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Fears that the US is headed for a recession have long been on the rise, especially among business owners. One poll found that eight out of 10 small business owners expect a recession sometime this year.
Recessions affect most businesses in two ways: First, revenues fall as consumers begin to hold on to their money instead of spending it. Second, tightening credit conditions limits the amount of financial resources available to help enterprises overcome economic difficulties.
Some businesses consider taking out a loan or line of credit when economic hardships are on the horizon, but is this the right move for your business?
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Is it worth taking a loan during a crisis?
You may not like the idea of taking on additional debt and wonder if applying for a loan during a recession is a good plan, but there are times when getting a loan or line of credit is the smartest option.
You should start by considering how much cash you have on hand. If you’re approaching an economic downturn with little cash on hand, a business loan can provide a financial buffer. Access to cash will give you problem-solving options, making it much easier to turn a profit and grow.
This is especially true since no one knows how long the recession will last. You may have enough money to get by for the next six months, but it won’t help if the downturn lasts two years or more.
Waiting for the moment when you desperately need money can significantly reduce your options. As the economic downturn approaches, lenders are tightening their rules, and you may not be able to meet their inflated eligibility requirements in the face of economic hardship. If you think you may need additional capital, it is best to act as early as possible.
Lending standards begin to tighten
Many companies struggle during a recession as demand falls and uncertainty about the future rises. They will start looking for ways to raise capital, such as taking out a business loan or a line of credit, but this is becoming a problem as most banks tighten their lending standards during an economic downturn.
As the economy worsens, banks face higher risk in lending. Most banks will only lend money to established businesses with good credit history and limited presence in the industry to reduce their risk of financial loss, which raises the eligibility criteria and makes it difficult for entrepreneurs to gain full rights.
Fortunately, banks and credit unions are not the only lending institutions. Non-bank lenders do not follow the same principles as traditional lenders, so they can lend to a wide range of businesses even during a recession.
Related: Worried about raising capital in a recession? Give your company an edge by doing things that other entrepreneurs often overlook.
Consider using a non-bank lender
A non-bank lender is a financial institution that is not a bank or credit union. They lend money like traditional lenders, but they don’t have a full banking license and don’t offer things like checking and savings accounts.
The non-banking route has its advantages and disadvantages. While this type of lender tends to charge higher interest rates than banks or credit unions, they offer numerous quality-of-life improvements and special benefits, including online communications, streamlined underwriting processes, fast financing times, alternative financing solutions, and more.
What you lose in cost of capital is gained in speed and efficiency. For example, you can fill out an application in as little as 15 minutes at some institutions, and many lenders provide funding on the same or next day.
These loans also have fewer conditions on how you can spend the money, and the cost of capital can be offset by income generating opportunities. For example, spending $10,000 on interest payments won’t matter as much if you increase your income by $50,000.
Also, as you continue to build a relationship with this lender and improve your credit score, you will be eligible for higher rates in the future.
Start looking for business financing now
After the March collapse of the Silicon Valley Bank, some economists lowered their economic growth forecasts for the year. Lending conditions have already begun to deteriorate after numerous hikes in key rates, but the SVB crisis has forced many banks to further tighten their lending standards.
In particular, smaller banks need to be more careful when lending in order to conserve cash. Small and medium banks account for approximately 50% commercial and industrial lendingso it will affect a number of businesses.
Federal Reserve Documents predicted that the fallout from the banking crisis is likely to lead to a recession later this year, and it is unlikely that we will see any significant improvement for at least two years.
If you think you will need funds next year, you should start looking for business funding now. While you may be apprehensive, a loan or line of credit can support your business until the economy improves and gives you the capital you need to grow further.
On the subject: 5 ways to protect your business from a recession