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3 Ways to Lessen the Impact of Inflation on Your Small Business

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In the midst of pandemic recovery, small businesses are feeling the weight of yet another economic setback: inflation.

According to the U.S. Chamber of Commerce’s Q4 2021 Small Business Index survey, 71% of owners report that rising prices have had a significant impact on their business in the past year. And economists agree that this high inflation could be long-lasting.

Inflation can be tough for small businesses, but the right strategies, support and resources can help them mitigate the challenge, says Carolina Martinez, CEO of the California Association for Micro Enterprise Opportunity, or CAMEO.

Here are three ways you can lessen the impact of inflation on your small business.

1. Raise your prices in the right way

It can seem like raising prices is the “easy way out” to combat inflation, but your business can gain more from this strategy than you might think.

“Survey the marketplace and see if you are underpriced for your services or goods,” said Matt Sotir, Northeast regional vice president of Equitable Advisors, in an email.

“One client, a landscaper, recently looked at his competitors and realized he was 30% lower than most others in the area. He was able to raise prices modestly and not lose any customers,” said Sotir, who works with small-business owners and entrepreneurs as an investment advisor.

And if you do decide to raise prices, there are creative ways to communicate with your clients that can benefit your business in the long run.

Jacqueline Snyder, co-owner of The Product Boss, a small-business coaching platform, recommends bringing your customers in on the story.

For example, saying something like: “We’re a small business, prices across the board have gone up. We’ve tried to keep this going for so long like this, but at this point in order to survive — and we still appreciate your business — we have to raise our prices.”

Snyder also suggests taking your customers through price changes by running a “last-chance” promotion, where you tell them that your prices are going up on a certain date due to inflation, but frame it like a sale. This way, you’re encouraging them to buy from you now at your lower prices, while also notifying them of the price increases.

2. Refine your business operations

The high-inflation environment has given small-business owners a pressing need to reevaluate the specifics of the way their businesses function.

“Consider a well-thought-out expansion strategy or adding alternate lines of goods to increase your profit margins,” Sotir said. These types of development opportunities can help increase sales, which in turn can help offset fixed costs like rent or machinery, he said.

Snyder says business owners should take stock of their current bestsellers and use them to their advantage. If you lean into your bestsellers and try to sell more of them in more places, you’re not only locking in something you know is successful, but you can also start to negotiate your pricing with manufacturers, she says.

You also should have a few backup plans for manufacturing in the case of continued supply chain delays. Buying in bulk with certain vendors, especially when you’ve negotiated lower prices, Snyder says, can also lead to better profit margins.

3. Revisit your finances and work with a financial advisor

Use rewards-earning credit cards as much as possible (without overextending yourself) to gain something back from your spending, says Brandon Reiter, CEO and founder of Skyview CFO, a virtual bookkeeping and financial services company geared toward small businesses.

Some credit cards feature valuable offers, especially if you travel a lot, including airline credit cards and cash-back credit cards. As inflation rises, you don’t want to spend on a credit card that doesn’t give you any value back, he says.

This is also a good time to consider refinancing debt, especially if you have high or variable interest rates. If you can refinance a variable interest rate to a fixed rate, you’ll limit the danger of adjustable rates rising in the future, Sotir said.

For assistance in identifying the best financial strategies for your business, especially during this challenging time, CAMEO’s Martinez recommends that small-business owners work with outside advisors, turning to organizations that offer free or low-cost help with financial planning, such as your local Small Business Development Center.

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SBA Loan Collateral vs. Guarantee: What’s the Difference?

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Personal guarantees and collateral are both ways of promising a lender that you’ll make good on your debt. You may have to offer both to get an SBA loan.

Collateral ties a loan to a specific asset, like your business’s inventory or your home, which the lender can seize if your business can’t repay the loan. A personal guarantee promises the lender that you will repay the debt using your personal assets, but may not specify how.

In general, SBA lenders require anyone who owns 20% or more of a business to provide a personal guarantee. SBA loans larger than $25,000 usually require collateral, too.

Do SBA loans require a personal guarantee?

SBA loans usually require unlimited personal guarantees from anyone who owns more than 20% of a business. Lenders may ask for limited or unlimited personal guarantees from other business owners, too.

Unlimited personal guarantee: This is a promise that the guarantor (the business owner) will pay back the loan in full if the business is unable to. The lender doesn’t have to seize collateral or seek payment from any other source before going straight to the loan applicant for loan repayment.

Limited personal guarantee: If you own less than 20% of a business, you may have the option to sign a limited personal guarantee instead. The limited personal guarantee caps the amount you’ll have to pay the lender, either as a dollar limit or a percentage of the debt.

Limited personal guarantees can be secured by collateral, which means the lender will seize those assets when they recoup payment instead of asking you to pay back a certain dollar amount.

