As business owners face a recession, the time has come to find the right funding partner to support them as they face new challenges and opportunities.
Just as companies are finally moving past the challenges the last few years brought, more economic woes are waiting in the wings. As interest rates rise in both the U.S. and Canada – with promises of further increases — and inflationary pressures persist, the threat of recession is now on the minds of almost every business leader and entrepreneur.
As one recent survey noted, nine out of 10 U.S. small business owners say economic trends such as inflation, supply chain issues and workforce challenges are having a negative effect on their businesses. Some 93% of U.S. businesses are also worried about the economy experiencing a recession in the next year.
Their worries may be well founded. According to the World Bank, the trend of central banks around the world raising interest rates simultaneously in response to inflation is likely to continue well into 2023, edging the world towards a recession.
For most sectors, rising rates, inflationary pressures and a looming recession are linked to a number of challenges. This includes pricing and contract-related concerns, higher borrowing and input costs along with supply chain slowdowns and staffing shortages.
Businesses in industries heavily affected by fluctuations in cost, supply chain pressures and changes in business and consumer confidence are particularly vulnerable. According to data from the Canadian Association of Insolvency and Restructuring Professionals, this is most prevalent in the construction, transportation and warehousing sectors, with insolvencies increasing this year for many companies.
For many small and medium-sized companies, successfully navigating this part of the economic cycle will mean having the agility and availability of capital to pay employees and meet demand from customers.
With rising costs affecting inputs, even those experiencing high growth will need access to funding quickly to take advantage of opportunities in their market.
Recession and traditional funding challenges go hand-in-hand
Unfortunately, just when cash flow is paramount, gaining access to it via traditional means has become more challenging as rising rates are causing banks to re-evaluate their lending risk.
In the second quarter of 2022, U.S. bank lenders began to tighten lending standards for commercial and industrial (C&I) loans to businesses of all sizes, according to the Federal Reserve’s Senior Loan Officer Opinion Survey. This tightening is expected to continue for the rest of 2022, as businesses are faced with an expected deterioration in debt-servicing capacity due to inflation, an expected deterioration in collateral values and an expected increase in the exposure to interest rate risk.
Finding an entrepreneurial partner
For many companies, the ability to thrive when a recession hits will mean having quick access to funding via a lender that looks beyond the data and takes the time to really understand your business.
In this climate, leveraging the close-knit relationship that develops between an alternative lender and small business will allow you to weather the cash flow challenges that a recession can bring. You’ll be prepared for working capital interruptions and – perhaps even more importantly – they’ll give you the tools required to take advantage of opportunities when they strike.
Looking at business through an entrepreneurial lens, established and partnership-oriented invoice factoring companies take a hands-on approach to client relationships. They take the time to dive deep into the data and seek to understand a company’s purpose and goals.
They empathize with the financial and emotional impacts facing businesses during times like this, and are ready to discuss potential problems and solutions and aim to collaborate and grow with their clients.
Ultimately, with the unpredictability of the changes that can emerge during a recession, it is important that a lender also has the flexibility to pivot and react, provide predictability and transparency, and give business owners the tools they need to proceed with confidence.
Alternative lenders are nimble and respond quickly to challenges
At Liquid Capital, our clients are just a call or click away from a funding decision, following the initial underwriting process. This can be tremendously helpful in an economic environment where opportunities and challenges arise quickly, and often, unexpected.
It’s common for financial institutions to be slower at approving requests for funding. They can potentially be required to wait for a company’s fiscal year-end or the results of an audit before distributing funds. Operating on a quarter-by-quarter basis, traditional banks also often have little incentive to issue loans with a high cost of administration, especially in the current environment, and consider companies with exponential growth to be higher risk.
One small business recently had the opportunity to scale significantly after landing a large contract to sell their product with a major U.S. retailer. However, the fact that the contract would represent 85 percent of their sales was considered by a bank lender to be too concentrated.
The company instead pursued an invoice factoring solution. Liquid Capital built a relationship with the large retailer’s accounts payable team and was able to notify and verify the receivables. This allowed the client to access the financing to buy the inputs to meet the sales demand – eliminating the need for the company to consider other options, such as prematurely selling equity in the business.
At the centre of the alternative business lending philosophy is a simple concept: a company that is not traditionally bankable can still be a high-growth business.
Finding a funding partner who takes the time to understand your company is one way to guard against the impact of a recession. Keep reading for more tips on how you can prepare your business for the new economic reality.