified for this type of financing. Previous bankruptcies or foreclosures may also be disqualifying factors.

The Different Types of SBA Loans

There are different types of SBA loans available based on the loan amount, what the money will be used for, and what kind of repayment terms are desired. Not all lenders are able to issue all types of SBA loans, so the type of loan needed by your business may narrow down the pool of lenders you are able to choose from.

Some types of SBA loans include:

SBA 7(a) – loans up to $5 million for working capital, refinancing, equipment, real estate

SBA Disaster Loanloans up to $2 million to cover physical and economic losses

SBA Microloan – Microloans up to $50,000 for working capital

SBA Express Loan – loans up to $350,000 for working capital

A lender can provide more detailed information about these and other SBA loans.

SBA Loan Application

Once the borrower has a better understanding of the requirements to qualify for an SBA loan and the types of SBA loans available, they can choose a lender. When looking for a lender, you may consider online lenders because they are accessible, and communication is easy. Other places to start when looking for an SBA loan are banks and credit unions.

You’ll want to discuss the fees each lender charges for SBA loans as well as the qualifications, like credit scores, required for approval. Another great question when looking for the right SBA loan lender is about the length of their approval process. Discussing the different SBA loans available to you, loan terms, and alternative options are also good ideas before committing to one lender.

Once you’ve chosen a lender, they can walk you through the loan application process. Preparing for the loan application will require gathering a lot of information. The quicker you can provide necessary items to your lender, the faster they will be able to get you approved and funded.

Common documents requested by lenders include:

  • Government issued I.D.
  • Business bank account information, including the statements
  • Copies of the business license
  • Personal tax returns
  • Two years of business tax returns
  • Financial statements
  • A schedule of personal and business debts

The lender you are working with may require more or fewer documents as well as have some questions about your business plan and credit history. It can be a frustrating and invasive process. Once the lender has everything, they will be able to submit your loan application for SBA approval.

Depending on the type of SBA loan being applied for, the Small Business Administration should be able to approve or reject the application within ten days. Your lender will be sure to go over the loan terms, monthly payments, and any deposit or down payment necessary with you. SBA loans typically offer fixed payments and loan terms up to thirty years.

A Business Line of Credit

Getting financial assistance through a line of credit is a great option for many small businesses because of the flexibility they offer. The funds received can be used for whatever purpose the business sees fit. A business line of credit is working capital that can be accessed repeatedly. Once the initial terms of the line of credit are established, you can draw funds as needed. Unlike a traditional loan, when the draw is paid back the funds become available to borrow again.

A business line of credit is a source of revolving credit, like a business credit card. The lines of credit usually have higher credit limits and lower interest than credit cards though. Because the terms are already set, funding for a business line of credit is much quicker than other financing sources. Although, this type of funding option usually has higher fees and stricter qualification requirements than traditional loans.

Getting Approved for a Business Line of Credit

Just like an SBA loan, there are requirements that must be met to get approved for a business line of credit. When selecting a lender, it is important to understand that a line of credit can come from an online lender or a bank. If you are concerned about whether you have enough good credit, an online lender may be a safer place to start.

Most lenders will require a personal credit score to be above 600 before approving a line of credit for a small business owner. Online lenders are a better option for those with lower credit scores. The business revenue is also considered when applying for a line of credit. Lenders require a minimum revenue of about $100,000 for most online lenders and $200,000 for traditional lenders. The length of time a business has been operating is also important when considering a line of credit, and the requirement varies from lender to lender. Most lenders will also require a personal guarantee with this type of business credit.

Working Capital Loans

Working capital loans are traditional loans used for everyday business expenses. They may be taken out to cover payroll, rent, inventory, equipment, or any other operational expenses. Often small businesses will use working capital loans to cover expenses during a slow season or hard time, like many are experiencing in 2021. The loan is then paid back when the business is better.

Working capital loans are issued by online lenders or banks. They require a very good credit history in the form of both personal and business credit scores. Upfront collateral is also required for this type of loan, so it is important to have a good understanding of both personal and business assets before applying. A down payment is not typically required but may be used to lower interest rates. Loan terms and approval requirements vary from lender to lender.

Other Types of Financing Available to Small Businesses

Personal loans for business – Often the best option for startups or very young businesses, personal loans are approved based on your personal credit score, income, and debt. Personal loans are usually for smaller amounts and can be funded very quickly after approval. Monthly payments are generally fixed and personal loans have shorter loan terms than business funding options.

Invoice factoring – Small businesses may obtain funding by selling some of their receivables (money that is owed to the business). Many commercial lenders will offer this type of financing.

Merchant cash advance– A small business can receive cash upfront for their credit card sales and repay that cash with payments based on daily sales.

Traditional bank loans, credit cards, crowdfunding, equipment financing, angel investors, grants, microloans, or bridge loans may also be suitable options for small businesses.

The Key Takeaway

Many small businesses survived 2020 and can also survive in 2021. The pandemic brought unprecedented hardships for operations and finances, and the current supply chain problems have only increased the uncertainty for business owners. But despite the variables and all of the uncertainties about what the holiday season will look like in terms of revenue, hopefully, it is now clear that there are also many sound financing options available to help you get through.

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