COVID-19 has shaken the economy and turned the entire world upside down. It’s been an escalating situation in the US for over three months and in that time, the stock market has plummeted, the economy has entered a recession, and much of life as we know it has completely changed. Even now, there is still so much uncertainty about the future. And many small businesses have been looking for ways to get financial help.
One question on many business owners’ minds is “Will it be harder for me to get small-business financing now that we’re in the thick of the COVID-19 situation?” And even still, you may be wondering about what the small-business financing environment will look like after things settle down with COVID-19.
There are some aspects to the answer which may seem like common sense, and others which may surprise you. Continue reading as we explore the future of small-business financing after COVID-19.
Will It Be Harder To Secure Business Financing?
The changes COVID-19 has caused in the financial world have trickled down to small-business financing. Lenders are scrutinizing more heavily due to credit risk because of the increased volatility of the market.
It’s a difficult time because so many businesses desperately need funding, but lenders have to be careful with their lending practices for their own sake. There may be many deserving businesses on paper (based on past guidelines), but lenders must take into account an accurate risk assessment with each small-business financing situation. And that risk assessment is likely going to be a lot more stringent than it was before.
Some businesses, on the other hand, may have a little more luck receiving financing than others. That’s because certain industries have been more negatively affected by COVID-19 than others.
Here’s What Matters Most
If you’re looking to receive small-business financing, here are the factors that come into play:
- Your Time In Business
Funders are looking to see longer track records when small businesses ask for financing and relief. This could mean one thing to one funder, and another thing to another. Funders that previously required a year in business may be looking for 18 months, or even 2 years, for example.
- Your Industry
Certain industries are more likely to receive funding than others right now due to uncertainties. While your industry may have easily attained funding just a short 6 months ago, you may have more challenges now. Funders have to evaluate their own risk when deciding to finance a small business.
- Your Cash Flow
Funding companies are also looking to see sufficient cash flow to successfully service debt. Some funders are even asking for real-time access to your bank records to confirm that your business can make timely payments. And many funders are requiring more than they used to; month-to-date bank statements are becoming more of a norm.
- Your Personal And Business Credit History
Knowing your personal and business credit score is more important than ever, but your ability to influence it for the better can make a world of difference if you’re applying for small-business financing. To learn more, please see our article about protecting your credit score during COVID-19.
Sectors With Highest And Lowest Risk
Experian™ has done some data analysis on industries that are at more of an advantage and others that are likely to have some adversity when it comes to small-business financing. Their COVID-19 US Business Risk Index has shed some light on the “new normal” of small-business financing. Their five most “risky” industries are:
- Arts, entertainment and recreation
- Administrative/support/waste management
- Accommodation and food services
- Retail trade
Arts and entertainment is the high-risk front-runner as the industry that makes most of its revenue from large crowds – these concerts, sporting events and other large gatherings of people are considered risky environments for the spread of COVID-19.
According to Experian’s index, the following five sectors have the lowest risk:
- Educational services
- Public administration
- Healthcare and social assistance
- Agriculture, forestry, fishing and hunting
Educational services and healthcare will always be needed, and current technology allows for unique opportunities for teachers to connect with students and doctors with patients.
How can you secure small business financing?
Securing small business financing during these unfortunate times is actually much harder than it was five months ago. While it is still possible, the number of funding companies available to fund has actually decreased dramatically as COVID-19 has obligated them to shut down operations. Some financial institutions are slowly making the comeback in preparing to make funding available again. Private financing loans are becoming available to current clients and in some cases new clients as well. However, this time around and for a few months until the economy starts to rise again, requirements will be more strict and the loan amounts will surely be less as less capital is available. This does not mean that this is situation for all the financial institutions, some are fully equipped to begin funding as soon as some stated open back up.
While there are some states that opened and now are forced to quarantine once again due to an increase in cases, there are other states that are doing particularly well during this time. If you live in one of those states that is open for business, chances are that funding will be available much quicker than other states, however, this is not guaranteed.
In the meantime, as mentioned above, there are a few things you can do to make sure that if and when funding is available, you can secure a loan. One of those things is keeping up with your credit score as this is a huge requirement for most financial institutions. Also, plan ahead and check out your funders website for all the requirements to make sure you have everything you need for applying, this will make the application much easier and faster.
Steps You Can Take For Success
As we’ve said, bettering your credit score could prove to be very useful right now. You can use Experian, Equifax®, FICO® or Dun & Bradstreet to monitor your credit and raise your credit scores. Start by addressing any incorrect information on your reports. As many as 20% of Americans suffer from lower scores due to incorrect information, and you may be among them.
Take steps to show that your small business is worth investing in and financing. Keep careful records of your business expenses and button up any liabilities. Show how you’re taking action toward COVID-19 compliance. Stay up to date on the current CDC and government recommendations. Certain industries will be more directly affected by their guidelines. Adhere to them as firmly as you can.
The Future Of Small-Business Financing
The short-term future has proven to make it more difficult to get small-business financing, especially if your industry is considered risky or you don’t have as much of a track record. Funding companies generally have had to be more conservative with funding practices because there is so much uncertainty.
Things you could focus on are your credit score, building a track record of financial success and applying for small-business financing. Here are our credit guidelines which could help you long-term.
If you have questions, we’re here to help! Contact us here.