In March 2022, when the Federal Reserve announced the first of what would ultimately become 10 straight interest rate increases, U.S. lenders felt a little nervous — and with good reason. Though the Fed’s desire to cool inflation made sense, many feared higher rates would trigger a recession. And though the economy has shown remarkable resilience in recent months, there’s at least a 60% chance we’ll see a mild slowdown before 2023 draws to a close, according to Wolters Kluwer Blue Chip Economic Indicators.
The collapse of three high-profile regional banks this spring didn’t calm anyone’s nerves. In fact, this may be one of many factors that drove business lenders to continue tightening their credit criteria. Even though loan approval rates seemed steady towards the end of Q2, many believe we’re heading for a serious credit crunch.
The New Credit Realities
If your company came into being anytime after 2008, you’ve benefited from the long-term gift of free money. In fact, the last 15 years have given many small businesses a stronger start in comparison with those getting started in a time when interest on short-term small business loans hovers around 9% to 10%.
The impact of high borrowing costs on your business will depend on your growth plans for 2024 and beyond. Maybe revenues and cash flow are so healthy that you’ll be able to build or expand mission-critical systems, add new technologies, open new locations, or hire and train new talent without additional financing. But maybe you’re not there yet. It may be time to consider whether your company’s progress over the next year or so will require you to borrow — and if so, how to do it wisely.
The Other Side of Credit Risk
Financing the next wave of your company’s growth isn’t the only reason you might need to think carefully about business credit now. Even a mild economic slowdown could drive some customers to conserve cash, dramatically shifting your accounts receivable risks.
Those who reliably paid within 30 days until now might move into the 60-to-90-day zone, in essence enjoying a 0% loan from you instead of drawing on credit sources to pay on time (and incurring 5% to 10% interest), or losing out on interest earned in certificates of deposits or online savings accounts.
It’s not hard to see how this will further constrict cash flow needed to fund daily operations, let alone capital expenditures or staffing needs.
Does it Make Sense to Secure More Credit Now?
Talk with your partners and your executive team about the possibility of borrowing now to give your company some room to breathe. Keep in mind that it’s always easier to get approved for a loan when you don’t need one. When your finances look healthier, you enjoy a distinct edge in securing the best available rates.
One option to consider is opening a flexible line of credit with an appropriate limit. You will likely pay a modest availability fee for access to these funds — an expense you didn’t have until now. Still, this isn’t too different from the practice of paying insurance premiums to protect yourself from unforeseen risks. You might never need it, but the coverage is there if you do.
Move Quickly for the Best Terms and Rates
If you decide to expand your access to credit, apply as soon as you can. Though loan approval rates increased slightly in June, lenders are still green-lighting business loans at only half the pre-pandemic rate, according to the Biz2Credit Small Business Lending Index, a monthly report based on the experiences of 1,000 small businesses seeking funding from banks, credit unions, community development sources, and microlenders. If the economists predicting a business credit squeeze in the months ahead are right, you’ll be glad you took quick action.
Borrowing in an uncertain economy might seem like a counterintuitive strategy, but it’s a forward-thinking move that may help your business navigate short-term risks for long-term success.
Dean Kaplan is president of The Kaplan Group, a commercial collection agency specializing in large claims and international transactions.