During the Era of COVID-19, Where’s the Bright Spot for Small Businesses?
Is it just me or did March seem like a long month? The COVID-19 pandemic does not discriminate and has affected virtually every aspect of our society. Public schools, colleges and universities have instituted virtual learning environments and businesses have closed - some temporarily, and certainly some will be closed permanently.
When a natural disaster hits, it usually happens in a relatively small geographic area and the people from surrounding, not affected, areas rush to help. We, as Americans, are wired to unite and help each other in times of need. But this time it’s different because in addition to a potential health crisis, we’re experiencing the making of an economic disaster simultaneously. Every single one of us is, or will be, affected.
Those of us that are entrepreneurs and small business owners are particularly affected. In addition to the stress of keeping our businesses afloat and operational, we also feel a sense of loyalty and commitment to our employees. Congress has temporarily put aside partisan differences and come together to create the CARES Act that is designed to stimulate our economy and provide relief to families and small businesses adversely affected by the national COVID-19 crisis. While the legislation is not perfect and may not provide the relief that everyone needs, it will provide resources to help mitigate the negative effects. Listed at the bottom of this post are some helpful resources on this topic.
COVID-19: Changing the landscape of traditional sources of capital
Most small businesses rely on one or more of these three sources of capital at some point in their life cycle: grants, banks, and private equity. Let's dive in to each and learn how the swirling environment around us may cause changes in how these traditional sources support small businesses:
Many sources of grant funding and small business lending like the NC Rural Center and the Golden LEAF Foundation have already implemented programs specifically designed to assist North Carolina small businesses. Groups like these have responded quickly and decisively but unless the funds used for these new programs are new funds, then surely there will be some effect of their existing great programs. Hopefully that will not happen, but it is a possibility.
While we don’t know exactly how COVID-19 will affect banks and their lending, a recent report by PwC indicates that “capital markets could become less accessible” and “lending standards could tighten and liquidity could dry up quickly.” If this condition continues “it could lead to cash flow challenges for banks and their clients.”
Interest rates have never been this low. Many regional banks derive the bulk of their revenue from interest income and with interest rates this low, it’s bound to cause stress. The financial crisis of 2008 forced banks to review their lending practices and their underwriting processes. Undoubtedly, this crisis will necessitate another review. While the availability of bank financing in the short-term may be greater and with more flexible terms, changes made by banks due to this crisis will make the availability of bank financing more difficult.
Private equity generally funds about 2% of the deals that they consider. That number will most certainly decline as they forego committing to new investments due to capital needs form their current commitments. In other words, they will use the resources they have to “shore up” the investments that they have already made. This “hard-to-get” capital will be even harder to get.
Combined, these three sources of traditional capital may not be as viable an option for small businesses to start, grow or expand their businesses as they once were. While the COVID-19 crisis has slowed our economy significantly, the world will not stop and small businesses will still need capital, just as they did before.
Community Capital: The funding ‘bright spot’ for your small business
Community capital, or investment crowdfunding, may be exactly what the doctor ordered! The premise behind community capital is that ordinary people have the opportunity to financially support businesses they love. They may love the mission of the company, the product or service the company provides, or the people that provide the product or service. Community capital allows the opportunity for anyone to support local businesses while also receiving a financial return.
The last economic calamity of 2008 led to a significant government response, including the passage of the JOBS Act of 2012. This made community capital legal, allowing it to be a real opportunity for today’s small businesses to access the critical capital that they need from the community around them - directly.
Are you doing your part to support local businesses in your community?
We are a country of people that respond to others in need. Small businesses need our help, support and financial resources, now more than ever. We often take for granted the role small businesses play in our everyday lives – until they are no longer there. Small businesses in our community have a tremendous opportunity to take advantage of this new form of capital by utilizing the provisions of the JOBS Act and we have an obligation and a duty to support those businesses. A lot of thought and good legislation was put into these laws coming out of the last economic crisis.
Kevin O’Leary of Shark Tank fame recently endorsed community capital by saying this financing mechanism should be in your toolkit. "This is probably the most viable opportunity there is for raising capital given an environment that is in shock right now."
During this crisis, we are fortunate that these laws exist. Small business owners should take notice: no plan of action leads to fatal inaction. Conversely, we in the community have the ability now to support our local businesses in ways that are not considered handouts. We can save the businesses we love and at the same time receive a return on our investment.
We are in this together. Together we will survive and prosper.
For more information on how to conduct a community capital campaign or how to support a company that you love that is conducting a community capital campaign, please contact us or feel free to give us a call at 910.269.7564.