In an age when businesses need more borrowing options, the opposite seems to be happening.
Thousands of small businesses struggled during the coronavirus pandemic, and for some the only way out was to borrow money. But a new report finds small business loans have been harder to get over the past year. Talk about terrible timing.
Loan approvals are down
Small businesses regularly depend on loans to stay afloat during times of declining income and economic distress, but funding has been less available to local establishments over the past year. According to , in January 2021, banks with assets of $ 10 billion or more approved only 13.2% of small business loan applications. That’s a slight increase from December when they approved 13.1%. But it’s also a big drop from January 2020, when they approved a record 28.3%.
Small banks have seen a similar drop in loan approvals. In January 2021, they approved 18.3% of requests, up from 18.2% in December. But in January 2020, they approved a whopping 50.4% of applications.
The same goes for credit unions. In January 2021, they approved 20.5% of requests. A year earlier, they had approved 39.6%.
An understandable but disturbing trend
It’s easy to see why banks may have taken a more conservative approach to lending throughout 2020. Once the pandemic struck, resulting in a deeper economic crisis, lending became much riskier overnight. In addition, as small business cash flow and income declined, some homeowners may have turned to credit cards or other expensive borrowing means to weather the crisis, damaging their own credit. and making it more difficult to approve loans in the future.
An affordable option for struggling businesses
Small businesses that are struggling to get a loan may be eligible for a second Paycheck Protection Program (P3) loan. Unlike traditional business loans, which largely depend on credit score requirements, eligibility for second PPP loans revolves around these factors:
- Have less than 300 employees
- Having exhausted all initial PPP funds
- Have experienced a 25% or more drop in sales for at least one quarter in 2020
Businesses that meet these criteria can receive a second PPP loan worth up to 2.5 times their monthly salary costs for a total of $ 2 million. The amount is slightly higher for restaurants and other hard-hit industries, which can apply for loans worth up to 3.5 times their monthly salary costs, but with the same limit of $ 2 million.
PPP loans are fully forgivable if 60% of their proceeds are used to cover staff costs. And for those who are not eligible for the rebate, the terms are very reasonable – the interest rate for second-draw loans, like the first round, is only 1%, and borrowers have five years to go. repay them.
Of course, not all businesses will be eligible for a second-draw PPP loan, and it is these institutions that risk going bankrupt in the absence of funding. Businesses that have been refused a loan by the big banks might instead try their luck with community banks. Although these local banks do not have the same resources as large credit institutions, they may be more likely to apply more flexible borrowing restrictions.
There are also small business grants for certain targeted fields and industries. Some businesses may be eligible to apply for additional relief even after they have been approved for a second PPP loan. It is worth visiting thefor more information.