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As the economy bounces back and the U.S. transitions out of the pandemic, small-business owners will need access to capital to both recover and grow. However, since federal relief from the Paycheck Protection Program ended on May 31, business owners may be wondering where to get financing or looking for new options after an unsatisfactory PPP experience with a particular lender.
“You're a number at a big bank,” says Carson Lappetito, president of Sunwest Bank, a regional bank headquartered in Irvine, California. “I think most clients experienced this when they went through PPP.”
The best source of funding will always depend on a company’s specific needs, qualifications and industry, among other factors. Here are four options to consider.
1. Regional and community banks
Small banks typically offer low interest rates, long terms and high loan amounts, as well as personalized attention and streamlined decision making. However, their technology has lagged behind other lenders. Lappetito says that’s become less of an issue.
“The biggest change PPP and the pandemic has had on banks, as well as bank clients, is it pulled forward the digitization of banking by five-plus years,” Lappetito says.
As an example, banks moved to using Docusign — an electronic signature and agreement platform — in a matter of weeks, Lappetito says, as they went through the PPP process.
Nevertheless, bank small-business loans are still difficult to qualify for; business owners will need excellent credit and strong finances.
Also, although big and small banks alike have been slowly increasing loan approval rates throughout 2021, Biz2Credit’s Small Business Lending Index report shows they’re nowhere near pre-pandemic levels — in February 2020, small banks approved 50.3% of small-business loan applications, compared with only 18.9% in June 2021.
2. Small Business Administration
Although the PPP program has expired, standard SBA loans, such as the 7(a) loan, will continue to be strong funding options for small businesses. Like bank loans, SBA loans can be tough to get but offer long terms and affordable interest rates.
In December 2020, to help support small businesses and encourage lenders to issue capital, the SBA increased the guarantee on 7(a) loans and waived standard loan fees. This move “has allowed lenders who might've sat on the sidelines in this time period to be more active,” says Mike Rozman, CEO and co-founder at BoeFly, a financial marketplace specializing in franchise solutions.
And with the pickup of the economy, Rozman believes more lenders will stay in the SBA loan market, even though the increased guarantees expire on Sept. 30.
3. Online lenders
Banks have made some progress in technology improvements, but online business loans can still come with a faster application and funding experience. Although banks can generally offer lower interest rates than online lenders, Rozman says, business owners may be willing to pay a little more for a more efficient experience.
A February 2021 report released by S&P Global Market Intelligence predicts that fintech lending will exceed pre-pandemic levels within the next three years. Small- and medium-sized business lenders, in particular, are expected to increase loan originations by 16.2%, for a projected total of $15.8 billion annually by 2024. Online lenders are also typically more willing to lend to newer businesses or those with bad or fair credit.
4. Nonprofit lenders and CDFIs
Nonprofit lenders and community development financial institutions, or CDFIs, can be great sources for affordable financing, especially for smaller loans. These mission-driven organizations are also particularly good options for underserved businesses, such as women-owned businesses and minority-owned businesses.
Throughout the pandemic, nonprofits and CDFIs have created low-interest loan programs to support business owners who were left behind by the PPP program, says Luz Urrutia, CEO of Accion Opportunity Fund, a nonprofit CDFI based in California.
For example, the Southern Opportunity and Resilience Fund offers loans of up to $100,000 to help businesses get through the current crisis. But capital is not the only goal of these initiatives. Urrutia says these programs also provide the support and coaching businesses need to graduate to other types of financing.
No matter where you look for funding, Urrutia advises caution. Review resources like the Small Business Borrowers’ Bill of Rights and make sure any loan’s terms are clear.
“This is the time when predators come looking for you,” Urrutia says, “and this is the time for you to take a little bit of time and do your homework.”