Economic downturns have been a regular but painful part of small business ownership. Yet unlike other recessions, Covid 19 hit Main Street businesses first and hit them hardest. When it comes to financing your business, this advice from lenders and advisors will make a big difference when times are tough.
When Maine declared a state of emergency and mandated a lockdown more than a year ago, nobody knew how long it would last or what the impact would be. But in her role as a small business lender, Renee Fahie, Senior Relationship Manager, VP at Bangor Savings Bank began calling her customers. She had conversations about re-amortizing debt, how to apply for the federal PPP program, or just let people know she was there to help. In one case, she taught a customer how to use zoom, scan documents and upload them to their loan portal.
But Fahie’s advice is that this communication should come from the customer first. “It’s so important that customers loop us in and have the hard conversations before their financial problems get to the point where we can’t help them get back on the rails,” says Fahie.
Choosing a smaller, locally based bank can be a much better option for startups and small businesses, says SBDC Small Business Advisor Raynor Large. “They tend to be more flexible and accommodating, which can be more valuable than accessing the large amounts of capital typically associated with larger, national banks.”
Lesson Learned: The relationship you cultivate with your lender can make a big difference, particularly during stressful times. Look for banks who have a strong connection to the community and be sure to communicate with them early and often if you are having trouble meeting your financial obligations.
When it comes to financing an existing business or starting a new one, good business plans with credible financial projections and marketing strategies will have an advantage.
According to Skip Bates, Senior VP at Bangor Savings Bank, the current financial landscape will reward applicants with solid business plans. Uncertainty about the future has made banks cautious about lending, but at the same time they have large amounts of cash on their balance sheets from programs like the PPP and economic stimulus checks. “This money has to be put to work and that means better rates for small businesses,” says Bates.
Given these trends, the businesses who will be in the best position to access capital are those with solid business plans. Because of lender liability concerns, banks cannot provide feedback or advice to applicants on business plans. That is why resource partners, like the Maine Small Business Development Center, are so important, says Bates. Business advisors are in a position to ask applicants to explain their thinking and to give honest feedback. In light of the pandemic, banks are asking more probing questions and want to know what an applicant’s “Plan B” is if things don’t go as planned. Business advisors can help work through these questions with clients.
SBDC Advisor Raynor Large says that the pandemic hasn’t changed how he advises clients, but has underscored the importance of diving into the numbers and reducing risk for lenders. “I’ve been advising people to put more emphasis on break even points in their financials, reducing their start-up costs and discussing the impact of the pandemic throughout the plan,” says Large.
Lesson Learned: Having a business plan with credible and defensible financial projections, well documented assumptions, and a Plan B is a necessary part of business planning. To put your best foot forward, work with a business advisor before you go to the bank.
Financial Literacy and Technology Matter
In a survey of Maine small businesses conducted in December of 2020, the overwhelming need identified by respondents, was a further injection of cash to stay afloat. Over the last 15 months federal and state funding programs have provided a necessary lifeline to the small business community. According to the 2021 Small Business Credit Survey, 91% of respondents applied for some form of emergency financing during the pandemic.
Yet a painful lesson observed by business advisors and lenders, was that businesses who were technologically savvy, had an electronic accounting system, understood their financial reports, and were generally more organized, were more successful in accessing emergency funding than those who weren’t. There are many reasons for this discrepancy, including limited access to resources due to social and economic status and geographic location.
Maine has numerous free resources to help you understand your finances and keep you up to date with new technologies.
Lesson Learned: Having up to date computer generated financial reports, digital copies of important documents like tax returns, and understanding how to electronically share documents and navigate online resources is a must. SBDC Webinars and E-courses are a great place to start. To stay informed about upcoming courses, be sure to sign up for our newsletter.
It may seem obvious, but those business who fared the best at the start of the pandemic were those with enough cash on hand to help them quickly adapt to their changing environment. Businesses who were able to purchase outdoor seating, accommodate new delivery options, and invest in new software had an easier time re-capturing sales.
Many experts recommend that small businesses have a minimum of three months of reserve funding in case of an emergency. But according to the annual Small Business Credit Survey (SBCS) conducted by the Federal Reserve banks in 2019, most US small businesses had far less than this going into the pandemic.
While few if any small businesses could have financially prepared for the length and duration of a global pandemic, planning for adequate working capital and cash reserves remains a top priority. Lenders will be looking closely at projected cash flow and working capital amounts before approving loans. In some cases, businesses will be asked by lenders to create debt service reserve accounts to set aside loan payments.
Lesson Learned: Understand your cash flow needs and create a rainy day fund. Work with an SBDC advisor to get you started.
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