Businesses Must Be Flexible to Experience Small Business Recovery

As the economy continues to transform, businesses will need to be flexible to meet the challenges posed by rapidly changing supply and demand, and the ability of America’s small business community will rise to the challenge.

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As the global pandemic rages on, small businesses face both risk and opportunity. While some industries have bounced back strong from the depths of the first wave and have weathered subsequent waves, not all sectors are recovering evenly. Recent application data from Kapitus suggests that the construction, manufacturing and healthcare sectors are rebounding faster and demonstrating greater resiliency than other sectors within the small business economy. Data also indicates that retail and other service providers (hotels, salons, performance venues, etc.) have experienced a weaker recovery as changes in consumer behavior compounded by the changing nature of the virus have created greater uncertainty in these segments of the economy.

Drivers of growth in healthcare, construction and manufacturing

Healthcare providers, contractors and manufacturers are applying for capital in greater numbers relative to their pre-pandemic demand, and when these businesses apply, they have stronger credit and revenue generation profiles than other industries. These sectors benefitting from unique macro-trends are likely to sustain growth for the foreseeable future.

·        Healthcare. Independent healthcare providers are benefitting from macro trends such as the aging of the American population, an increase in the number of insured Americans and the development of new treatment options for many chronic illnesses.

·         Construction. Contractors are benefitting from a hot residential real estate market driven by fundamental changes in how we work. As U.S. companies increasingly allow for (and even promote) remote work, millions of workers are reconsidering their current living situations. Some wish to expand their homes to accommodate better work environments. Some consider moving farther from the office, while others consider buying that second home since they now have less tying them to their primary location.  These changes often require a contractor to help build or retrofit a home to the unique standards of the owner.

·         Manufacturing. The United States has experienced strong growth in domestic manufacturing since we emerged from the depths of the pandemic. Hundreds of thousands of new jobs have been created over the past year and the Manufacturing PMI index is at historic highs. This trend is expected to continue as global supply chains continue to be disrupted by the pandemic, recent trade tariffs keep the cost of imports elevated and technological innovation reduces the impact of higher U.S. wages.  Shortening lead times and transportation expense through domestic production will increasingly be seen as an economic imperative for many manufacturers.

Despite growth, persistent challenges remain for small businesses

Whether you are a contractor in high demand or are reopening your salon for the first time in months, you are probably facing challenges that were not there pre-pandemic. The issues some in the industry face include:

·         Labor shortages. The unemployment rate has improved dramatically since spring of 2020 and many small businesses are finding it difficult to grow their employee base to meet renewed demand. This is true at all levels, however, customer-facing roles with variable work schedules that cannot be done remotely appear to be among the most challenging roles to fill.

·         Inflation. When labor is constrained, the cost of that labor increases, and small businesses are reporting significant wage inflation across positions. Raw materials costs have also risen dramatically in certain sectors – most notably automobiles and energy – from their early pandemic lows. Contractors, retailers and manufacturers (among others) are struggling with long lead times and abnormally high cost of raw materials and finished goods, primarily due to disruptions in the global supply chain.

·         Demand volatility. Many of the shortages that small businesses are experiencing are rooted in the volatility of demand. In the early months of the pandemic, travel, services and brick-and-mortal retail consumption plunged as the economy retooled to service a largely home-bound population. As the virus waned in the summer of 2020 and stimulus checks begin to arrive, the economy opened and pent-up demand for goods and services spiked, only to drop again as the virus raged back during the winter. Today, a partially vaccinated population weighs the threat of the Delta Variant and continues to eye the future warily when making travel plans and major purchases. 

Crisis creates opportunity

Despite the uncertainty in today’s economy, new applications for U.S. business licenses are up dramatically from pre-pandemic levels. The United States is in a period of rapid economic and social change in which Americans are reassessing how they shop, work and live. This change creates opportunities for creative new business models which in turn creates demand for alternative lending products to facilitate this growth.

Banks have traditionally been poor conduits of growth capital to small, rapidly growing businesses. Fortunately, there are small business finance companies capable of quickly providing the financing required to help a growing business financing their next opportunity.

Funding options most commonly available to small businesses include:

·         SBA loans. Can be secured or unsecured and may carry fixed or variable rates. SBA loans used for equipment, working capital and inventory have a term of 10 years. SBA real estate loans have a term of 25 years. Personal guarantees are required.

·         Equipment finance loans. Generally secured by the equipment being purchased and carry fixed rates and terms ranging from 3-7 years. Personal guarantees are generally required.

·         Term loans. May or may not be secured, depending on lender and credit profile, but come in a wide range of options depending on credit, term, fixed vs. variable rates, position of lender in the capital stack and speed and ease of funding. A personal guarantee is often required.

·         Cash-flow based factoring. Generally unsecured, have variable repayment periods based on velocity of cashflow and generally do not carry personal guarantees.

·         Revolving lines of credit. Offered by both bank and non-bank lenders, tend to be shorter in term, unsecured and often carry personal guarantees.

·         Invoice factoring. Offered by bank and non-bank lenders as an advance against outstanding invoices for products and services completed and delivered. Tend to revolve every 30-90 days in accordance with standard payment terms and are secured both by outstanding accounts receivable and a blanket guarantee from the borrowing entity.

Financial housekeeping after a difficult year

When applying for capital, many small businesses may be concerned with prospect of disclosing financial troubles experienced over the past year. Fortunately, many alternative lenders focus their underwriting on the current trends and cash flow of the business and less on operating history during a troubled time. When communicating with your bank or alternative finance company it is important to keep the following in mind:

·         Be transparent. Communicate openly about the struggles you have had and your plan to get through them. Be willing to provide bank statements and financial statements, even if they show distress. Transparency around your current situation will help you and your capital provider find the right solution for your unique set of circumstances.

·         Have a plan. Knowing what you need to grow and what you expect to gain from a capital infusion will inspire others to see your vision. Confidence and passion are contagious.

·         Applying for PPP forgiveness. Small businesses that took PPP loans should keep the following forgiveness requirements in mind:

o   Forgivable expenses include payroll, rent, mortgage interest and utilities.

o   The second round expanded forgivable expenses to include general operating expenses, property damage expenses, supplier costs and worker protection expenses.

o   60% of eligible forgiveness must come from payroll expenses.

o   The loan forgiveness period in which forgivable expenses may be accrued is 24 weeks (at borrower’s choosing).

o   If the borrower’s loan is less than $150,000, they will be eligible for a simplified one-page loan forgiveness process.

It has been a difficult 18 months for U.S. small businesses, but despite the uncertainty that remains, businesses are growing and demand is increasing. As the economy continues to transform, businesses will need to be flexible to meet the challenges posed by rapidly changing supply and demand, and the ability of America’s small business community will rise to the challenge.