How to Navigate the Volatile Business-Funding Environment
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Debt is extremely cheap nowadays. The federal government and Federal Reserve are injecting trillions of dollars into the U.S. economy, which means entrepreneurs can access loans at historically low rates. (In March, the Fed cut interest rates to zero.) And I don’t know what you’ve heard, but angels and VCs are still active.
Moreover, the $2.2 trillion stimulus package signed into law on March 27 is extraordinary legislation that attempts to avert another Great Depression. (The 1930s crisis saw 25 percent unemployment.) Last month, nearly 10 million Americans filed for unemployment benefits, and that’s after millions more were turned away by clogged application systems.
Because of the huge expansion of the money supply, companies have financing options at a time when some economists say the jobless rate could soon approach 20 percent. Former Fed Chairwoman Janet Yellen recently said unemployment is now at least 13 percent and that gross domestic product (GDP) will decrease by 30 percent.
Washington’s intervention to spark a weakening economy, 70 percent of which is driven by consumer spending, includes $500 billion in loans to businesses and local governments. Businesses can get a tax credit up to $5,000 per idle worker for keeping him/her on the payroll during the pandemic.
There’s extra funding if your business belongs to a hard-hit industry. For example, healthcare firms will be awarded $100 billion in grants, while airlines will get $58 billion in loans and grants. Finally, employers and self-employed individuals can defer the 6.2 percent tax on wages that fund Social Security.
More help could arrive as Trump is pushing Congress to cut the payroll tax for companies and employees. Even though I'm of the mindset that you should sell and build to increase revenue, I still know there's value in getting the support that you need. Here are tips for business owners who are seeking funding during the lockdown.
Use idle time to research government loans
More liquidity means record-low interest rates. Small businesses can use cheap debt to pay bills, employ Americans and keep doors open. You may have a great product or service, but still go bankrupt for lack of cash. When taking out government loans, like Economic Injury Disaster Loans, it helps to be organized.
Felix Polanski, a partner at the banking platform CreditPilot, recently explained in an email interview that entrepreneurs should research loans aimed specifically for small- and medium-sized enterprises, elaborating that, "Most small businesses don't have enough liquid reserves on hand to handle even two weeks of expenses. It’s imperative to leverage loans like the SBA's Paycheck Protection Program so that owners can get cash as soon as possible.” (The SBA program gives incentives to businesses to keep workers on their payroll.)
To see all options and expedite the borrowing process, you may want to call the bank where there’s an existing line of credit. “Do your homework because there are numerous options,” says Polanski, whose Cyprus-based venture works with mobile network operators (MNOs) who then provide mobile banking services to subscribers. “If you go with the option of turning a loan into a grant, make sure you can meet the requirements. And if you use payroll services like Gusto, info can be collected very fast.” He also adds to submit all paperwork as soon as possible.
“Entrepreneurs should be wary of big banks that offer credit products,” says Zon Chu, CEO of Constant, a peer-to-peer lending platform. “Traditional financial institutions have grown inefficient and greedy. They lend depositors’ money for interest, but keep most of the profits. And they charge high fees when selling complex products that confuse rather than inform borrowers.”
There are other ways to increase working capital without a bank loan. According to attorney Mat Sorenson, the stimulus “increases the dollar amount you can loan yourself from your own 401(k) … and also creates a penalty-free early distribution rule whereby IRA or 401(k) account owners ... can take a penalty-free retirement account distribution.”
The $2.2 trillion in stimulus money and the Fed’s quantitative easing are designed to increase employment. Business owners have access to cheap cash in today’s challenging environment. The bottom line is the bottom line –– get money.