Stung by the pandemic's economic chaos, banks are becoming more hesitant to lend, meaning that any business that wants to access financing will need to become creative and understand there are more options than they might think, according to Jim Conroy, regional vice president for business financing company Pursuit, who spoke at the Foundation for Accounting Education's Business and Industry Conference Wednesday.

"It's going to be a heck of a lot harder today to get bank financing than it was last year," said Conroy.

Due to this environment, Conroy said, prospective borrowers might need some sort of enhancement in order to access credit, and he pointed out that various programs under the Small Business Administration can provide just that, especially the newer ones developed in response to the pandemic, namely the revamped Economic Injury Disaster Loan (EIDL) program and the Paycheck Protection Program (PPP).

The EIDL program existed prior to the pandemic, but government action significantly enhanced it in recognition of the scope and scale of the pandemic's impact: While, typically, these loans were extended only to businesses in disaster areas, "obviously with the pandemic, the entire country is a disaster area." Unlike other program loans, an EIDL loan does not work through private intermediaries but, rather, is directly lent through the federal government, "and it's unique in that sense." The loans have a maximum of $2 million (although Conroy noted that "they put in an unofficial cap of $150,000) and can be used "for just about any business expense." Any loan over $25,000 requires collateral, such as a personal guarantee from the owner, and is available to both for- and not-for-profit businesses with fewer than 500 employees. The payments can be deferred up to a year, but the interest continues to accrue over this period.

Conroy said that while this program is still open, it may not be the best choice for a business that needs money fast, as "there is a considerable backlog in applications and the SBA has not really found a way of effectively communicating to the customer where the application is in the process along the way." At the same time, he said, "the approval rates and the terms make it a compelling option, as long as you don't need the money immediately."

He also talked about the larger of the two SBA pandemic programs, the PPP. While he conceded that it can be hard to say nice things about a government program, he praised it as "absolutely astounding" in terms of how many small businesses it helped. Since the program closed to new applicants in August, there has been growing interest in the process for how to turn those loans into grants, which "is still a work in progress." However, he said there seems to be progress on this front. He noted that the SBA recently released a simplified forgiveness application for those businesses whose loans were under $50,000, "which is wonderful." For loans over that amount, there is an 11-page application, which needs a lot of supporting documents before the loan can be converted to a grant.

Conroy said that, between the PPP and the enhanced EIDL programs, the Small Business Administration increased its loan portfolio more in just six months than in all of its previous 60 years of activity.

But the SBA offers more than just those two programs. A business seeking financing might instead turn to the SBA's 7A program, the oldest one it has. Since the program is run through intermediaries similarly to the PPP, the loans can go by many names at private banks, such as microloans, express loans or community advantage loans, but they're all the same 7A loans guaranteed by the SBA. The program, he said, acts like an insurance policy on loans originated by the bank; if the loan is under $150,000, then the lender can obtain an up to 85 percent guarantee, and if it's above that, then the maximum guarantee is 75 percent. This coverage could mean the difference between a banker deciding to approve or reject a loan.

Picture, he said, a business going through rough times, as many are during this pandemic. "So they don't have very good cash flow and they're requesting $250,000 of financing to help dig them out of the hole they've been operating in." The bank, he said, might note that the business has had good cash flow the last three years, but "we don't know when the end of COVID is and what your cash flow will be in the future, so banks ordinarily, at a time like this, are really taking a step back and saying, 'I don't know if we want to take on a level of risk for this transaction.'"

A 7A SBA loan sweetens the deal by mitigating a good portion of that risk for the bank. If the loan doesn't work out, the bank still has to liquidate as usual, but it can then go back to the SBA and get most of the outstanding balance paid back. This means that a loan of $250,000 carries only $62,500 of risk if the loan goes bad, which in turn makes it much more likely the bank will approve.

One drawback, Conroy said, was that these loans tend to come with higher fees, usually ranging from between 2 to 3.5 percent, which can turn off some prospective borrowers. On the $250,000 loan he used as an example, the fee would be $5,625, "so you are paying for that insurance policy but it is an access to capital product that helps you get a loan you might not otherwise get."

He also cautioned that the 7A loan limits apply across all companies within an entity, and so it is possible to accidentally reach that limit when one has several affiliate companies each with their own loan.

Finally, he said businesses might consider the SBA's 504 program, which he said was "the best economic development financial product available to small businesses." A big reason is that the loans are for a 25-year term with a fixed interest rate, he said, adding that "the current rates are the lowest they have been in my career, 2.4 percent," so "it's absolutely an amazing program you should be aware of." It can be applied only to a fixed-asset product such as real estate, equipment or construction, and if it used toward real estate, it cannot be for residential use.

"Regardless, the point is that it's a low down payment, better repayment term, financing option," he said.