COVID-19 has exacerbated the funding problems businesses face, highlighting the need for change.
The disruptions that 2020 brought left most small businesses reeling. Owners and would-be entrepreneurs found themselves faced with various issues regarding business capital funding, and although it’s tempting to lay the blame solely at lenders’ feet, that would be unfair. Small businesses have also played a role in creating a situation that’s less than ideal.
According to Nav co-founder and executive chairperson of the board Levi King, there are two big issues in business capital funding — and they need addressing. One issue is financial institutions not being technologically savvy; the other is small business owners not having sufficient cash on hand.
Financial Institutions Don’t Know Tech
One of the most glaring examples of financial institutions’ lack of current technology and the know-how to use it effectively was the U.S. Small Business Administration’s processing of Paycheck Protection Program applications. Although King acknowledged that the SBA processed more loan applications in three months than it ever could previously have done over a few years, he explained that the administration’s technological infrastructure buckled under the volume of applications.
The SBA and an alarming number of traditional financial institutions use processes and computer systems that direly need updating. Those elements are too outdated to handle the demands that come with a financial crisis. The number of politicians, officials, public servants and bankers who are ignorant of the workings of Fintech companies also heighten this issue. Many of those individuals also don’t understand why using technology to simplify and speed up the loan application process could be good for small businesses.
Insufficient Cash On Hand
According to a 2016 JPMorgan Chase Institute report, the median small business has a reserve of 27 cash buffer days. That’s enough cash to cover basic operating costs for less than one full billing cycle. For small businesses in that situation or similar, borrowed capital is a lifeline that ought to be relatively quick and easy to access.
However, according to King, insufficient cash on hand is not the only issue when it comes to small businesses. He explains that the bookkeeping and accounting processes many utilize don’t do them any favors. Instead, their financial records make it even more difficult for them to apply for loans successfully. This became evident when some small businesses were denied PPP funds due to issues with their financial records.
Many small-business owners run things in such a way that, on paper, cash and revenue appear minimal. This is all a bid to decrease the amount of tax they should be paying. This can hinder their ability to apply for loans successfully. The practice makes it difficult for lenders to make a wise decision regarding the business’s ability to pay back the loan. A loan application usually gets declined if a business’s financial records make it look like it cannot service debt by making periodic payments. According to King, small businesses should aim for five times the cash flow needed in order to make a monthly payment.
Responding to the Issues
Although the situation can sometimes appear dismal, it’s not insurmountable. King suggests several ways that lenders and borrowers can respond to the biggest issues of business capital funding.
Traditional institutions can meet small business’s needs better by updating their technology in one of a few ways. One is a partnership with a Fintech provider that can help improve process efficiency and streamline customer experience. Another is to purchase reliable technology and integrate it with the institution’s existing technology. There’s also the option to invest in the building of in-house systems and technical financial platforms.
Small-business owners can play a role in overcoming some of these issues by improving their knowledge and skills around the financial side of business ownership and management. They should educate themselves not only on personal and business credit profile interactions, but on the factors that lenders take into consideration in terms of loan applications as well. The current model for the SBA, traditional financial institutions and the owners of many small businesses is not sustainable. It’s clear that things must change, and that can happen only after facing the biggest issues.
With more than seven years of experience in bookkeeping, Nina Sharpe leverages her professional background and passion for writing as a content champion for various outlets — most notably contributing to accounting software powerhouse FreshBooks. Sharpe often covers business and financial topics with a strong focus on startups, small businesses and sole proprietors.
