The recently-passed CARES Act is designed to provide financial relief to the Americans and businesses that need help most. There’s a provision in the act that helps small businesses obtain paycheck protection funds and disaster capital as they contend with mandatory closures and reduced business hours.
But is the act really helping all small businesses?
Since the SBA loan applications opened on April 3, many small business owners have had difficulty getting approved. Here’s why the act may be working against some small business owners—and what community banks and other lenders can do right now to help in the long term.
The big impact of small business
Across the U.S., small businesses account for as much as 44% of all economic activity—and create two-thirds of jobs. But their impact isn’t just felt on a nationwide scale. Recent data from an Arizona State University and University of Iowa study shows that to local economies, small businesses are vital to prosperity.
The study found that for every small business venture in an area, the median household income increases by $331 (19 more percentage points than the national average of $1,700). This includes micro-businesses and online startups—many of which are vastly profitable but don’t have the brick-and-mortar assets to prove their success.
The challenge with PPP loans
The CARES Act uses certain criteria to evaluate creditworthiness that may leave out certain small businesses. For example, to obtain an Emergency Injury Disaster Loan related to COVID-19, small businesses aren’t necessarily required to provide previous tax records, but must provide a business credit score instead (which not every small business has).
In addition, although independent contractors are eligible to receive funding, they may be required to submit paperwork such as payroll records, tax records, and expenses. These provisions beg the question of what qualifies as a small business—and what small businesses and contractors can do if they don’t check all of these boxes.
The fact is, not every successful small business looks great on paper. Tax records, employment records, credit scores—these aren’t fully representative of a small business’s growth over time. Like non-disaster related small business lending, the act doesn’t account for all of the alternative criteria that are indicative of a small business’s success.
One example of what will indicate success is cash flow. Assets don’t mean anything if money isn’t coming in. Cash flow can provide a more accurate picture of creditworthiness, whether you’re looking at an e-commerce business or an auto repair shop that still keeps paper books.
The way forward
The small business sector is a market worth preserving as much as possible. If you’re a community bank or an online lender, you can help your small business customers and considerably expand your own book of business by adopting criteria that evaluate their creditworthiness fairly and objectively.