The Fog of Financing During COVID

It has been said, the fog of war can distort reality.  This certainly can be said for petitioning a lender for a business loan. During the height of the pandemic the government, via its fiduciary agent, SBA, allowed business owners of all textures and sizes to borrow via the Economic Injury Disaster Loan program.

EIDL loan eligibility requirements were not aligned with industry lending practices already in place prior to February 28, 2020.  EIDL loan requirements were:

  • A minimum credit score of 570 to 650
  • Ability to repay determined by credit score only
  • Be in business on or before January 31, 2020
  • 2019 Federal Income Tax Schedule

The industry standard for borrowing from lending institutions prior to February 2020 and since the expiration of EIDL, and re-adopted is:

  • Credit Score, most lender believe that past result reflect future performance
  • Annual Revenue, clear picture of the trends of your business
  • Updated Business Plan, lenders want to know how the loan will be used and how the company plans to grow.
  • Additional Collateral, all lending institutions want to reduce their risk when making loans. One of the ways they do is by getting financial collateral that secures the loan in case your busines fails
  • Operational documentation, commercial leases, business licenses, personal and business tax returns, payroll records, incorporation documents, other affiliated corporate ownership, or current added financial obligation

We can easily see the requirements to getting an EIDL loan were very skewed to the economic, political, and social nuances of the period.

A Return to Old – New Reality

What did all businesses, small and large, sole proprietorships to corporations learn?  We were not prepared.  None of us.  Business managers – operators, must be forward thinking.  Tools such as Key Performance Indicators, a Pro Forma, or Scenario Planning, should be utilized routinely to not just see if you’re profitable, but provide guidance when there’s an internal or external crisis that may impact your business.

Many lending institutions, especially, Merchant Cash Advances (MCA) or similar hybrids, where they debit small business owner bank accounts daily or weekly, require small business borrowers to connect their bank accounts to see if they are a viable candidate for MCA.  Like accounts receivable factoring, MCAs have their beneficial use in the lending space.

We’re discovering there is an urgent need to educate business owner and operators on the Debt Servicing.  Debt Servicing is the cash required to pay back (a loan) the principal and interest of outstanding debt for a particular period.  What if you’re a servicing more than one debt?  How many clients should you see monthly?  What are your products or services ideal price point?  What is your business cash burn rate?  How How soon will you break even after taking out a loan?

We partner with clients to meet loan qualification requirements and implement loan- financing strategy compliment growth.  To learn more how we may serve your business’ growth get in touch.