Be prepared and avoid loan freezes that can sideline your business plans.
5 min read
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Year-end is approaching, which means it’s time for businesses to start worrying about the prospect of another government shutdown. Sadly, it seems like this has become a perennial pain, reflecting worsening political dysfunction and animosity.
Small businesses across the country are only just recovering from the record five-week government shutdown that began in December 2018. The Small Business Administration, which guarantees loans worth $28 billion a year, has to freeze all loan applications during a shutdown, throwing many businesses’ plans into disarray.
The impact of the shutdown reverberated for much longer than the five weeks because it upended people’s plans to invest in new projects, forcing businesses back to the drawing board. And unlike federal workers who received back pay for their downtime, small business owners and workers don’t get a cent in compensation for their losses.
Here we go again
Although a shutdown isn’t a certainty in the coming months, the signs aren’t auspicious. On November, 21, Congress approved a short-term bill to extend government funding through December 20.
But this only kicks the can down the road a few weeks into a period when the House could likely be voting on the president’s impeachment. With both parties still at odds over key funding issues like border security, the trigger for last year’s shutdown and a significant issue for a full-year budget accord, small businesses should start preparing for the worst again.
What can businesses do?
For any business that has a loan application underway with their bank or is considering applying, the first priority should be to get it approved before a shutdown hits. Pick up the phone and ask your bank if they can get your project approved and get SBA’s approval prior to the December 20 deadline.
Options to consider
Here it’s advantageous to be applying through a bank that is a preferred lending partner (PLP) of the SBA, also known as a delegated lender. PLP lenders have the authority to make lending decisions on behalf of the SBA, which enables them to obtain the authorization once certain minimum requirements are met.
Businesses that can’t get their loans approved in time need to be prepared to change their tactics, perhaps by delaying projects, extending contracts or obtaining interim financing. If the bank you’re working with also provides conventional loans, it may be possible to apply for and receive a bridge loan to cover the gap in funding.
If the SBA loan you are seeking hasn’t been approved by the SBA, then when the SBA is again operating, the bank must submit the loan to SBA for their direct approval to refinance it. If a shutdown results in a delay of 90 days or more after submission, the application will be past the maximum time allowed. The SBA would likely still honor the lending request but it creates uncertainty by putting businesses on the wrong side of the rules.
Finding an alternative lender is an option, though the disruption and costs this imposes on your plans may vary widely depending on the type of loan. For something straightforward like a real estate purchase or a line of credit based on accounts receivable or inventory, there are plenty of good lenders available, though their rates may be higher.
For things like financing tenant improvements or general working needs not supported by collateral, it will be more of a struggle to find a reliable lender. That may lead down the perilous path to alternative lenders in the fintech space, where businesses will face significantly higher interest rates and have to be mindful of potentially onerous repayment and prepayment terms.
There are potential problems
It’s important to be aware that some forms of alternative financing can jeopardize the chances of getting SBA-guaranteed lending. If your business gets long-term financing elsewhere, the SBA views that as demonstrating that you don’t need their guaranty.
If partners put additional equity into the business in order to qualify for alternative lending, the SBA won’t reimburse them over the amount that it would have required itself. If you put up special collateral for the alternative loan, such as your primary house, the SBA is required to use that as collateral if it refinances the loan.
The good news is that all of these potential headaches can be avoided if Washington works hard enough to prevent another shutdown. So here is one last piece of advice: pick up the phone and call your congressman and senator to make clear how opposed you are to a shutdown and the damage it would do to your business and employees.
Lawmakers are genuinely sensitive to concerns and complaints from their constituents, especially from businesses that provide jobs in their district or state.