As the global pandemic continues, small businesses face both risks and opportunities. While some industries have recovered vigorously from the depths of the first wave and survived subsequent waves, not all sectors are recovering equally. Recent application data from Kapitus suggests that the construction, manufacturing and healthcare sectors are recovering faster and showing greater resilience than other sectors within the small business economy. The data also suggest that retailers and other service providers (hotels, salons, venues, etc.) have seen a weaker recovery as changing consumer behavior, compounded by the changing nature of the virus, leads to greater uncertainty in these economic segments has led.
Growth drivers in healthcare, construction and manufacturing
Healthcare providers, contractors and manufacturers are applying for capital in proportion to their pre-pandemic demand, and when these companies apply, they have a stronger credit and revenue generating profile than other industries. These sectors, benefiting from unique macro trends, should support growth for the foreseeable future.
Â· Health care. Independent health care providers are benefiting from macro trends such as the aging of the American population, an increase in the number of Americans insured, and the development of new treatments for many chronic diseases.
Â· Construction. Contractors benefit from a hot residential real estate market driven by fundamental changes in the way we work. As US companies increasingly allow (and even encourage) remote working, millions of workers are rethinking their current living situation. Some would like to expand their home to create a better work environment. Some are considering moving further from the office while others are considering buying this second home as they are now less tied to their main location. These changes often require a contractor to help build or retrofit a home to the owner’s unique standards.
Â· Manufacturing. The United States has seen strong domestic production growth since emerging from the depths of the pandemic. Hundreds of thousands of new jobs were created over the past year and the manufacturing PMI index is at historic highs. This trend is expected to continue as global supply chains continue to be disrupted by the pandemic, recent trade tariffs keep import costs high, and technological innovation mitigates the impact of higher US wages. The reduction of lead times and transport costs through domestic production is increasingly seen as an economic necessity for many manufacturers.
Despite the growth, small businesses remain stubborn challenges
Whether you’re a sought-after contractor or you’re reopening your salon for the first time in months, you are likely facing challenges that weren’t there before the pandemic. Some of the problems some in the industry face include:
Â· Labor shortage. The unemployment rate has improved dramatically since spring 2020 and many small businesses are struggling to increase their workforce to meet the new demand. This is true at all levels, but customer-facing roles with variable working hours that cannot be done remotely seem to be one of the most difficult roles.
Â· Inflation. When labor is constrained, the cost of that labor increases and small businesses report significant wage inflation across positions. Raw material costs have also risen dramatically from their early pandemic lows in certain sectors – especially cars and energy. Contractors, retailers and manufacturers (among others) struggle with long lead times and unusually high costs for raw materials and finished goods, largely due to disruptions in the global supply chain.
Â· Volatility of demand. Many of the shortages in small businesses are due to volatility in demand. In the first few months of the pandemic, travel, services, and stationary retail consumption plummeted as the economy shifted to cater for a population largely tied to their home country. As the virus wore off in the summer of 2020 and economic controls began to arrive, the economy opened up and pent-up demand for goods and services skyrocketed, only to decline again as the virus raged again in the winter. Today, a partially vaccinated population weighs the threat posed by the Delta Variant and continues to look suspiciously into the future when it comes to travel plans and major purchases.
Crisis creates opportunities
Despite the uncertainty in today’s economy, new applications for US business licenses have increased dramatically from pre-pandemic levels. The United States finds itself in a time of rapid economic and social change as Americans are reassessing the way they shop, work, and live. This shift creates opportunities for creative new business models, which in turn creates demand for alternative credit products to enable this growth.
Banks have traditionally been a poor source of growth capital for small, fast-growing businesses. Fortunately, there are small business finance firms that are able to quickly raise the funding needed to help a growing business fund its next opportunity.
The funding options most commonly available to small businesses include:
Â· SBA loan. Can be secured or unsecured and can have fixed or floating rates. SBA loans for equipment, supplies and inventory have a term of 10 years. The SBA real estate loans have a term of 25 years. Personal guarantees are required.
Â· Equipment finance loans. Generally covered by the equipment purchased, with fixed rates and terms of 3-7 years. Personal guarantees are usually required.
Â· Term Loans. May or not, depending on the lender and credit profile, but offered in a variety of options depending on the loan, term, fixed vs. floating rates, position of the lender in the capital stack, and the speed and ease of financing. A personal guarantee is often required.
Â· Cash flow based factoring. Generally unsecured, have variable repayment deadlines based on the speed of cash flow and generally do not include personal guarantees.
Â· Revolving Lines of Credit. They are offered by both bank and non-bank lenders, are usually shorter, unsecured, and often come with personal guarantees.
Â· Factoring on account. Offered by bank and non-bank lenders as an advance payment against outstanding invoices for finished and shipped products and services. Usually revolve every 30-90 days according to the usual payment terms and are backed by both outstanding claims and a blanket guarantee from the borrower.
Financial housekeeping after a difficult year
When applying for capital, many small businesses may have concerns about disclosing last year’s financial difficulties. Fortunately, many alternative lenders focus their underwriting on current trends and cash flow of the company rather than on operating history during a troubled time. When communicating with your bank or alternative finance company, keep the following in mind:
Â· Be transparent. Communicate openly about the struggles you’ve had and your plan to overcome them. Be ready to present bank statements and financial statements, even if they show emergencies. Transparency about your current situation helps you and your investor to find the right solution for your particular circumstances.
Â· To have a plan. Knowing what it takes to grow and what to expect from an injection of capital will inspire others to see your vision. Trust and passion are contagious.
Â· Request for PPP forgiveness. Small businesses that have taken out PPP loans should consider the following forgiveness requirements:
o Excusable expenses include payroll, rent, mortgage interest, and utilities.
o In the second round, the reasonable expenses were expanded to include general operating costs, property damage, supplier costs and employee protection costs.
o 60% of eligible forgiveness must come from wage costs.
o The loan grace period in which reimbursable expenses may be incurred is 24 weeks (at the borrower’s choice).
o If the borrower’s loan is less than $ 150,000, they are eligible for a simplified unilateral loan cancellation process.
It has been a difficult 18 months for US small businesses, but despite the ongoing uncertainty, businesses are growing and demand is rising. As the economy continues to evolve, businesses must be flexible to meet the challenges posed by rapidly changing supply and demand, and the ability of American small businesses will be up to the challenge.