Who has to personally guarantee an SBA loan?

The SBA requires personal guarantees from:

  • Individuals who own more than 20% of a business.

  • Spouses who own 5% more of the business, if their combined ownership interest is 20% or more.

  • Trusts, if the trust owns 20% or more of the business.

  • Trustors, if a revocable trust owns 20% or more of the business.

SBA lenders may require additional personal guarantees.

Do SBA loans require collateral?

For SBA 7(a) loans of between $25,000 and $350,000, SBA lenders have to follow collateral policies that are similar to the procedures they’ve established for non-SBA loans. Banks and credit unions are usually the intermediary lenders for SBA 7(a) loans.

If you use an SBA loan to finance specific assets, like an equipment purchase, the lender will take a lien on those assets as collateral. The lender may also use your business’s other fixed assets as collateral, and you may have to offer personal assets, too.

For SBA 7(a) loans larger than $350,000, SBA lenders need collateral worth as much as the loan. The lender will start with your business assets. If they need more collateral, the SBA requires them to turn to the real estate you own personally, as long as you have at least 25% equity in the property.

Live Oak Bank is the largest SBA 7(a) lender in the U.S. by volume. Its loans may require collateral in the form of:

  • Personal residences.

  • Retirement accounts.

  • Commercial real estate.

  • Equipment.

  • Commercial vehicles.

  • Accounts receivable.

  • Inventory.

What if I can’t provide collateral or a personal guarantee?

If you’re seeking any type of SBA loan, there’s a good chance you’ll have to provide both collateral and a personal guarantee. Even SBA microloans usually require collateral and a personal guarantee. Without them, you’ll have trouble getting an SBA loan.

Some online lenders offer unsecured business loans, which don’t require collateral. But you may still have to sign a personal guarantee.

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SBA Loans vs. Bank Loans: How to Choose

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When deciding between a business bank loan and an SBA loan, the right fit will depend on the number of years your business has been in operation, your annual revenue, your credit history and a handful of other factors.

Generally, bank loans offer the lowest interest rates and best terms on business loans, which make them the first stop for many borrowers seeking financing. However, if a borrower doesn’t qualify for a bank loan, a Small Business Administration loan with competitive interest rates and terms can be a good alternative. Take a closer look at bank loans and SBA loans to understand how each works.

Overview of bank loans

Banks, credit unions and other financial institutions offer small-business loans. The amounts, interest rates, fees, eligibility requirements and other terms of these loans vary depending on the bank and its guidelines. The repayment period for these loans may be as short as 12 months or as long as 20 years.

General eligibility requirements

Bank loans can be hard for many small businesses to qualify for because the lender takes on the full risk from nonpayment of the loan. Each bank sets its own qualification standards for the loans it offers. However, some general requirements include the following:

  • At least two years in business.

  • Minimum annual revenue amount.

  • Strong credit history.

Types of small-business loans offered by banks

While they may be branded with specific names, the following are some common types of small-business bank loans:

  • Business lines of credit.

  • Term loans.

  • Equipment loans.

  • Commercial real estate loans.

Uses of bank loans

Bank loans can be used for a number of purposes including, but not limited to, the following:

  • Purchase of land or commercial property.

  • Expansion or remodel of an existing business.

  • Working capital to improve business cash flow.

  • Purchase of equipment and machines.

  • Funds to consolidate debt.

Interest rates

Business loan interest rates vary by lender, but a range from 2.5% to 7% is common for small-business loans from banks. Typically, your lender will base your interest rate on factors such as the following:

  • Loan amount.

  • Loan term.

  • Your creditworthiness including credit score.

  • Business relationship with the lender.

When a traditional bank loan may be a good fit

Some situations where a bank loan may be a good option for your business include:

  • Established business: You’ve been in business for more than two years and have a proven track record.

  • Strong annual revenue: An annual revenue amount of over $100,000 can meet the qualification requirements of some bank loans.

Overview of SBA loans

If you’ve been turned down by a bank for its loan program, you may still qualify for an SBA loan. These loans are not offered directly through the SBA, but are instead handled by approved lending partners. Some of these lending partners may even be the same lenders that you looked at for a bank loan. Qualification for an SBA loan can be easier for borrowers because SBA loans are guaranteed by the Small Business Administration, meaning there’s less risk to the lender in the case of nonpayment of the loan.

The SBA’s Lender Match tool can help you find a lender in your area. After answering some questions about your business, you’ll receive a list of lenders that are interested in your loan. This gives you the opportunity to compare rates, fees and terms for lenders before submitting your application.

General eligibility requirements

Eligibility requirements are determined by the loan program and the lender. A complete list of requirements will be given to you by the lender, but some general eligibility requirements for SBA loans include:

  • The size of your business must meet SBA standards.

