The Paycheck Protection Program is a major game-changer, but to keep the lights on, today’s small business leaders need a lot more help – from the government, from financial institutions and from themselves.
The SMB and entrepreneurial communities have applauded the US government for both extending the deadline for PPP applications, and for making sure the money reaches smaller businesses, after many big corporations had to be publicly shamed into returning stimulus funds intended for small businesses last spring.
The Biden administration extended the deadline for loan applications by an extra two months to May 31, and for loan authorizations until June 30, so as to allow the Small Business Administration to deal with the flood of applications.
The administration has also changed the application requirements to include a two-week application window exclusively for SMBs with under 20 employees, and extended funding for SMB owners with non fraud-related felonies – and for solopreneurs and freelancers who were previously excluded because payouts were calculated according to the number of employees.
But while we’re in favor of stimulus money going to small businesses, and there’s no denying that SMBs need the working capital injection, PPP payments aren’t enough. If your fiscal survival begins and ends with PPP approval, your future looks rocky.
Every small business owner needs strong fiscal planning capabilities to optimize their operating models and maximize profits. That means income forecasting that runs six months or a year ahead, and cash flow projections updated on a monthly basis.
It’s also a good idea to prepare more than one fiscal forecast, covering your best-case, worst-case, and median scenarios.
Proper fiscal forecasting helps you know ahead of time when you’ll be needing a loan, so you have enough time to find the best option and receive the funds before it’s too late. Additionally, most lenders expect to see a short term and/or long term forecast before they agree to the loan, because they want to know that you’re organized and are asking for genuine business needs.
Sales forecasting is an important part of fiscal forecasting, covering both returning and new customers. Turn to your CRM to predict your sales pipeline, and to your invoicing reports to track sales performance so you can estimate future sales. Keep an eye on business metrics like sales, revenue, recurring, seasonal, and one-off expenses, too.
You also need to allow for seasonal fluctuations to your sales volume. For example, a personal trainer might fill a lot of appointments in January when everyone makes the New Year’s resolutions, but not so many in August when people go on vacation.
One more issue to consider is your ratio of clients per employee. When you’re a solopreneur, you’re the only employee, but hopefully your business will scale until you need to take on more employees. Stay ahead of these milestones by calculating how many clients you can cope with, so you’ll know when you’re approaching the tipping point and allow for another salary within your expenses.
The good news is that if you weren’t born with financial planning skills, you can acquire them from training courses run by a small business organization like the SBA.
A typical small business is likely to need to apply for extra working capital a number of times over the years, for a whole range of purposes – including keeping the show on the road when sales are low, funding business expansion, or to carry out repairs.
You might need extra cash to cover payroll for a new employee, because there’s often a gap between the point when you need an extra pair of hands, and when you start to see the resultant jump in revenue.
It’s good to become familiar with the different types of SMB funding in advance, so that you know what’s available to you and where to turn when you need it.
Classic business bank loans are already well-known and reassuring in their familiarity, especially if you’re not used to digital finances and already have a relationship with the bank manager. During the first round of PPP, as big a role as fintechs played, SMBs turned to the banks more than to any other lending type. Of course, SMBs who turned to banks did so mostly because they already had a relationship with them, which would have helped the bank succeed in securing PPP.
If you already have a relationship with your business bank manager, you might be able to get a loan faster, plus banks tend to approve loans for larger amounts. However, for SMBs loan size is rarely a factor.
P2P business loans are a more recent option. They give more transparency about fees and amounts you can borrow, and some have no minimum credit requirements, but loan amounts tend to be fairly small. Crowdfunding has some similarities to P2P loans, because you’re borrowing directly from individual lenders rather than from institutions. Crowdfunding loans don’t have any credit requirements, but it can take a while to reach your goal.
Traditional banking still has its place, but technology platforms are on the rise. The fallout from the 2008 banking crisis and the Frank-Dodd act led banks to tighten lending criteria to small businesses, which made it harder for SMBs to get loans and pushed them towards digital lenders.
To apply for a small business bank loan, you’ll need to hand over at least three to five years of financial records and a similar number of years of credit history. Banks also have minimum turnover requirements which are often too high for an SMB to qualify. Some banks even have minimum turnover requirements before you can open a business account. On top of all that, it takes weeks, and a mountain of paperwork, before a bank approves a loan.
It’s little wonder that SMB owners who are frustrated with the time and hassle needed for any kind of traditional banking are falling with relief on digital alternatives. Fintech lenders tend to ask for one or two years of financial records, and some for just six months, and there’s often no credit history requirement..
Digital lenders send initial approval instantly, and take just one to three days, not months, to approve loans. All the contracts are digital, and you don’t need to make an appointment or meet in person to sign contracts, drastically reducing the hassle involved.
Fintech can help with more than loans, with online-only business banking likewise trending. With people in lockdown last spring, mobile banking registration jumped 200%, and mobile traffic to banking websites rose 85%. Many fintech platforms offer financial planning tools for business bank account holders, some of which can even help entrepreneurs generate revenue projections to increase the likelihood of loan approvals.
On top of that, as consumers embrace digital finance solutions like mobile payments, digital banking grows more attractive for businesses. Digital bank accounts coordinate with mobile payments to process payments faster to improve cash flow; offer superior fraud detection; integrate with your bookkeeping and accounting software; and support automated reports that make it easy for you to track income and expenditure.
Running a successful small business takes more than passion. You also need old-fashioned financial planning skills, plus fintech innovations can help you along too. Streamlining your fiscal planning, discovering alternative funding sources, and leveraging the capabilities of fintech all help SMBs to remain afloat, grow and scale.