Arrange Financing Before You Need It

Be sure to arrange financing before you need it! The Covid pandemic and subsequent distancing laws surprised business owners, especially small- and medium-sized companies with little financial reserves. The Wall Street Journal reported that more than 600,000 businesses closed in 2020. Many of the others barely scraped by with the aid of the $900 billion in Federal Payment Protection loans.

Two years later, companies struggle with broken supply lines, rising energy costs, and higher interest rates. A recession is likely in the future, probably beginning in the second quarter of 2023. The National Federation of Independent Business reports that problems of rising inflation, increasing energy costs, supply chain disruptions, and workforce shortages are “unlikely to subside any time soon.”

The Federal Government is unlikely to ride to the rescue again due to other priorities and a new Congress. According to Forbes magazine, the reality is that the “federal government cannot possibly meet the unique needs of small enterprises…”.

The Decline in Lending Opportunities

Business owners are discovering that the lending windows at their local banks are closing. Their “friendly” banker has little interest in new loans or negotiating the terms of loans already on the books. Community banks, the primary source of banking services to small- and medium-sized businesses, are declining in number – 8,300 in 2000 to 4,277 in 2022[i] – due to consolidation.

Many business owners assume that pre-Covid market conditions will return, including their ability to receive funding when needed. They need to recognize that community banks have problems competing with larger national and international banks. Funding opportunities for small- and medium-sized companies with little credit histories are significantly restricted. In 2020, less than one-half of smaller businesses applying for loans received the funds needed.[ii]

Reasons to Arrange Financing Now

“Even though every business owner has a bank account, that does not mean there is a banking relationship. ”    ∞ U.S. Representative Byron Daniels (R – FL-19)

Some business owners might question the practice of borrowing money before they need it. They fail to consider how borrowing money today can pay off tomorrow by

1. Managing future risks. Will a new strain of the coronavirus arise, triggering another period of lockdowns and lost sales? Will higher energy and raw materials prices drive up costs and squeeze cash flow? How will the expected recession affect a business? No one knows what the future might be. Establishing a credit facility before the situation is critical is good risk management.
2. Building a solid borrowing relationship. Companies that properly manage debt and repay loans build strong credit histories and improve their chances of securing financing from banks and other lenders. Developing a relationship before asking for a loan can shorten the lender’s standard approval process.
3. Covering emergency needs. Unexpected expenses occur in every business. No business is immune to the risks of operating in a dynamic and uncertain environment. Cash reserves or preapproved access to funds enable companies to respond effectively to new business conditions.
4. Smoothing Cash Flow. All businesses face unexpected revenue and expense fluctuations from time to time. Having funds available by borrowing money in advance ensures that companies can pay their bills as required and maintain a superior credit history.
5. Exploiting competitor weaknesses. Weak economies invariably hurt those companies unprepared to handle the new conditions. Competitors are more willing to sell or merge, often at deep discounts. Access to capital enables small businesses to capitalize on opportunities when they arise and grow their business.
6. Capturing technological advantage. Employing new automation technologies can reduce costs, provide a competitive edge, and disrupt an industry. Being the first mover is only possible if a company maintains excess capital to take advantage of favorable circumstances.
7. Strengthening the Balance Sheet.With excess borrowed funds, businesses can invest in equipment, hire employees, and expand their operations, positioning themselves for future growth and success. Additional growth provides economies of scale, greater access to critical employees, and an expanded market presence.
8. Providing Peace of Mind.Having the security of being prepared for future contingencies is the goal of every business owner and manager. Knowing that funding is available lets owners focus on operational and marketing issues directly affecting the bottom line.

Types of Financing used to arrange financing

The commercial finance industry is a preferred lender of small- and medium-sized companies due to their flexibility and the variety of financing programs available:

• Asset-based Lending. Short-term, revolving loans collateralized by accounts receivable, or inventory reduce the gap between the payment of costs of a product or service and the receipt of its associated revenues. The improved cash flow enables companies to capitalize on vendor and supplier discounts.
• Business Line of Credit. An unsecured loan commitment for future unspecified needs is an intangible asset every company needs.
• Commercial Real Estate Loans. Many companies own or seek to buy real estate in their business. A lender with real estate knowledge and the flexibility to handle multiple real estate financing options is always preferred.
• Merchant Cash Advances. An advance payment of future sales, repayment occurs through automatic deductions of a predetermined percentage of credit card sales or regular bank account withdrawals. The drain on the company’s cash flow is limited. When revenues rise or fall, the fixed rate never changes. Merchant cash advances are ideal for companies with significant credit card transactions that need fast access to cash.
• Purchase Order Financing. This type of funding allows businesses that need capital to deliver larger sales orders without sacrificing other operations, straining cash flow, or giving up equity.
• Small Business Lending. Some companies do not qualify for standard loan programs and require special handling. A lender capable and willing to accommodate special borrower needs is an asset.

The Right Time to Borrow

The importance of a cash reserve cannot be overstated. When cash flow turns negative, i.e., more funds going out than coming in, having sufficient cash available to cover deficits is critical. Trying to buy insurance when the house is burning down is difficult, if not impossible. The likelihood to arrange financing when creditors and their lawyers are banging on the door is slim and none. The opportune time to arrange financing is when you don’t need it.

The timing of loans for small businesses impacts a business’s ability to manage its cash flow and meet its financial obligations. Small companies that wait to take out a loan until they need it may not be approved. On the other hand, a small business that borrows when its income is high is likely to make required payments and use the loan for emergencies or invest in growth opportunities. Ultimately, the timing of loans for any business can have a significant impact on its financial success.

[i] Hanauer, M., Lytle, B., Summers, C. and Ziadeh, S. Community Banks’ Ongoing Role in the U.S. Economy. Federal Reserve Bank of Kansas City. (June 24, 2021 ) https://www.kansascityfed.org/Economic%20Review/documents/8159/EconomicReviewV106N2HanauerLytleSummersZiadeh.pdf

[ii] Sheppard, M. Small Business Lending Statistics and Trends (2021). Fundera by Nerdwallet. (December 16, 2020) https://www.fundera.com/resources/small-business-lending-statistics