Loan Approvals Climb, Yet Small Businesses May Need Bridge Loans As They Wait For Disaster Funding

Since the pandemic began, the SBA has delivered more than $1 trillion in economic aid via COVID relief to help the nation’s hard-hit small businesses survive. As of Oct. 17, Paycheck Protection Program (PPP) forgiveness applications have been received for approximately 70% of the total PPP loan volume. For 2020 PPP loans, approximately 92% have applied for forgiveness.

Following the end of PPP, small business owners have had to look for other sources of funding. The SBA’s COVID-19 Economic Injury Disaster Loan Relief is accepting applications through Dec. 31, 2021. As of Oct. 14, more than 3.8 million COVID EIDLs totaling $280 billion have been approved and applications remain open through Dec. 31, 2021.

COVID EIDL program policy changes that took effect on Sept. 8 included:

1.   An increase of the maximum loan cap to $2 million

2.   Use of funds expansion to include payment and pre-payment of business non-federal debt incurred at any time (past or future) and payment of federal debt

3.   An extension of the deferment period to 24 months from origination for all loans

4.   Simplifying the affiliation requirement to an affiliate being a business the owner controls or in which an owner has 50% of more ownership

5.   An additional path to meet program size standards for businesses assigned a NAICS code beginning with 61, 71, 72, 213, 3121, 315, 448, 451, 481, 485, 487, 511, 512, 515, 532, or 812

However, one of the common challenges for business owners regarding EIDL funding is the length of time that it takes to get the money into borrowers’ hands. The SBA has a massive amount of applications to process, and they have many regulations they must abide by before they can release funds to any given business. The result is that many businesses will receive an initial approval, but it can take 3-4 months sometimes for the money to arrive.

So what does a business owner who needs money quickly do to survive when he or she waits for EIDL funding to come through?

Bridge financing can smooth out the need for immediate cash in hand for business owners, while the SBA does the all-important work of reviewing and authorizing this next phase of EIDL financing to America’s small businesses.

A bridge loan, also known as bridge financing or gap financing, is a short-term loan that can last anywhere from a few weeks to a month. This short-term financing solution is typically utilized to form a “bridge” between more traditional loans to keep operations flowing smoothly and effectively.

Although we are past the height of the pandemic, small business owners still find themselves worried about the financial stability of their companies, especially as fuel costs and labor costs continue to climb. An EIDL loan can take 3-4 months to process. With bills due, many companies do not have that kind of time to wait for funding to arrive.

How Can a Bridge Loan Help Your Business?

Now that forgivable PPP loans are no longer available, obtaining financing with favorable terms can take time. In dire times, business owners may need to capitalize quickly. Banks can take months to review all of your business’ information and come to a decision. Bridge loans are designed to fill the gap.

A bridge loan can come in handy for commercial real estate purchases that often require businesses to act quickly in order to take advantage of the opportunity before another interested buyer does. Companies also frequently need quick funding to make inventory and equipment purchases, and acquisitions. In these scenarios, a business can take out a short-term bridge loan and then refinance the value once they have settled on a longer-term financing option.

It is important to note that bridge loans often come at higher interest rates because of their shorter duration. Depending on the situation, the benefits can offset the negatives, and rates can be very reasonable for businesses with a strong credit history and track record.

Meanwhile, small business loan approval percentages at big banks ($10 billion+ in assets) increased from 13.9% in August 2021 to 14% in September, and small banks’ approvals also rose in September to 19.5% from 19.3% in the month before, according to the latest Biz2Credit Small Business Lending Index™.

Business owners are investing in their companies, and banks are increasingly willing to lend, albeit not at the speed that many had hoped for. Nonetheless, it is a good sign for the economy that every category of small business lender – including bank and non-bank lenders – have seen their loan approval percentages rise every month during the past five months.

Along with traditional banks, non-bank lenders remain a viable source of funding for companies that need money quickly. Their approval rates once again rose in September.

For instance, institutional lenders approved grew to 24.5% in September, up from 24.3% of funding requests in August and up 2.3 percentage points from one year ago. Meanwhile, alternative lenders approvals went from 25.2% in August to 25.4% of funding applications in September 2021. Last year, the September percentage for alternative lenders was 23.1%.

Credit unions approved 20.6% in September, up one tenth of a percent from August, but down from 21% in September 2020.

These numbers are solid, but there is much room for improvement. Overall, the economy has rebounded well from the pandemic, but it is far from perfect. Small business owners still face the triple whammy of increased fuel, materials and labor costs, and continue to look for debt funding to cover those costs as they get back on their feet following the pandemic.


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