Interest rates are at historic lows and cash-rich banks are eager to issue loans. The economy is expanding, inflation is on the rise and the economic outlook is strong. On paper, now is the time to borrow money to invest in your small business or buy a new business. But in reality, loan preferences favoring specific groups mean that only a privileged few can access this abundant and cheap capital.
“No bank wants to lend to a 3-year-old company,” said Rob Spiewak of MOR Kombucha. “It’s too risky. They say they want 24 months of steady profits, but that’s unrealistic for a rapidly growing business.” Three months ago, Rob thought it would be the perfect time to give up his lease and buy a new facility for his growing business. But the banks gave him a hard no. Rob ended up signing a new lease for a bigger facility and will have to relocate his business – again – in two years.
Rob’s situation is a classic startup hiccup: he can’t get a loan without years of solid profits, so instead he overpays rent and moving costs, which, in turn, cuts into his profits. . The SBA has loan programs for these start-ups, like the Community Advantage program, but most program administrators saw high defaults during Covid-19 and reduced their participation to reduce portfolio risk.
Even small businesses with strong finances find it difficult to borrow money if they didn’t establish good lending relationships before the pandemic. “Banks lend to the person they already know and have lent to before,” says Johnny Kang, commercial real estate agent at Sky Realty Partners. “They don’t lend to new customers. The guy with strong banking relationships gets the good deals now, and the guys who are just starting out have a harder time.”
Since the 2008 financial crisis, banks have favored low-risk commercial clients who are well-established, in growing industries, and personally guaranteed by an owner with strong credit and high net worth. This eliminates huge swaths of small businesses that need capital the most, such as start-ups, hard-hit industries like brick-and-mortar retailers, and entrepreneurs from low-income households with poor or no credit history.
Since Covid-19, banks have become even more conservative and lend less and less to risky segments. The impact of this is deep and wide – for example, even today, as consumer travel increases, it is nearly impossible to get a bank loan in the hospitality industry.
“Banks always look at historical financial data,” says Nick Otis, a young real estate investor. He adds, “2020 was an unprofitable year for hotels, so you can’t get a hotel loan now, even though the industry has rebounded.” During a recent search for investment opportunities, Otis saw several large hotel businesses for sale, but was unable to secure financing. Most of the trades he lost to cash investors – organizations with millions of dollars in cash, so they didn’t need loans. “The small investor with a loan always loses to the big one with money.”
The federal government stepped in to fill the lending void during Covid-19 with programs like PPP, SVOG and EIDL. However, these programs come with restrictions that exclude businesses created after Covid-19, businesses that use independent contractors instead of employees, or businesses that operate in specific industries. “Some small businesses have had to double their EIDL and are like, ‘I don’t know what to do with all that extra money,'” my colleague Matt Draymore recently told me. “Others have not qualified for EIDL at all and are barely making it.”
The Shuttered Venue Operators Grant (SVOG) was created in December 2020 to save small performance spaces and museums. But the SBA, mired in the administrative burden of multiple new and complex programs, did not release the funding until July 2021. By then, mask mandates and social distancing regulations had been dropped, and many grant recipients were back at full capacity. . For other potential beneficiaries, it was too little, too late.
“Hodi’s Half Note was a popular local spot – a real neighborhood staple,” says Pete Kos of Fort Collins, Colorado. “They held out until March 2021 before they finally folded. If only they could have held out for another four months, SVOG might have saved them.”
Access to capital is essential for businesses, but financial markets are beyond the control of a single business owner. If your small business is to be one of the winners in the credit world, you must coordinate your business strategy with the existing credit environment, instruments, and market opportunities. Build a relationship with your banker during the good times so they are there for you in the bad times. Track interest rates and lending instruments or partner with someone who does, like a financial advisor. Stay tuned for government programs targeting small businesses. Most importantly, make a financial plan for your business so you can study worst-case scenarios and plan for contingencies.
LJ Suzuki is Fractional CFO at CFOshare, an outsourced financial service for small businesses. He helps business owners and managers with strategic planning, mergers and acquisitions, capital planning, cash management, pricing strategy, growth cost analysis, forecasting, budgeting and incentive plans.