All signs point to slowing growth in the U.S. economy in 2019. Many economists believe that indicators such as lower new home construction and the yield curve inversion (the difference between short-term and long-term interest rates) indicate a looming recession, sometime in 2020. Small businesses typically feel the pinch far before large private and public companies that have been holding cash on their balance sheets since the 2008 financial crisis. Public corporations, in particular, have leveraged the booming economy, and more recently, the Trump administration’s tax cuts, to buy back stock and keep cash on the sidelines for a rainy day.
That’s all well and good for the big guys, but not for small businesses. Because so much of creditworthiness is tied to the business owner him/herself, individuals have had to dig out of crisis before they can even think about refinancing company debt or applying for working capital. It’s well documented that the recovery among small business owners took far longer than the large public corporations able to take advantage of the low interest rate environment, or in the case of large financial institutions, the gift of pure money to cover their losses while restructuring.
Knowing the economy is going to expand at a slower rate, it’s wise to begin acting like we are already in a recession.
If your business is like most within the United States, you have only recently begun to reclaim your life, get your company on track, and think about growth. These same small business owners just regaining their footing have also been impacted by the tight labor market, and have had to pay people more because talent is simply hard to come by. While that may be great for the overall economy, it means that while small businesses have grown their revenues, expenses have grown simultaneously.
Knowing the economy is going to expand at a slower rate, it’s wise to begin acting like we are already in a recession. Recessions are a fact of life in business, and it’s been more than a decade since the heart of the Great Recession. In other words… We’re due.
Acting on this idea means getting your house in order today and not waiting for the economy to truly contract. Acquiring the right financing to pay down credit cards, make improvements to secure your competitive advantage in the near future and down the road, and hire the best talent available is mission critical.
Most banks or online lenders will examine the creditworthiness of the business owner. If you don’t know your personal credit score, you can sign up for a free service, such as Credit Karma, to find out. If your score is below 600, it’s important to work on raising it before applying for a loan. Otherwise, you might only qualify for the riskiest products on the market at extremely high interest rates. Follow the advice of an authority to find out how to increase your score. Oftentimes, there are old, unresolved, or incorrect issues on your credit report suppressing your score, and they’re easily disputed.
Every bank and online lender wants to know that you manage your bank account responsibly. They will ask you for a minimum of three months’ worth of bank statements (up to a year for seasonal businesses). The worst things you can have are notices of insufficient funds and negative balance days. These are deal killers across the board, so as difficult as it might be, do everything in your power to project three months of healthy, positive balances. You’ll also want to demonstrate that you have multiple deposit days from various sources, and not just one or two deposits each month to get you through. Most lenders will interpret this as a lack of depth, and fear that the loss of one client could cripple the business.
If you haven’t filed tax returns, don’t even think about applying for a loan. Banks will want to see at least three profitable years on your returns. Online lenders typically ask for at least one year.
If you apply to a traditional bank, the process will be longer and more arduous, but less expensive, if you qualify for a loan. Payments will be made on a monthly basis, and they will likely look for some sort of collateral, such as automobiles, a home, or liquid investment. Online lenders typically require personal guarantees and no hard collateral, but the rates are obviously much higher, and they require daily or weekly payments. These can be difficult to manage, but they can also help you stay incredibly disciplined.
If you’re looking to have a more in-depth conversation about your lending options, we’re happy to help, and make a recommendation. The most important piece of advice we tell all prospective clients is to make certain you have the ability to pay back a loan. Don’t borrow on hope. It’s a recipe for business disaster, and a personal credit nightmare.