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While the US economy wasn’t as dire as many predicted in the second half of 2022, investors and entrepreneurs are already panicking as we move through the first months of 2023. The World Bank has indicated that the chances of a recession are growing, citing a sharp slowdown in global growth. The Consumer Price Index of All Urban Consumers (CPI-U), one of the leading indicators of inflation, rose 6.4% in January, which was higher than most analysts’ predictions. The rise indicates that more interest rate hikes are coming in 2023, and with that, a potential stock market downturn. All of this could indicate that a recession is coming later this year.
The question is, how prepared is your small business for a recession? One of the ways you can prepare is to take out a business line of credit. This is a financing tool that can get you through tough times by helping to maintain your cash flow, payroll and expenses during periods of slow sales. If you’re planning for the worst, here’s why a line of credit can support your business.
A line of credit can help you prepare for a recession in two major ways:
- A line of credit can help you maintain your cash flow and meet expenses if your revenues decline.
- Taking on a line of credit before a recession hits gives you accessible cash and can lower your chances of having to seek a loan or other financing during the economic downturn. This is especially important given the fact that lending requirements tighten significantly during a recession.
How Can a Line of Credit Prepare Your Business For An Economic Downturn?
Preparing for a recession as a business means preparing for the worst and hoping for the best. According to a USA Today article, 65% of economists predict a recession in 2023. Happily, 97% predict that the upcoming downturn will be mild. Nevertheless, it’s vital to stay ready for anything.
Obtaining a line of credit before a downturn puts the power in your hands.
Economic crashes create troubled waters for all businesses, because loan requirements tighten amid an economic drop.
The nature of a line of credit means you can borrow up to your total credit limit when required; but you only make repayments when you make a draw on your credit line, making it an excellent source of emergency funding when finances tighten.
Unlike a business loan, you can continually borrow against your credit line for as long as it remains active. Borrowing to cover your expenses until a hefty invoice is paid, paying the outstanding balance in full, and borrowing more in later months is a viable strategy to keep your business running.
The value of a line of credit for your business during a recession is its versatility, enabling you to stay agile and pivot as you confront new and unexpected financial challenges.
What are the Pros and Cons of Taking Out a Line of Credit Now?
CEOs know that a recession is no excuse for allowing inertia to set in. However, despite the signs of recession, a study of more than 3,000 CEOs saw 61% of leaders agree that delivering a better customer experience was their priority.
It shows that overperforming companies understand the value of going on the offensive instead of simply surviving during a recession.
Getting approved for a line of credit helps build your offensive line by providing access to financing as and when you need it. Moreover, this form of revolving credit enables you to continually borrow and repay for a set period.
So, what are the advantages and drawbacks of obtaining a line of credit now?
Pros of a Line of Credit
Lines of credit are ideal if you want to invest in your company now. Adding new assets to balance sheets requires significant outlays, especially if you’re relying on a customer paying a hefty invoice.
Additionally, obtaining a business line of credit can cover your operating expenses when sales numbers fall during a recession. Nearly all industries experience a significant drop in revenue throughout a recession. An examination of the previous ten recessions indicated anaverage market decline of 29.5%.
The numbers reported by the nation’s most prominent businesses often reflect what small and medium-sized American businesses experience. Possessing a line of credit can keep your business going if you experience a short-term reduction in revenue.
Generally, businesses dealing with fluctuating cash flow, such as hospitality, construction, or seasonal businesses, are better served by a line of credit when compared to traditional business loans because of the inherent flexibility.
Finally, there’s the ripple effect to account for. Recessions impact organizations up and down the supply chain. In 2023, corporate debt represents a severe problem with an$11 trillion debt count. All it takes is one customer, supplier, or distributor to become insolvent, and your business could be left with an overburdened accounts receivable column.
A line of credit acts as a shield should your business find itself stuck on a reef because of unpaid invoices. With access to immediate financing, you cansolve problems before they cripple your operations.
Cons of a Line of Credit
Businesses with wild variations in their cash flows can benefit from aline of credit, but what if your business has a stable income?
Your decision becomes more complex. Although lines of credit can serve you during difficult times, there are drawbacks to these loans. Primarily, lenders will charge maintenance fees even if you don’t borrow money against your line of credit. Additionally, lines of charge variable interest rates, so borrowing money against your line of credit will become more expensive when interest rates rise.
In short, consider whether the correct answer to rising interest rates and inflation is a line of credit.
Which Industries Should Consider Expanding Their Credit Now?
Small businesses in every industry can benefit from expanding its credit availability now. Depending on your business’s cash flow and anticipated need for future credit during a recession, paying a maintenance fee on an unused credit line may be beneficial in the long term.
According to theWall Street Journal, several major franchises are already increasing their revolving lines of credit, including restaurant franchise Dine Brands Global Inc. and utility brand Xcel Energy Inc. The aircraft manufacturer Bombardier Inc. has similarly followed suit.
What these businesses all have in common is cash flow that fluctuates during changing economic conditions. Specific industries are more vulnerable to increasing inflation and reduced demand than others, including:
- Leisure and tourism
Your line of credit can allow you to cover expenses for inventory or materials, particularly if a customer sandbags on an invoice. The nature of surviving a recession is time. The longer you stay afloat, the higher your chances of making it to calmer waters.
Remember, theaverage recession length from 1854 to 2020 was 18 months, revolving credit line duration can last anywhere from six months to five years, depending on the lender making it a viable option to get you through the worst of a recession. .
Your Business Needs to Consider Taking Out a Line of Credit Early in 2023
The best way to leverage a business line of credit is to get it before you need it. However, from a practical perspective, you may need to wait a few days or weeks for the line of credit to become available, depending on the lender.
On the other hand, a recession leads to lenders tightening up their requirements. Lenders may hedge their risk by increasing credit score requirements, reducing maximum credit ceilings, or applying higher interest rates on borrowed funds, so the best bet is to take out a line of credit before a recession hits.
Nobody knows precisely when a major recession might hit but having the option to draw money whenever it happens puts your organization in a position of strength. In the worst-case scenario, a recession may not hit or not be as bad as predicted, meaning you lose nothing but a relatively low maintenance fee with a line of credit.
Applying for a Line of Credit
It’s no secret that the future has never been more uncertain. But, despite the array of talking heads attempting to make predictions in the dark, there’s no doubt that tough times are likely to hit sooner rather than later.
At Kapitus, we specialize in matching small and medium-sized businesses with the right financial products for them. So get your line of credit through Kapitus and take advantage of an application process that could see your application approved in as little as four hours.
To learn more about obtaining affordable business financing, apply now with Kapitus.