Challenges of Obtaining Business Financing in a Volatile Economy

In today’s fast-paced global economy, businesses must be nimble and adaptable to survive and thrive. However, one constant challenge that business owners face is obtaining financing, especially in a volatile economic market. Recession fears, rising interest rates, inflation, bank failures, labor shortages or high unemployment rates all lead to economic uncertainty and can make it difficult for businesses to secure funds.

In this article, we will explore the multifaceted challenges businesses encounter when seeking financing during turbulent times and suggest strategies to overcome these hurdles.

The Availability of Capital – Banks Tighten, Predators Get More Aggressive

During times of economic uncertainty, most financial institutions become much more risk averse. This leads to reduced access to financing as banks tighten their loan approval guidelines, they limit credit line increases, tighten their bank covenants, and reduce their total exposure amounts. Additionally, banks and non-traditional lenders may exit some markets or industries, further reducing access to capital for businesses operating in those industries.

As access to capital is reduced and small- and medium-sized businesses become more vulnerable, predatory lenders and scammers get more aggressive. It’s important to the financial health and well-being of your company to be on the alert for these costly financial solutions, and to question unsolicited offers for working capital.

Dangers of MCAs (Merchant Cash Advance)

A merchant cash advance (MCA) is a type of business financing that advances a lump-sum payment based on future sales, typically future credit card sales. They are not considered loans so they aren’t regulated like loans or limited by lending laws. MCA providers typically charge very high fees and factor rates, making them extremely costly to the company receiving the financing.

Most companies don’t typically refer to these as merchant cash advances, choosing instead to promote them as working capital. They are aggressively advertised and fairly easy to obtain. Sometimes you simply need to provide a couple months’ worth of bank statements to be approved and obtain a large line of credit.

• Good for a one-time influx of capital, but very difficult to stop once started.
• Easy to obtain – provide a couple months’ of bank statements.
• Credit lines are often high, and therefore quite attractive.

However, MCAs can be a quite detrimental to the financial health of a company. They have limited regulatory oversight, are very expensive, and should be considered an option of last resort.

• While not considered a loan, the charges and fees result in extremely high effective interest rates — rates most companies would completely balk at if presented in loan documents.
• Payments are automatically drafted from your bank account daily or weekly.
• Many finance companies will not consider lending to a company that has taken MCAs.
• Most MCA contracts include an upfront consent of judgement (a statement that you acknowledge you owe the creditor money and the creditor does not need to have a judge sign off).

Actions to Take Regardless of the Economy

The best time to prepare for a volatile economy is when times are good. However, there are ways you can prepare even if the turbulent times are already here.

Build Equity in Equipment

Your equipment and manufacturing machinery are assets on your balance sheet, and any corresponding loans on that equipment are liabilities on the balance sheet. As you pay down your loan, the equity in the equipment builds. Once you have significant equity in that equipment, you can refinance it to get working capital to help fund business operations. Equipment equity gives you flexibility in many situations. The key is to find a manufacturing equipment finance partner that understands your business and your equipment.

Build a Cash Reserve

Much like having equity in your equipment, cash reserves provide flexibility, especially in the case of unforeseen expenses that may be difficult to finance, for example, emergency situations, machine repairs, tax issues, etc.

Be Honest with Your Lender

While not every lender is willing to work through late payment issues, keeping your bank and/or lender apprised of any negative situations allows them to better help you when the need arises. It’s easier to let them know a payment might be late in advance, rather than the lender having to chase you down for payment. Being proactive and honest and often they will work with you.

Diversify Your Lending Base

Having multiple finance partners (a bank, an equipment lender, a small-business lender) can help you if one of your partners decides they need to tighten their credit box. If you only have one financial partner and rely on them for all your monetary needs, you have no fallback should they decide to make changes to their lending practices.

If You Find Yourself Cash-Strapped

• Consider selling equipment that is not being used:
  • Production machinery
  • Office equipment
  • Company vehicles
• Refinance equipment or assets that have equity, thereby providing working capital.
• Reduce inventory — raw material, work-in-process, finished goods.

Final Notes

Your bank or financial partners should be seen as a resource. If you communicate with them, they will often help you weather the economic storms, and provide you with good advice and guidance. If you have questions about new financial instruments or question whether you are being scammed, your trusted partners should help guide and protect you.

• Your bank or finance company want you to be successful.
• Your bank or finance company does not want your equipment or other assets.
• If something seems too good to be true, it probably is.

Resources used in this article:

• Companies Turning to Alternative Financing Sources – Business Wire, June 2023
• Banking Crisis Impact on Manufacturing – Asis Intelligence, March 2023