  • Your business needs to be for profit and officially registered.

  • Your business should be located and operating in the U.S. or its territories.

  • You’ve invested time and money in your business.

  • You can’t get financing from other lenders.

Types of SBA loans

SBA loans can be used to start or expand your business. There are three main types of SBA loans available to borrowers:

  • SBA 7(a) loans including standard 7(a) loan, 7(a) Small Loan, SBA Express, Export Working Capital, International Trade, Preferred Lenders, Veterans Advantage and CAPLines.

  • 504 loans.

  • Microloans.

Uses of SBA loans

How you use the funds from your SBA loan can depend on the type of loan you get. For example, SBA 7(a) loans can be used for working capital, while 504 loans cannot. Here are some common uses of SBA loans:

  • Working capital or revolving funds.

  • Real estate, equipment, machinery, furniture, supplies and materials purchases.

  • Construction or renovation of buildings.

  • Establishing a new business; acquiring or expanding an existing business.

  • Refinancing existing business debt.

  • Improvements to existing facilities including land, streets, parking lots, landscaping and utilities.

Interest rates

Depending on the type of SBA loan you get, the interest rate could be tied to the prime interest rate, the Libor rate, U.S. Treasury issues or something else. For example, the interest rate for a $60,000 fixed-rate 7(a) loan would be the prime rate plus 6%, while the interest rate on a microloan depends on the lender. The SBA sets maximum interest rates and you can negotiate with your lender on the interest rate you pay.

When an SBA loan may be a good fit

Situations that make an SBA loan a good option for business financing include the following:

  • Startup financing: The SBA’s 7(a) loan can be used to establish a new business.

  • Credit flexibility: There’s the potential that you can qualify even with poor credit ratings.

  • Continued support: Some SBA loans offer counseling and education to help you get your business off the ground and continue to operate it.

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How Long Does It Take to Get an SBA Loan?

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SBA loan processing takes approximately two to three months from start to finish, and sometimes longer. The effort of preparing a business plan, gathering your documentation and applying for the loan can take weeks by itself, as can underwriting the loan once it’s in the lender’s hands.

Since the U.S. Small Business Administration guarantees up to 85% of an SBA loan — meaning it repays the lender if the small-business owner defaults on their payments — the application and underwriting process can be more time-consuming than for other types of financing. The timeline also depends on the type of SBA loan and lender.

The SBA loan process

While the process usually takes 60-90 days, this is an estimate. It may take more or less time depending on the type of loan, the lender, how prepared the business owner is and whether the lender needs approval from the SBA before moving forward.

  1. The small-business owner prepares their loan application (can take up to 30 days, but varies from person to person). People applying for an SBA 7(a) loan, for example, fill out an application that asks for their personal information and includes several questions about their citizenship status, any criminal history, their business and how they plan to use the loan. They must also provide a statement of personal history, a personal financial statement, business financial statements, business ownership and licensing documents, loan application history, income tax returns, a resume and a copy of the business lease.

  2. The lender reviews the application (takes 10-14 days or more, and includes the underwriting process in the next step). This review involves checking the small-business owner’s credit score and their business plan to determine how likely they are to repay the loan, plus interest. If your lender isn’t in the SBA’s Preferred Lenders Program, the SBA must approve the loan before the lender underwrites it. This situation will likely result in a longer loan approval process.

  3. The lender underwrites the loan. At this point, the lender may collect appraisals for any collateral offered up in case of default. If the business is already established, the lender will also analyze environmental reports, balance sheets, income statements and financial projections. This analysis helps the lender establish how much money the applicant is qualified to borrow and at what rate they’ll have to pay it back.

  4. Loan agreement documents are drawn up (takes around 10-21 days). Most importantly, this task includes a formal commitment letter detailing the loan amount, terms and conditions, any collateral involved, repayment terms and interest rate.

  5. The loan is closed (generally takes seven to 14 days, though some banks warn it could take up to 90 days). During this period, the lender should be in touch with the small-business owner and give them a heads-up if there are any issues.

Factors that affect SBA loan processing time

 

Lender

Banks that are part of the SBA’s Preferred Lenders Program will usually process loan applications more quickly than a lender that’s not in the program. PLP lenders have the authority to determine an applicant’s eligibility themselves — rather than wait for the SBA to do so — which helps streamline the process and move it along more quickly.

Type of SBA loan

The SBA responds to Express loans within 36 hours. If you’re working with a bank that isn’t a preferred lender, this turnaround time can speed things up, since the SBA takes five to 10 business days to process SBA 7(a) loans. However, the Express option won’t necessarily affect how long the lender takes to review and approve the application. Regardless of your lender, Express loans are typically for small amounts, and less of the loan is guaranteed (50% vs. up to 85% for 7(a) loans). These factors make the Express loan application process simpler than others.

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