Small Business Finance in the Pandemic: What You Need to Know

by / ⠀Funding / July 22, 2020
woman staring stressed at mac laptop and notebooks

The impact of the COVID-19 pandemic on small business finance is huge and mostly negative. Lockdowns sped up the development of some industries and trends, such as e-commerce and remote work, but the majority of businesses were deeply affected by their inability to function because of the restrictions. According to McKinsey research, the economic situation globally is perceived as worse than it was six months ago with 33% of global executives believing that recovery will be difficult and take a lot of time.

Moreover, there is an imminent risk of a second wave of the virus. Should this occur and lead to more lockdowns, this will lead to additional business closures and bankruptcies. The number of small business owners in America alone has already decreased by 22% because they don’t have the funds to wait out the lockdowns.

Unfortunately, financing is very hard for businesses to come by right now as only programs backed by the government are active.

The COVID-19 Pandemic and Its Impact on Small Business Finance

The COVID-19 pandemic isn’t the first pandemic in history, but it’s the first to hit the world so hard economically because we live in a globalized world where trade is essential. Moreover, this pandemic all but stopped the majority of production lines because lockdowns prevented factories from working. This led to both production and consumption levels going down.

Small businesses were deeply affected by both. Some were unable to transition to working from home and those that were able to transition were often unable to function optimally.

Even the businesses that were little affected by the change in work format suffered because the level of consumption had been reduced due in part to the unemployment crisis. Unemployed people simply do not have the capacity to buy goods and services at the rate they did before the pandemic.

However, the situation should be improving now, right?

Most of the lockdowns have been lifted and businesses are getting back to work. Factories in China are already at almost 100% productivity, and considering that China supplies over three-quarters of intermediate parts for word’s manufacturing businesses, this is an important development.

But sadly, these improvements aren’t enough to make any significant, positive change for small businesses because a global economic recession has already started. Therefore, people won’t be consuming goods and services at high enough rates to make up for the losses caused by the pandemic.

Moreover, there is a big risk for a second wave of the virus, with Europe and American being the primary danger zones for this. Should this happen, small businesses that managed to make it through the first lockdowns might not make it through a second round of lockdowns.

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Financing for Small Businesses in Times of the Pandemic

Financing in times of crisis and shortly after is mostly unavailable to small businesses. This is exactly what happened after the recession of 2008, when lending went down by 18% in two years. It’s safe to assume that the same thing will happen now, in the COVID-19 crisis. In fact, it is already happening as the business lending sector has all but stopped.

Not so long ago, small businesses and startups just got their chance to shine. Banks and other traditional lenders finally relaxed their regulations after the previous recession, and innovations like bookkeeping software made running a small business even easier. The relaxed regulations helped businesses secure starting capital or financing to boost their cash flow, and they also got access to “luxury” services. This includes fit out finance, which can be used for the specific purpose of boosting a small company fast. Such transformative loans became easy to obtain, especially considering the rise of alternative finance providers.

However, the coronavirus pandemic, and the global economic recession it caused, erased all that progress. And while the industry is restarting now, the uncertainty level is still too high. Therefore, lenders’ risks are exceptionally high. As a result, they stopped lending altogether. Smaller private lenders also operate on a very limited level, if at all.

The only exception right now is lenders who are backed by the government. Many governments are providing grants and loans to business owners to help reduce the devastating impact of the pandemic. However, these types of financing are also limited in many ways.

All things considered, small businesses are at a tremendous disadvantage at the moment. Quite a few of them will not survive through this difficult period. Many businesses require loans right now in order to reopen and refill their stocks to get back into the game. However, with no financing available, they cannot even do that.

