Small business financing: Considerations for borrowers and lenders during the coronavirus crisis

For small businesses, there’s never been a time when “business as usual” has been so unusual. With many companies facing coronavirus-related challenges, the FTC has tips for business owners – and for those offering small business financing – about navigating today’s uncharted financial waters.

For small business owners

Keep your lender in the loop. If you have existing financing and are struggling to make payments, maintain open lines of communication. You may not be able to stroll down the street to chat with your banker, but many financial companies have extended their menu of online options. Some have special portals and hotlines for small businesses and consumers who need to ask for deferrals or other relief.

Check your contract for provisions that could apply. Read through your financing documents. Are there provisions for requesting a lower payments based on decreased sales? Does the current situation – for example, a government order in your locale requiring businesses to suspend operations – allow you to stop making payments at least temporarily? What steps do you need to take? Your lender or provider is dealing with many businesses in the same straits. Contact the company to talk it through.

Seeking new small business financing? Keep a cool head. Now more than ever, it’s wise to think through your options before committing to a financial transaction – a traditional loan, an online arrangement, or any other product. Comparison shop to determine how much it will cost and whether you can afford repayments. If you sense a sales person is rushing you through the process, that alone should be sign to slow things down.

Understand the details of the deal. Some business owners are looking for financing through non-traditional sources, including online options. But many of those transactions are different from what you may be used to. Scrutinize the offer before signing on the digital dotted line. What are the consequences if you can’t make timely payments? Do you have to offer a personal guarantee? Does the lender insist on a confession of judgment? If there is anything you don’t understand about the offer, call or email the lender or provider. Don’t commit until you’re satisfied with the answers, but also don’t rely on oral representations. Get the details in writing and closely review the proposed terms or contracts.

Consider what resources may be available from government agencies like the Small Business Administration. As you investigate your options, look into whether places like the SBA have programs for which your company may qualify. For example, the SBA’s Coronavirus Relief Options page offers information about the Paycheck Protection Program, Economic Injury Disaster Loan Emergency Advances, SBA Express Bridge Loans, and SBA Debt Relief.

Protect your business from COVID-19 fraud. The FTC has identified at least seven coronavirus-related scams targeting small businesses – and we’re hearing reports of more. Some businesses are getting unsolicited calls or email or have seen websites claiming to offer an inside track to expedite financial relief from the SBA or other agencies. Some brazen scammers are even impersonating government officials. If anyone contacts you out of the blue and says they need upfront money or personal information so you can get a government business loan or a personal payment, it’s a scam.

If you spot deceptive or unfair practices, report them to the FTC. We have a special online portal where you can report your experience with questionable conduct related to small business financing.

For providers of small business financing

Arranging financing for new customers? Don’t engage in deceptive marketing practices. New customers may turn to you for financing to survive the current situation. When you market financial products, don’t make claims about key features – costs, payments amounts, and other terms – that would mislead a small business owner acting reasonably in the circumstances. Given that many businesses are sole proprietorships or have just a few employees, assume their understanding of your offers is similar to consumers in personal credit transactions. Remember that the FTC Act’s prohibition against deception applies to you and your marketing agents.

Stay in touch with current customers. Due to economic challenges or government stay-at-home orders, some of your small business customers may not be able to operate at all. Make it easy for them to contact you to discuss their situation. Furthermore, before you declare a default, talk to your customer to alert them of this possibility and give them every opportunity to start paying again.

Keep your repayment promises. Your contracts may include provisions regarding customers’ right to lower payments as a result of reduced revenue or to cease payments during a health-related shutdown. Under the FTC Act, you have a legal obligation to honor your representations.

Don’t initiate collection actions or seek harsh remedies – for example, confessions of judgment – against small business owners who are honoring their obligations. For example, if your contracts allow for the cessation of payments during a government-mandated closure, you can’t sue small business owners for payment or file confessions of judgment against them. Indeed, some state courts currently prohibit you from filing collection actions or invoking confessions of judgment.

Even now – especially now – bedrock FTC consumer protection principles apply. Small businesses and entities that offer them financing are facing economic uncertainty. But one thing remains very certain: The FTC Act prohibits a broad range of deceptive or unfair practices, including collecting money customers don’t owe, making false threats, or harassing people with continuous calls or abusive language. Even amid the current crisis, the FTC is closely monitoring the marketplace and stands ready to bring actions to stop illegal practices.