Finding a loan is an important part of getting up and running or staying on track through the ups and downs of owning a small business. Well over half of entrepreneurs recently reported they weren’t sure they had enough cash to even start their businesses.
Small Business Trends got in touch with Krista Morgan, CEO and co-founder of P2Binvestor, to find out if and how small business can get a loan in a bear market.
She started by defining the term for us via email.
“In a bear market, banks become more risk-averse and will either 1) not provide SMBs financing at all or 2) provide loans to these small businesses at unfavorable rates,” she writes.
Look Beyond More Traditional Lenders
There’s a case that this is the situation now. The Small Business Administration (SBA) has halted SMB loan programs as of Dec 22 due to the ongoing government shutdown. There’s a ripple effect that’s being felt by American banks causing them to curb the money they make available for small businesses too.
Morgan stresses there’s still a bright side because the market is diverse:
“Small businesses are fortunate with the wide variety of lending options that are currently available. With banks being more selective to whom they provide loans, alternative lending options become the obvious choice for these small businesses to access financing.”
Realize APRs will Be Higher
Still, she adds a caveat pointing to the fact that small businesses need to be aware that the APR’s and repayment terms, should they be able to get a loan from a bank or alternative institution, won’t be as low as they would in a better market. The Annual Percentage Rate (APR) is the amount charged on any loan over twelve months.
Seek Out Alternative Lenders as an Option
There’s at least one solution that was designed specifically to support SMB’s during down times when loan money is scarce.
“Online alternative lenders were built to support and fund SMBs during down markets,” Morgan writes. “For example, P2Binvestor was built to provide high-end lines of credit to businesses that can’t receive bank financing. So, if banks become more selective and restrictive during a bear market, SMBs know they can access a large pipeline of lenders in order to get the financing they need.”
Develop a Plan for Market Downswings
Small businesses aren’t totally at the mercy of market swings either. Morgan writes that they should have a plan on how to withstand one of these bear markets and even succeed during a downturn. She writes that both banks and alternative lending institutions will be looking to see if any small business has put one of these financial battle plans in place.
She offers a tip:
“The more diversity you have in your payor base provides more security and confidence so even if some of your payors fall off the map during a recession, you still can sell your product or service and be successful.”
Morgan also cautions against taking on large loans because SMBs think their company can grow at a rapid pace during a bear market. She points out that it’s improbable any small business will grow at the same rate it did during a more lucrative bull market. Small businesses taking on loans during leaner times should focus on having money to operate businesses and get over any financial and market humps.
Although she says there aren’t any specific small businesses that stand a better chance than others of surviving a bear market, those that sell high-end luxury goods tend to take a bigger hit during downswings.
Develop a Must-Have Feeling for your Product
“Buyer behavior typically shifts when the market is down and people decide to buy ‘store brand’ goods as opposed to more select ‘niche’ products,” she writes. “At the same time, it is up to these niche businesses to market the product/service need to their customers.”
Finally, Morgan says if a business can stoke that “must have” feeling for their product or service by ramping up demand during the downtime, they should be successful regardless of the market cycle.
And remember that nothing will help you get a loan faster than being profitable.
Love what Robert Brady had to say. If a business is not profitable, they will not get a loan. I have a questions for the readers and the editors. Are we in a bear market? I would add one additional resource to this article. A business line of credit is another great solution for a bear market. Even if a business is doing well currently, if revenues begin to decline they can tap into the line of credit for emergencies. Today, there are online lenders that can approve a business line of credit much faster than a bank.
Hi Gil, late last year I learned that if a young business isn’t profitable yet, in some cases the team at Ms. Morgan’s lending company still can provide assistance if it’s the right fit and it helps if market conditions aren’t dreadful. https://smallbiztrends.com/2018/12/small-business-economic-trends.html
It is important to be careful as well. Some lenders may be lenient with their requirements but they can charge a lot afterwards.