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Navigating Inflation: How a Small Business Loan Can Provide Security
Government support programs like the Paycheck Protection Program (PPP), Shuttered Venue Operators Grant (SVOG), and COVID-19 Economic Injury Disaster Loan (EIDL) ended in 2021, but small businesses are still looking for economic relief amid surging costs of borrowing in 2024. Local businesses, the lifeline of our communities, grapple with mounting borrowing costs. Their preference for local financing over national banks reflects a desire for personalized support and community connections. Yet still, many entrepreneurs find themselves tapping into personal savings or relying on the goodwill of friends and family to keep their businesses afloat.
As of May 2024, the year-on-year inflation rate, before seasonal adjustment, stands at 3.3%. Over the past 12 years, the annual average Consumer Price Index (CPI) increased from 224.939 in 2011 to 304.702 in 2023, reflecting an overall inflation rate of 35.5%.
If you are an existing business owner or an entrepreneur planning a start-up, a small business loan can provide funds with flexible repayment terms that suit your business needs.
What is a Small Business Loan?
The U.S. Small Business Administration (SBA) offers various loan programs to meet different business needs. The most popular program is the SBA 7(a) loan, which provides funding for business growth and emergencies. Here is a list of SBA loan programs:
- Standard 7(a): long-term financing used for various business purposes.
- SBA 504 Loans: Fixed-rate financing through community-based Certified Development Companies.
- SBA Express: Streamlined process for smaller loans up to $350,000.
- Export Express: Supports businesses expanding into international markets
- Export Working Capital: Provides working capital for export-related activities.
- International Trade: Helps businesses engage in international trade.
- Preferred Lenders: Partners with private lenders for faster loan processing.
- Veterans Advantage: Special benefits for veteran-owned businesses.
- CAPLines: Supports working capital needs, including seasonal fluctuations.
How to Secure an SBA Loan
When applying for an SBA loan, it’s highly recommended by funding advisors to include a well-structured business plan with your application. This plan outlines how you’ll utilize the borrowed funds and plan to pay back the loan. A solid business plan can significantly enhance your chances of loan approval and demonstrate your business’s potential for success.
How to Choose a Lender for an SBA loan
There are two types of SBA loan providers: Preferred Lenders (PL) and General Lenders (GL). Preferred Lenders have the authority to underwrite the loan by themselves. General Lenders send loan applications to SBA for further processing, which may delay the funding timeline. Small business owners also tend to prefer local banks and credit unions for their funding requirements.
Credit Rating for SBA Loans
SBA loans are specifically designed for businesses only, not individuals. When applying for SBA loans, lenders evaluate your creditworthiness using the FICO Small Business Scoring Service (SBSS) score.
The FICO SBSS score is a credit score tailored for small businesses ranging from 0 to 300. A higher SBSS score indicates lower risk.
You can get an SBA loan with SBSS scores as low as:
- 7(a) Small Loans: 155
- Community Advantage: 140
- Express Bridge Loan Pilot Program: 130
Pros of a SBA Loan During Inflation
The Federal Reserve is likely to hike interest rates to offset the impact of inflation. Under these circumstances, you can benefit from borrowing money at low rates. You can also make emergency payments with SBA loans. Some of the pros of a small business loan during inflation include:
Low-Interest Rate
Most SBA loan rates are linked with the Prime Rate, while some offer fixed rate loans. Loan programs under SBA have transparent interest rates that are usually lower than the industry average.
Increase your Business Equity
Inflation provides an opportunity to boost your business equity. You can buy out stakes from partners or shareholders at a lower cost due to decreased currency purchasing power. SBA loans can also help you acquire a new business.
Collateral Requirements
The value of your business assets may increase during inflation. You can pledge your current book value as collateral for an SBA loan. Micro SBA loans up to $25,000 do not require any collateral. However, all assets created out of bank finance will be hypothecated to the lender.
Lower Down Payment
With good credit and strong cash flow, SBA loans offer low down payments. For SBA 7(a) and 504 loans when buying new assets, the minimum down payment is 10%. If credit is poor or cash flow is stressed, it may be 30%.
Easier qualification
Most commercial lending agencies require high cash flow or extensive business experience for lending to businesses. You can start quickly with an SBA microloan for up to $50,000 to build your credit profile. Once you have an SBA loan, it gets easier to scale up your line of credit.
Emergency Line of Credit
SBA lines of credit help during economic cycles. Use them for inventory, payroll during low sales, or one-time payments. SBA also offers low-interest Disaster Assistance loans and FEMA Grant Assistance for distressed businesses.
Nationwide availability
You can easily find a registered SBA loan provider locally. The loan underwriting process is standardized across the nation for all lending partners.
Cons of a Small Business Loan During Inflation
New business owners with no prior credit history may find it hard to get financed under SBA loan programs. Here are some of the drawbacks of SBA loans.
Personal Guarantees
Applicants may need to pledge all available collateral for getting an SBA loan. Lenders can offer up to an 80% discount rate on the fair market value of new equipment and 50% for used equipment. If you own more than 20% of the business, lenders may also place a lien on your personal assets. Some SBA lenders may ask for personal guarantees, which means your personal assets could be at risk if you default on the loan.
Extensive documentation
The application process for an SBA loan can be lengthy and stressful. Getting an SBA loan involves a detailed process. You’ll need to prove that your business is viable by providing documents like tax returns, financial statements, income projections, and personal information.
Lengthy Processing Time
An SBA loan can take several months to process depending on the lender, the loan amount, and your business plan. However, once you are funded under the SBA program, future loans can take less time. You can start with an SBA microloan and keep increasing your credit limits every year.
Alternatives to SBA Loans
Obtaining an SBA loan is not always easy. Because of this, business owners turn to alternative business lenders for their financing. Alternative lenders offer faster applications with less paperwork. Your loan application may be approved in as little as 24 hours.
