Loan approvals are rising, but small businesses may need bridging loans while waiting for disaster funding

Since the pandemic began, the SBA has provided more than $1 trillion in economic relief through COVID relief to help the nation’s hard-hit small businesses survive. As of October 17, requests for Paycheck Protection Program (PPP) forgiveness had been received for about 70% of the total PPP loan volume. For 2020 PPP loans, approximately 92% requested forgiveness.

After P3s ended, small business owners had to seek other sources of financing. SBAs COVID-19 Economic Disaster Loan Relief is accepting applications through December 31, 2021. As of October 14, over 3.8 million COVID EIDLs totaling $280 billion have been approved and applications remain open through December 31, 2021.

The COVID EIDL program policy changes that went into effect on September 8 included:

1. An increase in the maximum loan limit to $2 million

2. Expanded use of funds to include payment and prepayment of non-federal commercial debt incurred at any time (past or future) and payment of federal debt

3. An extension of the deferral period to 24 months from grant for all loans

4. Simplify the affiliate requirement that an affiliate be a business that the owner controls or in which an owner has 50% or more ownership

5. An additional pathway 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 with EIDL financing is the time it takes to get the money into the hands of borrowers. The SBA has a massive amount of applications to process and must meet many regulations before it can release funds for any given business. The result is that many companies will receive an initial approval, but sometimes it can take 3-4 months for the money to arrive.

So what does a business owner do who needs quick cash to survive while waiting for EIDL funding to arrive?

Bridge financing can alleviate the need for immediate cash for business owners, while the SBA does the all-important work of reviewing and authorizing this next phase of EIDL financing for small American 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 generally used to form a “bridge” between more traditional loans in order to guarantee the smooth running and efficiency of operations.

Although we are past the peak of the pandemic, small business owners are still worried about the financial stability of their business, especially as fuel costs and the cost of labor continues to rise. An EIDL loan can take 3-4 months to process. With invoices due, many businesses don’t have that kind of time to wait for funding to arrive.

How can a bridging loan help your business?

Now that repayable PPP loans are no longer available, obtaining financing on favorable terms can take time. In difficult times, business owners may need to capitalize quickly. Banks can take months to review all of your business information and make a decision. Bridging loans are designed to fill the void.

A bridge loan can be useful for commercial real estate purchases which often require companies to act quickly in order to take advantage of the opportunity before another interested buyer does. Businesses also often need quick financing to make purchases and acquisitions of inventory and equipment. In these scenarios, a company may take out a short-term bridge loan and then refinance the value once it has opted for a longer-term financing option.

It is important to note that bridge loans often come with higher interest rates due to their shorter duration. Depending on the situation, the pros can outweigh the cons, and rates can be very reasonable for companies with strong credit histories and track records.

Meanwhile, small businesses loan approval percentages in large banks (over $10 billion in assets) fell from 13.9% in August 2021 to 14% in September, and small bank approvals also increased in September to 19.5% from 19, 3% the previous month, according to the latest Biz2Credit™ Small Business Loan Index.

Business owners are investing in their businesses and banks are increasingly willing to lend, but not at the speed many had hoped. Still, it’s a good sign for the economy that all categories of small business lenders — including bank and non-bank lenders — have seen their loan approval percentages rise every month for the past five months.

Along with traditional banks, non-bank lenders remain a viable source of funding for businesses that need cash fast. Their approval ratings rose again in September.

For example, approved institutional lenders rose to 24.5% in September from 24.3% of funding requests in August and up 2.3 percentage points from a year ago. Meanwhile, alternative lender approvals have risen from 25.2% in August to 25.4% of funding requests in September 2021. Last year, the September percentage for alternative lenders was 23.1% .

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

These numbers are solid, but there is still a long way to go. Overall, the economy has rebounded well from the pandemic, but it is far from perfect. Small business owners are still facing the triple whammy of rising fuel, material and labor costs, and continue to seek debt financing to cover these costs as they recover on foot after the pandemic.