Kelsey Sheehy is a senior writer and a small business specialist at NerdWallet, a leading personal finance company. She covers the biggest financial decisions and challenges that small business owners face.
The world is now experiencing peak inflation, projected to increase from 4.7% in 2021 to 8.8% in 2022.
This storm, primarily caused by the COVID-19 pandemic, has affected many sectors, but small businesses may have suffered the most.
As much as 85% of small business owners said that they are concerned about the impact of inflation on their companies, as reported by the U.S. Chamber of Commerce. In fact, 39% of them have taken out loans last year as a way to cope with the spiraling inflation.
To understand how small businesses can better deal with these circumstances, we spoke to Kelsey Sheehy, a senior writer and small business specialist at NerdWallet.
Sheehy also shares valuable tips for small businesses on how to get their loans approved and invest their money for increased financial benefits.
NerdWallet’s mission is to help with small businesses financing. What steps does the company take to educate clients on what type of financing is best for a small business and why?
There is no one-size-fits-all small business loan.
A restaurant that needs a new walk-in cooler and a startup that needs short-term funding to cover operating costs have very different loan options.
At NerdWallet, we start with the why and help businesses find the best business loan options for their specific needs.
Our editorial team has also crafted a library of content to educate business owners on the different types of funding available — use cases, requirements, benefits, drawbacks — and the steps they need to take to apply for a loan.
Whether hiring employees, expanding into a new market or investing in new product(s), small businesses need money to achieve goals. Can you share 5 tips that would help them obtain a loan successfully?
It’s extremely important, especially in the current business lending environment to put your best foot forward and find any advantage you can to increase your chance of approval and secure the best terms possible. To that end:
- Don’t skip the prep: Having organized, up-to-date financial records and a rock-solid business plan will up your odds of approval. You also need to know your numbers and the story they tell about your business inside and out because lenders will ask questions.
- Keep your credit score high: Part of your prep should include checking your personal and business credit reports for any errors or negative marks. You don’t want any surprises when you apply and you need to be prepared to address up front anything on your report that would raise questions with potential lenders.
- Cultivate a relationship with your business banker: A strong relationship with your local bank or credit union can go a long way, too, as they can guide you through the lending process and may have more underwriting flexibility than a large national bank.
- Shop around, compare multiple options: Start your search with the bank or credit union you have a relationship with, but don’t end it there. Reach out to multiple financial institutions, including local or regional banks, online lenders and community development financial institutions that serve businesses in low-income and underserved communities. You’ll increase your odds of approval, and make sure you get the best terms, if you look at multiple funding options.
- Consider collateral: Using collateral to help secure your business loan lowers the risk for your lender and can improve your odds of approval and get you better terms on your loan. Not all collateral is created equal; real estate and savings are considered more valuable than equipment or inventory.
What trends have you observed regarding small business financing and how they can deal with inflation?
Small-business lending slowed in the latter half of 2022 due in part to tighter lending criteria from banks.
The other contributing factor is that business owners aren’t very optimistic about the current economic conditions and many are shelving plans for expansion or opting not to invest in inventory or big capital expenditures. Business owners who seek out financing need to factor in higher borrowing costs due to rising interest rates.
There are a few ways business owners can hedge against inflation and rising rates. If your business carries credit card debt, consider moving it to a balance transfer card that offers 0% interest for 12 months or longer. Owners can also work with a financial advisor or business mentor to adapt your business plan and streamline operations.
You recently announced the launch of NerdWallet’s Socially Conscious Financial hub. Can you tell us more about it and share the key steps to help entrepreneurs make responsible business decisions?
NerdWallet’s mission is to help consumers and small-business owners with all their financial decisions, including areas like social responsibility, which is top of mind for many.
One of the big questions people have is how to get started.
We found that roughly 2 in 5 banking consumers (39%) don’t know if their primary financial institution is socially responsible and of them, about 1 in 3 (31%) don’t know how to find out if their financial institution is socially responsible, according to a survey conducted with The Harris Poll.
Our Socially Conscious Financial Hub was designed to guide people to the most relevant information for their needs.
It’s organized based on the kind of financial decision you’re looking to make - either investing or banking - and includes guides on everything from minority-owned banking or LGBTQ+ and gender equity investing.
You can also find reviews that NerdWallet has written on various socially conscious banks and roundups of clean energy stocks, among other things. The Hub also features relevant YouTube videos and episodes of NerdWallet’s Smart Money Podcast that dive into topics like ethical investing and sustainable banking, along with a curated selection of articles exploring socially conscious topics beyond investing and banking.
You have an entire section dedicated to ethical finance. How hard is it for a small company to turn a profit while also being conscious about equity and inclusion?
There are plenty of barriers to turning a profit as a small company — inflation, economic concerns, supply chain issues.
Making socially responsible financial decisions is not one of them. Ethical finance can be as simple as the bank you choose.
When you keep your money with a minority-owned bank or a community development financial institution, that money circulates back into the community by way of mortgages, personal loans and small-business loans to underserved communities.
Where can small business owners invest their money to help them thrive financially and independently in the long run?
So many small-business owners pump every penny back into their company and fail to invest in their future outside of running a business.
In fact, a huge percentage of entrepreneurs — roughly a third — have no retirement savings at all. That’s risky.
What if your business fails? Or your health fails? Or you can’t find a buyer for your businesses? You may never be able to fully retire. Small-business owners work too hard for that to be their reality.
Make savings for retirement a priority and put aside whatever you can — whether it’s 1% or 10% or more — into an investment account geared toward retirement. Even a small amount, contributed regularly, will compound over time.
There are several retirement plans for small-business owners, including traditional and Roth IRAs, Solo 401(k)s, SEP IRAs and Simple IRAs. Rules and tax implications vary for the different options, but you can work with a certified financial planner or registered investment advisor to figure out which one makes the most sense for your business.
Lastly, starting a business can be rather challenging, and some people have no idea where to start. What wisdom can you share with our readers that might be interested in starting their own business?
There’s a meme I keep seeing about starting a business: “Didn’t want to work a 9-to-5 job so I started my own business. Now I work 24/7.”
You have to be beyond passionate about the business you want to start if you’re going to power through long days (and nights), setbacks and everything else entrepreneurship will throw at you.
You also need to know when to ask for help. The most savvy entrepreneurs don’t do it alone, they have a support system of friends, family and other business owners they can lean on for advice and assistance. As your business grows, pull in people who can help with things you don’t excel or don’t enjoy doing. Work with an accountant to help manage your books or bring on an intern to help run your social media channels.
A business mentor is also a great resource, whether you’re just in the idea phase or if you’ve been running a business for decades. You can find a business mentor through SCORE, a national organization of volunteer business mentors.
Thank you for your time, Kelsey Sheehy! Best of luck to you and NerdWallet!