Data from the Federal Reserve released last month illustrated how small businesses eagerly sought funding during the worst days of the pandemic as the uncertainty that accompanied the World Health Organization’s announcement about the severity of the virus crisis instilled fear among business owners.
According to a report from the St. Louis Federal Reserve, commercial and industrial loan volumes experienced a 29% spike during May after the federal government gave the green light to the implementation of the Paycheck Protection Program (PPP).
Meanwhile, non-traditional financial companies that offer small business loans also saw the demand for their financing products surge due to the impact that lockdowns had on the cash reserves held by US-based SMBs.
Most of these companies, categorized as fintech due to their online-based services and customer experience, quickly became allies for these small businesses as they offered less stringent credit conditions compared to traditional institutions while their interest rates were fairly competitive considering how uncertain the environment was back then.
Looking back at what happened in the early days of the pandemic, the main reason why businesses sought funding back then was to shore up their finances at a time when sales were dropping precipitously.
Meanwhile, as we progressively head to a new reality where the virus crisis should start to take a back seat amid the rollout of vaccines across the world, small business loans should continue to help companies in responding to their customer’s needs in an increasingly digital commercial landscape.
Is the demand for small business loans expected to rise in 2021?
According to the latest survey from the Federal Reserve applied to banks this year, financial institutions responded that they expected “stronger demand” from all categories of business loans.
The reason for this uptick is related to multiple factors, the first being an expected strong rebound in the country’s economic activity as more and more people get vaccinated along with pent-up demand for services and entertainment alternatives that were not accessible during lockdowns.
In response to this forecasted uptick in business borrowings, banks stated that they planned to tighten their lending standards for business loans to make sure that companies that applied for funding had emerged from the crisis in good shape to undertake new financial commitments.
This could leave some small businesses on the sidelines as many have experienced a deterioration of their fundamentals, and that opens the door for fintech companies to once again become valuable allies to help these companies in bouncing back from the crisis.
Most business loans offered by these non-traditional financial services firms impose fewer restrictions in terms of the amount that can be borrowed and the collateral that needs to be pledged.
In this regard, companies that can demonstrate their revenue generation capacity by presenting evidence like tax returns and bank statements could even access unsecured financing alternatives without the need for disclosing how the funds will be used.
In most cases, businesses that apply for financing with a fintech need to either shore up a short-term cash gap, or their inventories might be declining rapidly amid overly elevated demand levels.
These loans can facilitate an inventory increase, the purchase of fixed assets, renovations needed to prepare physical establishments to receive customers with adequate biosafety considerations, and other similar financial requirements.
How can small businesses apply to one of these loans?
With traditional financial institutions, the process of applying for financing for a small business tends to be tedious, and response times might fail to cater to the urgent needs that SMBs often experience.
In response to this situation, fintech companies have designed online application processes that allow business owners to complete the process of applying for a loan in less than a few minutes.
Meanwhile, the incorporation of technologies like artificial intelligence and algorithms has reduced response times to as little as 48 hours.
Depending on the type of loan, the eligibility criteria can be as simple as being 18 years old or older, owning a business that has generated a certain minimum level of income, and having a FICO score above 550.
Interest rates usually start at 1% per month, while repayment periods can go from 24 to 60 months, depending on the borrower’s creditworthiness.
Have you applied for one of these loans for your business already? If not, you can go ahead and check if your company is eligible for one by visiting the website of Camino Financial.
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