Are You Prepared for a Credit Crunch?

Are You Prepared for a Credit Crunch?

During Covid, more money was pumped into the economy than ever before. Now, liquidity is being removed from financial markets faster than ever before thanks to the Federal Reserve. Among the many other potential effects is a tightening of credit in the marketplace, which may hinder business’ growth opportunities. While we’re waiting to see how things play out, there are steps you can take now to put your business in a better position for getting new capital, should you need it.

As reported by Forbes, “The exact effect of this quantitative tightening is not known as we are in uncharted territory, but it could result in upward pressure on interest rates and siphon liquidity out of the financial markets, meaning commercial banks may have less capital to lend.” (Weissmueller, Ryan. “How To Set Your Company Up for Success in a Possible Credit Crunch.” March 8, 2023.

To increase your business’ likelihood of securing new capital:

Be prepared to sell your business case to lenders.

What distinguishes your company from others? How are your margins and cash reserves? What do your quarterly results say about your business? Did you make strategic moves to take advantage of market forces and successfully navigate the last few years? Are you looking to grow or maintain the status quo until things turn around? Now is the time to tell your story, using plenty of details and facts to back it up.

What’s your contingency plan?

Showing lenders you have a viable plan to address different market challenges can boost their confidence in you and your business.

Minimize risks.

Do you have protocols in place for ensuring you receive prompt payment from customers? If your inventories are high, what’s your plan to lower them? Are you taking steps to protect and boost your credit rating?

Pick the right lender.

As recent events prove, it’s vital to make sure your lender’s business is healthy. Have you looked at its performance, reserves, and loan quality? What about its portfolio? Perhaps most important: do you they know and understand the construction business and industry?

Looking at the bigger picture, many of the steps you can take to prepare for a potential recession, can also help position your business to secure capital while riding out uncertain times. Consider:

How well do you know your numbers – how much cash you have, what’s your inflow and outflow, and how upcoming projects and deadlines may impact results? What about your operating costs and overhead – are there opportunities to lower them?

What’s your contingency plan should we enter a recession? How will your business respond? Will you cancel loans on unused equipment? Sell materials? Adjust headcount? Are your suppliers in a good place financially? Having a plan in place now can save you precious time and money when you need them most. (It’s also a great way to show potential lenders you have viable plans to address uncertain times.)

Do you have enough cash on hand to cover operating expenses and negotiate prices for rental equipment or purchases? How’s your emergency fund?

Have you done everything possible to increase margins? Are you getting the best prices for materials? Can you save by changing subcontractors? Should you rent instead of purchasing equipment? Are you estimating on jobs correctly? Have you reviewed contracts to make sure you’re not paying for anything you don’t use?

Are you balancing backlog and growth? While a strong backlog can provide a strong sense of security, the odds of projects being delayed or cancelled may increase. Double-down on looking for new business opportunities.

Are you engaging your employees to identify challenges and solutions? They see the news and know the headlines. Empower them and your business by asking for their help identifying and eliminating inefficiencies.

Do you have a business advisory service or accountant like RBT CPAs to help you develop and adjust your financial plans? In good times and bad, we’ve been helping Hudson Valley businesses adjust to the ever-changing economic landscape for over 50 years. We believe we succeed when we help our clients succeed. Find out why 97% of individuals and businesses who become RBT clients remain RBT clients for the long haul. Give us a call today.