Business Funding Requirements Increase as Global Economy Deteriorates

Business Funding Requirements Increase as Global Economy Deteriorates

Media reports about consumer price increases have been plentiful this year. Most of them focus on the prices of goods and services. Few mention how provider costs for those are also going up. Those costs are driving the price increases. They’re also the reason why small business owners are searching for new funding sources. Traditional sources are too expensive. 

The numbers tell the story. Consumer Price Index (CPI) data for September shows a 0.4% increase for the month and a 3.7% increase over twelve months. That’s still nearly double the target range for the Federal Reserve Bank, a scenario that could lead to additional interest rate hikes. The cost of acquiring business capital from banks will go up even further.

This is not a new problem. A Bank of America study released in 2022 reported that 88% of small businesses were adversely affected by inflation. Most saw cost increases of 20% or more during the two years following the 2020 pandemic. Much of that was due to supply chain disruptions. Those have eased this year, but costs are not coming down. They’re still going up.   

Funding Acquisition Costs are a Global Problem 

The UK’s inflation rate for the past twelve months is 6.7% and the Eurozone average inflation rate is 5.2%. To combat that, the Bank of England and the European Central Bank have adopted the same monetary policy the Fed uses. The best APR for business loans in the UK is currently 12.35%. US business loans range from 11% to 14.5%.    

China’s prime rate is 4.20%. They don’t lend to foreigners. Argentinian banks will lend to US citizens, but their average business loan rates are over 50%. Annual inflation is over 100% and Argentina’s economy is on the verge of collapse. Only Venezuela and Lebanon are in worse shape. As for the rest of the world, most of it is immersed in conflict right now. 

Acquisition costs for small business financing are a key variable in determining the economic health of a nation. Argentina’s monetary and trade policies have put them in an untenable position. The United States is not in the same state, but raising the costs of debt financing is damaging our infrastructure. Thankfully, US businesses have other funding options. 

Liquid Capital is Essential to Prepare for Recession

Is recession inevitable? Economist Bill Conerly wrote an excellent article in August that sums up the economic conditions that are leading our nation down that path. One of the points that he makes is that the current interest rate set by the Fed will lower gross domestic product (GDP) by 1% over the next five quarters. That is the classic definition of a recession. 

According to Investopedia, GDP is calculated by adding up all the money spent by consumers, businesses, and the government over a specific period. That number includes wages paid to employees, rents and leases on real estate and land, entrepreneurial profits, and returns on investment portfolios. Decreases in any of those numbers can affect small businesses. 

Conerly goes on to explain why we haven’t gone into a recession yet. One of those reasons is the unemployment rate, which remains low at 3.8%. Maintaining that level when GDP contracts will be impossible without an influx of new capital. Acquiring that capital through traditional sources like banks and credit unions could be cost-prohibitive.

Another factor in the recession equation is auto sales. Supply chain problems coming out of the pandemic increased demand. That will last only as long as the supply remains high. With auto workers on strike and auto loan rates rising, those high sales numbers are unlikely to continue. Without consistent revenue, auto dealers will need to pay cash for new inventory.

Lending Has Evolved in the Post-Pandemic Economy

The need for funding is clear. Unfortunately, the criteria for getting that funding from traditional banks and credit unions have changed. The number of corporate debt defaults in 2023 surpassed the 2022 total in July. That increase has caused banks to tighten their lending requirements and increase their fees. Add that to higher interest rates. 

Startup business owners have faced this obstacle before. The lender’s criteria demands more than what the business can provide, like years of accounting documentation and large capital reserves. Those standards are even stricter today. Startups are finding it nearly impossible to get traditional loans. More established businesses are paying more for them. 

Risk analysis has also changed. The 2020 pandemic exposed vulnerabilities in certain business sectors that were not part of a risk evaluation before. Technological capability is one of them. Sustainability is another. Worst-case scenarios that were merely hypotheticals four years ago are now brutal realities. Banks know that and have adjusted accordingly. 

Reliance on personal credit scores is another area where the waters are getting muddied in the lending sector. Banks and credit unions rely heavily on them. Venture debt funding companies do not. Private lenders do their risk analysis based on the business financials, not the owner’s personal FICO® score. That’s shifting the focus for SBAs looking for working capital.

Using Private Debt to Get Through the Recession

Paying double-digit interest for traditional debt could decrease or even eliminate your profit margin. That’s not a sensible way to get through a recession. Private debt, aka venture debt funding, normally has a lower acquisition cost and limited fee structure. Repayment plans can also be more flexible, a feature that will come in handy when GDP contracts.

The next question is how to use the money. Any acquisition of funding should be preceded by a budget review and cost-cutting. Sadly, many firms may choose to cut labor costs. That’s certainly an option. Streamlining operational costs should come first. Private debt can be used to buy new equipment, upgrade software, or stock up on inventory. 

Global economics is a heady topic. Attempting to unwind all the factors that have led us into our current situation is a job for finance professionals and economists. Small business owners just want to get to the other side of this. Venture debt funding is one way to do that. Contact our team at Wise Venture to learn more about it today.

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