Financing Options Backed by the Government

All these issues with private and “traditional” lending boiled down to governments becoming the primary (and sometimes only) financing provider recently. Top examples of government-backed financing options worldwide are:

  • Paycheck Protection Program (PPP) in America
    Distributed by the SBA, the PPP is a program that offers loans that will be forgiven when used for specific purposes. Eligible small businesses can use these funds to cover essential expenses, such as payroll, rent, utilities, and mortgage, but the majority of the funds must go toward employee paychecks. The main purpose of the PPP is to help Americans retain their jobs in spite of lockdowns.
  • SME Guarantee Scheme in Australia
    The SME Guarantee Scheme should help Australian businesses that need to obtain loans up to $250,000. The government will guarantee 50% of the loan, so the program is more focused on encouraging lenders instead of providing businesses with “free” money. The loans are unsecured, but rather limited in both size and terms.
  • Coronavirus Job Retention Scheme in the UK
    The UK has a wide range of programs and grants to help small businesses during the coronavirus pandemic. The Job Retention Scheme is only one of these options and solely focused on covering payroll to retain employees. However, the scheme will cover only a portion of the pay, even for fully-eligible businesses. 
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Criticism of Government-Funded Small Business Financing

These programs face a lot of criticism, the PPP in particular, because the money in them is not necessarily used as it should be. The biggest complaint about the PPP is that a big portion of the funds went to big businesses that shouldn’t have had access to it. As the money is limited, this means that smaller companies were unable to get aid.

Even among truly eligible businesses, there is a lot of inequality in the distribution of funds. For example, in America, construction businesses got the biggest cut of the PPP funds. That portion was significantly bigger compared to all other industries. The inequality in regional distribution is also a major concern.

Another major point of criticism for these programs is that they are difficult for businesses to qualify for. It’s true that there are many eligible small businesses in every country. However, the bureaucracy surrounding the actual applications makes it hard for companies to apply. There are many minor clauses that make it impossible for many entrepreneurs to qualify.

All in all, government financing is a great thing. It’s also the only type of real help many small businesses can hope for at the moment. However, even despite the claims that these loans and grants are straightforward, a lot of the funds don’t reach small businesses.

How a Small Business Can Get Financial Aid During the Pandemic

As a small business today, you need to use every opportunity available. There aren’t many of those opportunities, so you also need to act fast.

First of all, you should research all programs, grants, and loans offered by your local government. Research every source of additional funding you have available and apply for what is necessary. You might consider trying for several grants as well as loans to cover all the expenses your business has.

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If none of those financing options are available to you or fit your needs, contact your bank. It’s true that banks are very reluctant to offer financing right now; however, you have a better chance of getting a loan or refinancing one you already have from a bank where you are a long-time customer.

Try for refinancing or renegotiate your current debts in a different way. Many big banks today are rather open to offering concessions to their customers. But you need to be proactive in seeking this kind of help.

Finally, no matter what type of financing you get, you need to build up a small fund of emergency cash. At the moment, the global economic situation is drastic; therefore, you need to have at least some security if your worst case scenario does happen.

You also need to reconsider your business expenses very carefully. Cut down everything that’s non-essential and reduce the essentials as much as you can. With financing so scarce, you need to plan for having a very limited budget for a while.

Prepare your mind as well as finances

It’s also important to understand that your revenue won’t go back to pre-lockdown levels for months still. Therefore, you need to prepare for reduced income both in your business budget planning and in mental strength. The stress of this situation is one of the main reasons why business owners break down and make mistakes or give up altogether.

You should develop a budget and a strategy for countering the biggest challenges of this time. Simply having a plan will help you resist the mental damage of the stress better.

Hard Times for Small Businesses Are Ahead

Small businesses have fallen on hard times because of the coronavirus crisis. Without financing freely available, there is no doubt many of them will fail still. Therefore, it’s essential for small business owners to be extremely cautious and resourceful right now. One must not miss any opportunity presented by the government and other providers offering assistance. Now is the time to seek out grants, loans, refinancing options, and even aid from charities. Research every option available and rethink your budget to cut the costs as much as you can. This should be the best strategy for survival, especially if the second wave of the virus hits.

About The Author

Kimberly Zhang

Editor in Chief of Under30CEO. I have a passion for helping educate the next generation of leaders.


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