Lenders have been reducing the number of business-loan approvals throughout 2023. What's more, the American Bankers Association's Q4 Credit Conditions Index forecasts that this downward trend will last into midyear 2024, if not longer. The ABA makes its lukewarm projection despite Deloitte's reporting of stable retail sales and a continued reduction in business-loan delinquencies.
Why are banks pulling back?
A combination of factors contributes to banks' increased reluctance about commercial lending.
Cost and risk issues. Banks used to provide capital to local businesses — think George Bailey or Mr. Potter's in It's a Wonderful Life (on TV a few dozen times this month). However, writing business loans puts pressure on banks to balance out higher risk business ventures by filling out their portfolios with less expensive, secured loan products like mortgages and auto loans.
A tougher regulatory landscape. Given the failure of banks like Silicon Valley Bank and Signature Bank earlier this year, regulators are raising the bar for banks of all types and sizes. It makes good business sense.
If you're like most entrepreneurs I talk with, you don't have much time to ponder the deep-dive stories behind economic indicators, inflation, and rising interest rates — you simply want to keep your organization growing. Fair enough. But you'll need a strategy to work around these inevitable conditions: How can you protect yourself from a lukewarm economic forecast, while also growing your business — and, most importantly, getting the funds to do that?
Retrench: Leverage the power of a slower loan market.
"Buying low" in the stock market is a smart move. Likewise, you can make the case, depending on your business sector, for investing aggressively in your business while your peers are borrowing and spending less.
When consumers are spending at a stable rate and small businesses are investing less in their own growth, you have a golden opportunity to pull ahead from the pack. Say, for instance, you decide to make a tradeoff: You'll live with a lower profit margin over the next 12 to 24 months, so you can invest more revenue into your business. The endgame: Build more long-term customer relationships by offering lower prices and pocketing less, while your competition struggles to make their quotas. Once you've met your expansion goals, you can then refocus on profitability.
Getting funded means being more attractive (to lenders).
Retrenching calls for capital, whether that means money you reinvest, or getting funding from a bank, fintech, or other business lender.
So how do lenders look at your business when you're asking for capital? Will they look at the cashflow of your business and growth trajectory, or might they take a much closer look at your business and personal assets. What's your degree of willingness to pledge those and/or other assets as collateral? If you don't have real estate, cars, trucks, or other equipment, you'll be left out of many loan processes.
Sometimes being a more attractive funding candidate calls for a few simple changes in how you package and present information; in other cases, it calls for operational shifts.
Practice speaking thoughtfully about your cashflow, accounting processes, and provisions for seasonal lulls or other slow-business periods. Try to erase "Let me ask my accountant" from your vocabulary. If you're managing cash flow and maintaining a consistently solid balance sheet month over month, year over year — and can articulate your steps to maintaining these positive conditions, you're that much closer to getting funded, irrespective of the economic environment.
If you're a seasonal business, explain how you maintain cash flow year-round, even if your doors are open only eight months a year. Showing that you have a plan and can discuss it enhances a lender's comfort, just as much if not more than the actual numbers. Are you reducing overhead during your slow months – and still providing for growth? Talk it up.
Keep reinvesting in the business, no matter how little you can do. It shows your responsibility and maturity as a business owner.
Build out collateral. Having tangible assets helps with getting approved and determining the cost and structure of your financing. If you can own your business location, that's an appreciable asset. Or if you have trucks, cars, or other equipment integral to your business, owning them services your debt.
Keeping a cap on capital.
Funding is an essential business component. But how much should credit factor into your total business plan? Consider establishing multiple funding scenarios, and how each informs the milestones of your growth trajectory.
What if your Plan A, in which you're able to raise all the capital you need in 18 months, slips behind? You may only get 60 percent of that capital and it'll take 24 months. In this case, you may have to revisit your timetable for hiring, marketing, and maybe even product launches. When you have backup plans, you're ready. You're not scrambling or overextending yourself and laying out your own capital because you simply have no other choice in the moment.
Gaining a better understanding of how the business of lending works helps you keep your business growing, even during adverse economic conditions. Feel free to reach out with your questions on this, or your success stories, at [email protected]. You can also follow me on LinkedIn and Twitter.
Did you know?
Where do business owners get their capital?
64.4% Personal and family savings 16.5% Banks or other financial institutions 9.1% Personal credit cards 8.7% Family assets other than savings
Source: CFPB/U.S. Census Bureau
Since 2008, Fora Financial has distributed $4 billion to 55,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.