In a slow economy, businesses often face financial challenges and many may consider borrowing money or relying on buy now, pay later solutions to sustain operations, invest in growth, or navigate unforeseen circumstances.
Borrowing activity in slow economies tends to increase as companies seek external funding to bridge financial gaps and stimulate growth, according to recent data from the Federal Reserve.
However, borrowing money in such an economic climate requires careful planning and informed decision-making. By understanding these best practices, businesses can optimize their borrowing strategies and mitigate risks effectively.
Before proceeding with borrowing, it is crucial to assess your company's financial needs and risks. Cross those T’s and dot the I’s as understanding the purpose of funds and evaluating associated risks will help you make informed borrowing decisions. Consider the following:
Review your company's financial statements, cash flow projections, and budget to determine the precise amount needed and the anticipated impact. Consider the lending environment, interest rates, and availability of credit to identify the most favorable borrowing options.
What’s right for company A may not be for companies B, C, and D. Take the time to research and compare different lenders and financing options to secure the most favorable terms for the best cash flow outcome.
Consider various financing options, such as term loans, lines of credit, equipment financing, or invoice financing, depending on your specific needs. Compare interest rates, repayment terms, collateral requirements, and potential fees associated with each option.
Look beyond traditional banks and consider alternative lenders, such as online lenders or B2B lending platforms, which may offer more flexible terms and faster approval processes. Research their reputation, track record, interest rates, fees, and customer reviews to make an informed decision.
In a slow economy, lenders may be more cautious when extending credit. Therefore, maintaining a strong credit profile is essential to improve your borrowing potential. Focus on the following:
Regularly monitor your business credit score and take steps to improve it, such as paying bills on time, reducing credit utilization, and resolving any errors or discrepancies. Demonstrate creditworthiness by maintaining a solid payment history and keeping your credit utilization ratio low.
Be prepared to provide additional information or answer questions from lenders to expedite the borrowing process.
By fostering strong relationships and keeping lenders informed, you can build trust, address concerns proactively, and ensure a smooth borrowing experience.
Keep your lenders informed about the progress of your business, including key milestones, financial achievements, and any significant changes. Provide updated financial statements, such as income and balance sheets, to demonstrate your company's financial stability and growth potential.
If you anticipate a temporary decline in revenue or foresee potential cash flow challenges, communicate these concerns to your lenders in advance. This proactive approach demonstrates your commitment to managing financial risks responsibly.
In a slow economy, businesses often hesitate to invest due to concerns about the cost of capital. However, it is important to shift the focus from the cost of borrowing to the potential benefits and returns generated by the investment.
Assess the potential benefits and value the investment can bring to your business, such as:
Focus on the potential return on investment (ROI) rather than solely the cost of capital and consider the strategic importance of the investment in positioning your company for future growth and sustainability.
Companies are prepared for you to be asking for payment flexibility. With the changing economic landscape, you won’t be the first, nor the last company to ask for monthly or quarterly payment options. This can be incredibly beneficial as it will unlock your ability to pay for new products today with money you’ll earn tomorrow and it can make renewing a product that is helping your company meet the bottom line less stressful, or at least less of a tradeoff.
Remember that borrowing in a slow economy is not without risks, but with careful planning, thorough research, and strategic decision-making, you can optimize your borrowing strategies and mitigate potential pitfalls.
Ultimately, borrowing money should be seen as an opportunity to fuel growth, invest in essential resources, and navigate challenging times. Each business is unique and requires a tailored approach to borrowing. While the six best practices outlined in this blog provide a solid foundation, it's important to consider the specific circumstances and goals of your own business.
To learn more about how Vartana can help your business, visit Vartana.com.