The Small Business Credit Survey, recently released by the Federal Reserve, shows how the pandemic has significantly altered the financial landscape for small businesses.
The majority of firms (95%) reported that the pandemic impacted their business. For example, 26% closed temporarily, 56% reduced their operations, and 48% modified their operations.
85% experienced financial difficulties in 2021, up 20% from 2019. Back then, more than half of the business owners who sought a loan wanted to expand; last year, most of the small businesses surveyed needed funds to cover everyday operating expenses.
More than 90% of firms sought emergency funding to weather the financial impacts of the pandemic. The Paycheck Protection Program (PPP) was the most commonly used – 82% of the survey responders applied to the program, and 77% received all the funding they sought.
The pandemic wasn’t the only variable affecting small businesses. Inflation is the highest in decades, supply chain slowdowns have caused severe inventory shortages, and workers are demanding higher wages. The Federal Reserve is raising interest rates in response, which means the cost of borrowing money is going up.
According to the survey, 78% of businesses reported decreased revenues, 46% reduced their workforce, and 57% characterized their financial condition as “fair” or “poor."
The number of small businesses that experienced financial challenges in 2021 rose from 66% to 80%. Business owners commonly used personal funds (62%), cut staff hours, or downsized operations (55%) to meet those challenges. 79% percent revealed they struggled with outstanding debt.
Small Businesses and Traditional Lending
Today, small business loan applicants are more likely to get turned down or receive less money from traditional lenders than they asked for before COVID-19.
- Only about 30% of businesses that applied for financing last year got the total amount they requested, down from 50% in 2019.
- Only 68% of businesses got some of the amounts they applied for, down from 83% in 2019 and 76% in 2020.
Todd McCracken, president of the National Small Business Association, said the current loan environment makes it more challenging for small businesses to recover from the pandemic. In February 2021, big banks approved just 14.7% of loan requests, down from 28.3% in February 2020. The banks’ stinginess has led business owners to consider other options such as community banks, crowdfunding sites, and online lenders.
Alternative Funding and the Benefits for Small Businesses
There are some stark differences between alternative funding and traditional bank loans. For those that don't have the time, credit, or collateral to apply for a bank loan, non-traditional funding like a business cash advance offers a viable, quick, and safe alternative.
- Speed – Unlike the long and complex loan application process, a business cash advance offers a simple application. From approval to funding typically takes just 2-5 business days.
- Collateral and Credit – Bank loans are decided based on credit score and are reported to credit agencies. Since it’s not a loan, the cash advance is not reported to credit agencies. Bank loans typically require a business owner to put up collateral. Business cash advances require no collateral – instead, the business is selling a portion of its future credit card sales.
- Repayment - Traditional loans typically require fixed payments over a predetermined time. Payments for a merchant cash advance are flexible and fluctuate with sales. When sales are down, payments are lower. When sales are booming, they are higher and allow a merchant to repay the cash advance quickly.
Since 2005, Quikstone Capital Solutions has provided thousands of merchants with working capital to cover their business needs, including inventory and equipment purchases, hiring staff, expanding or remodeling, and responding to emergencies. Quikstone has an A+ rating with the Better Business Bureau, and 80% of Quikstone's merchants are repeat customers. To learn more about Quikstone, contact us today.
