Working Capital For Business Affected By COVID-19
As you may know the recent outbreak of the Coronavirus pandemic is burdening small businesses like we haven’t seen before. Businesses are being hurt due to low volume of customers and because supply chains are being disrupted. Unless the Coronavirus is controlled soon, the economy is at risk of a sudden stop. Making things worse is the fact that many lenders now view entire sectors of the economy as off-limits as far as providing business loans and working capital due to the fact that businesses effected by the Coronavirus may be incapable to bringing in enough revenue to be able to payback their loans. In this article we will look at some of the financing options available to businesses affected by the Coronavirus.
Quick-jump to the following sections:
- Paycheck Protection Program
- SBA Express
- SBA Disaster Loans
- EIDL (Cash Advance)
- SBA Loans
- Alternative Working Capital Loans
- Lines of Credit
- Equipment Leasing
- Cash Advance
Just weeks ago, the first case of COVID-19 (the disease caused by SARS-CoV-2) was reported in China. Since then the disease has migrated throughout Europe and to the rest of the world. While not every country has been directly affected by the virus (in a public health sort of way) nearly every country is feeling the economic effects of the Coronavirus. Due to the highly-transmittable nature of Coronavirus, each day, thousands of new cases are being found throughout the globe, and it is now bordering on a pandemic in the U.S. Airlines are shutting down, supply chains are being disrupted, major events are being cancelled, schools are closing – all of which will have a major negative impact on GDP in the US.
More acutely, consumer demand in the United States has already plummeted because of the Coronavirus, and as consumer demand decreases, not only are the business to customer companies hurt, but so are their suppliers – who already operate on razor thin working capital margins. Even companies that aren’t directly affected by the drop in consumer demand will be hurt, as both national and global GDP decline.
Making matters worse is the fact that many factories in China have either temporarily shutdown, or have not returned to completely normal activity – and aren’t expected to for months ahead. If this disruption continues into the late summer, we will then see supply chain disruptions heading into the Christmas season – a time many companies rely on to put them into the black. For now, the delays are manageable, with delays at the ports only being about 6-10 days, but if the availability of migrant labor continues in Asia and throughout the globe and normal capacity isn’t restored, things could get much worse.
Industries Facing Working Capital Shortages Due To Coronavirus (COVID-19)
- Health Services
CoronaVirus Loans & Working Capital Options
The key part of weathering Coronavirus for small businesses is making sure you have enough liquidity for your business to ride-out the pandemic. But what are the options available to small businesses hurt by the Coronavirus (COVID-19)? Below are a look at some of the business loans and working capital options for businesses hurt by SARS-CoV-2:
Paycheck Protection Program
Passed in late March 2020 under the CARES Act this program covers the cost of a business’s payroll, along with rent/lease, mortgage interest rates and the costs associated with their employee’s health insurance.
|Rates||0% if forgiven (4% if not forgiven)|
|Terms||Up to 10 years|
|Funding Amounts||Up to $10,000,000|
SBA Express Loans
This program also saw changes with Congress’s passing of the CARES legislation. Whereas the flagship SBA 7(a) program may have a funding time up to 30 days (sometimes as long as 45 days), the SBA Express program has a much faster turnaround because the lender’s aren’t required to go through the standard processes associated with sending the loan package to the SBA and wait up to 20 days. Instead, the final SBA approval has a turnaround with the SBA of 36-72 hours.
|Rates||$50,000 or less; prime +6.5%
over $50,000; prime +4.5%
|Terms||Up to 10 years|
|Funding Amounts||Up to $350,000|
|Collateral||May be required|
|Fees||0.25 – 3.0%|
SBA Disaster Loans
This was the initial program the government used to help providing credit to businesses affected by the Coronavirus / COVID-19 epidemic. The program had offered up to $2,000,000 in funding at 3.75% interest over 30 years. Since then, Congress has passed legislation diverting rescue efforts into the Paycheck Protection Program as well as the 7(a) and 7(a) Express. With that having been said, this program is still operational, but has many hundreds of thousands of applicants and limited manpower to process them, slowing down the underwriting and funding process.
|Terms||Up to 30 years|
|Funding Amounts||Up to $2,000,000|
|Collateral||May be required|
EIDL Cash Advance
With Congress having passed the CARES act legislation, there has been a shift away from the EIDL for larger funding amount, and thus: have essentially converted the EIDL into a cash advance program, offering businesses access to $10,000 as a cash advance to use as they need as they wait for approval for other SBA programs. This cash advance has minimal requirements and doesn’t need to be repaid — regardless if you are approved or denied for other programs.
Coronavirus SBA Loans
The Small Business Administration offers both disaster loans, and SBA enhanced financing to small businesses that meet the SBA financing guidelines. The general SBA 7(a) program is designed to encourage banks, community lenders and credit unions to provide loans to businesses that don’t qualify for conventional financing but have solid revenue and profitability. The SBA will cover up to 90% of the conventional lender’s losses should the small business fail to fully-repay their loan; thus: removing nearly all the risk from the lender.
Coronavirus Alternative Working Capital Loans
For companies that are now considered “high-risk” like trucking, transportation, freight, import/export, restaurants, and businesses with lots of customer foot-traffic, or have have large groups of customers frequenting at a given time (airlines, movie theaters, events, etc), there are working capital options. These types of loans have minimal paperwork, minimal credit score requirements, and can fund within a day or two – if not immediately. Granted, the rates and terms aren’t nearly as favorable as you would find with bank loan, it’s the availability that is the key – with approval rates as high as 90% — even during the Coronavirus pandemic.
|No Collateral||Not Required|
Coronavirus Lines of Credit
There are multiple types of credit lines available to businesses affected by COVID-19 (Coronavirus) in both secured and unsecured structure. The SBA offers a secured interest-only line of credit for all business (not just affected by Coronavirus). Additionally, there are 0% APR unsecured lines of credit for businesses affected by Coronavirus. Both of these programs require a credit score of, at least, 680 to qualify.
|Rates||As low as 0% for 12 months|
Coronavirus Equipment Leasing
While working capital may be the top need for many companies affected by Coronavirus, for companies that are in need of purchasing equipment, but are unable to get a loan to make the purchase, and option may be to simply lease business equipment. By leasing the equipment, you don’t actually own it (the lender does) so therefore the risk exposure to the lender is limited, as they can always reclaim such equipment should the business become unable to service the lease payments
Coronavirus Cash Advances
This type of financing may be tricky, because it involves the sale of future business revenue by companies affected by the Coronavirus. But if the company is seeing revenues dramatically decrease, the future revenues are going to suffer. With such a risk to the cash advance funder, they will price the advance, accordingly, making sure that the rate matches the risk. In short, it can become a very expensive type of financing. But it may be the difference between the business riding-out the pandemic or going out-of-business.
|Rates||1.08 – 1.49|
These are the main coronavirus business financing and COVID-19 working capital options. While the options are not plentiful, there are solutions for nearly all industries affected by Coronavirus. If you are a business affected by Coronavirus looking for Working Capital loans and lines of credit, and need help securing such financing, please reach-out to our experts, and we can help you obtain the best rates and terms for your business.