To my fellow entrepreneurs,
As the CEO and co-founder of Fundera, I’ve had the privilege of supporting entrepreneurs for the past six years by helping them confidently find the financing they need to grow and sustain their businesses. To date, we’ve helped tens of thousands of small business owners secure nearly $2 billion in credit.
Everything you’re about to read is my opinion—not fact. It’s just what I think based on the experience accumulated over the course of running Fundera, and I thought I’d share it with you in the hopes that you find it helpful.
The past several weeks have been unusual, to say the least. We are in the midst of an unprecedented moment in history. I view the coronavirus pandemic as a global natural disaster with far-reaching consequences. It’s unclear how long it’s going to last. And when you couple this natural disaster with what looks to be the beginning of a long-overdue (in my opinion) recession, it’s a recipe for confusion, especially for small business owners.
I can’t make a blanket statement about how all entrepreneurs should run their business today. But I can say that at Fundera we are being particularly prudent—removing existing and upcoming non-essential expenses, and constantly evaluating our financial position as this fluid situation unfolds. It’s hard to make a recommendation that businesses should seek financing today so they have extra cash to weather any upcoming storm, because that might be the wrong thing to do as an entrepreneur depending on your situation.
Instead, I want to share with you what I am seeing, and what I believe will happen in the world of small business lending so that you can use it to make your own educated decision. Over the past week, we’ve seen demand skyrocket as small business owners look to stockpile cash to help them through hard times ahead. We’ve also seen many entrepreneurs withdraw from the financing process, particularly those with businesses that have been immediately impacted by the coronavirus outbreak (e.g. event planning, restaurants, and travel and transportation), because they do not want to take on debt that they may be unable to repay.
With that in mind, I’d like to break down what I see as a fluid and difficult situation for business owners who are seeking financial aid, are expecting cash flow issues that will impact their ability to repay existing debt, and who have heard conflicting information on the status of SBA loan program funding during this trying time.
Here’s What Small Business Owners Should Expect From Lenders
Most lenders are beginning to pull back on lending to businesses that operate in industries most impacted by the coronavirus pandemic. These include restaurants, physical retail, travel and transportation, and oil and gas. Some have paused entirely for the time being. Others are being much more selective and only lending to the most creditworthy customers.
Lenders will normally have credit grades for the customers they underwrite, like A, B, C, and D. With industries that are most impacted, they will likely stop making loans to customers in these industries that they would grade a C or a D, but continue to lend to A and B grades. Online lenders may also be very sensitive to specific geographies. If you’re in a major metropolis that is significantly impacted by the coronavirus outbreak, certain lenders may have blanket policies to pause lending in those cities.
Online Lenders Will Tighten Their Credit Boxes, Some Will Stop Lending Altogether
Most online lenders will operate as if we are entering a recession. This means that their credit boxes will tighten as lending to small businesses will become inherently riskier for them. A tightening of credit will shorten the duration of the average loan (e.g. instead of a 12-month average working capital loan, it may shake out to be a six- or nine-month repayment term on average), decrease average loan size, and raise the average interest rate. It also means that the least-creditworthy small businesses will be denied more often.
You should expect that term loans will have to be paid back faster, the average loan size will decrease, and the interest rate will be higher.
Why? Lenders need to mitigate risk. The capital online lenders extend to small business owners is often provided by other lenders (like banks and hedge funds). They borrow this money and must repay it to their creditors at a fixed interest rate. During a recession, defaults and delinquencies usually increase, so lenders have to make sure they cover their bases and can repay their creditors so they can continue lending to small businesses.
On the more drastic end of the spectrum, some lenders I have spoken with and Fundera works with have paused all lending for the time being as they have no idea how to assess risk in this evolving pandemic environment. Expect this to trickle to other lenders as it is nearly impossible for an underwriter to confidently predict a borrower’s ability to repay.
What to Do If You’re Already Repaying a Loan
If you are currently working with an online lender, there are several things you should expect from them. First and foremost, it will in all likelihood be harder to renew your financing. Lenders are going to more rigorously reevaluate your creditworthiness when you go back to them for more capital, and you should expect all of the things above to be true even if you have an existing relationship with a lender and are in good standing.
If you find yourself in a precarious position and feel like you may not be able to repay your existing debt, contact your lender and work with them to renegotiate payment terms. Lenders do not want their customers to default—it is against their every interest. In many instances, they may elongate your existing term, reduce the amounts of your regular payments, or even defer some payments. They want you to succeed. Be patient with your lender when you try to renegotiate or ask for some deferred payments. By one account customer service inquiries have grown over 25x in the past week.
Lastly, if you currently have a line of credit from an online lender, you should expect that if you want to draw on it lenders will ask for updated information from you (like bank statements that show cash flow) so they can re-underwrite you to assess risk and make a determination of how much you can draw, or if you can draw.
How to Approach Loans From the SBA
SBA lenders are a completely different story and can be the silver lining through these trying times. The SBA was built for times like these. During the Great Recession, the SBA increased its guarantees to 90% to encourage banks to lend more to businesses in need, and they were extremely flexible to distressed business owners in regards to their repayments, oftentimes deferring payment for up to three months with zero penalties.
I believe that we will quickly see legislation that increases the SBA guarantee to 90%, provides a generous policy for distressed businesses that need to defer payments, and increases the cap of the SBA Express loan from $350,000 to $1 million. We may even see greater flexibility in underwriting standards as the SBA will do everything it can to ensure banks continue to lend in these trying times.
Furthermore, the SBA has its own Disaster Loan Assistance Program to assist business owners most in need. The SBA runs this directly, as opposed to providing these loans through banks. This program is critical during times of duress, but this pandemic is going to put the SBA under a considerable amount of stress. Normal disaster loan assistance is concentrated in a specific geographic area (e.g. a hurricane hits a city, and the SBA needs to focus on that city); however, in this instance there is no geographic concentration. The impact will be felt across the entire country.
This is going to put a strain on the SBA—to fulfill the incoming requests for disaster loan assistance unlike anything it has experienced before.
Operationally, applicants should expect slower turnaround times due to the overwhelming demand and the fact that staffing at the SBA will be an issue in servicing this demand. My hope is that the SBA finds a way to deploy disaster loan assistance through third parties to enable a more expedient distribution of capital to those who need it most. We need this program to work, and for those business owners hit hardest, I’d encourage you to explore this opportunity, and it is my hope that Fundera can help facilitate these loans to expedite their impact.
The Bottom Line
The evolving situation is about as fluid as it gets. We are here to keep you updated on everything we learn. If you’re interested, you can subscribe here to Fundera’s COVID-19 newsletter, which focuses on changes and announcements that directly impact us entrepreneurs.
We’re all in this together. Stay safe, and we will do everything we can at Fundera to help however possible. While we may not always be able to find you the capital you need—especially given the rapidly evolving economic environment—we are here to provide information, support and any personalized guidance we can.
More COVID-19 Coverage From Fundera:
- How to apply for a low-interest business loan if you were impacted by the coronavirus outbreak
- State-by-state resources for businesses impacted by COVID-19
- The comprehensive guide on how COVID-19 is affecting small businesses