As mandatory shelter-in-place orders issued by states and local governments slam small businesses, their owners are scrambling to find ways to cover critical overhead.
While the Coronavirus Aid, Recovery and Economic Security Act promises some $350 billion in loans to small businesses (500 or fewer employees) to cover payroll and other expenses, some business owners are already wading in red ink and need solutions sooner than the federal aid may become available. Many are turning to home equity lines of credit and other personal lines of credit to get through the crisis for the short term.
Bloomberg News
While the Fed’s dramatic rate drop in mid-March may have initially seemed like a boon to those looking to refinance their mortgages, the short-term effect has actually been a rise in rates, as lenders seek to stem a flood of refi inquiries that threatens to overwhelm their systems. But HELOCs are tied to the prime rate and float in response to market conditions. That makes them a better and more economic way to borrow in the current environment, with the Fed doing everything possible to maintain liquidity in the economy.
Make no mistake, I’m advising my small business owner clients to take every opportunity to tap into the Cares Act lending spigot. A client called me just recently, grieving because he was being forced to lay off loyal and trusted employees. When I mentioned the possibility of the government program, he told me, “I’m going to call those people and reire them; I hope the bill passes.”
It was a great relief to be able to tell him that the bill has passed the Senate on a unanimous vote and is headed to the House. His business will qualify for loans to maintain payroll, and the loans are forgivable. He can also get payroll tax refunds to offset costs of paid leave and other employee expenses related to the COVID-19 crisis.
But for those who can’t wait for the government program rollout, tapping into a HELOC can probably offer the least expensive way, interest-wise, to bridge the short-term gap created by vanishing revenue streams.
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