First, with rising prices on supplies, gas and even employee health insurance, small businesses that are already struggling, cash flow negative or break even are going to see their costs unavoidably increase. Businesses in these situations are inherently unstable, and become higher risk for lenders. During a time of economic uncertainty (or potential recession) they are less than ideal credit risks.
The second source of problems comes from the lenders themselves. Lenders buffeted by the recent shocks are losing faith in their own good judgment, and fear is creeping into the credit market as well as the stock market. Good companies with positive cash flow that should otherwise have no trouble obtaining loans see that some sources have dried up completely.
The good news is that good lenders who know their business are still around and operating. And these are the better sources of debt anyways. Additionally, some financiers have identified opportunities in the debt market and are raising funds to address any illiquidity that might arise. Although they frequently entail "venture debt" premiums, this is an option available as last resort.
For a small business, a few steps to take are readily apparent:
- Conserve cash - reduce expenditures and unnecessary, long-term investment.
- Don't be afraid to renegotiate pricing with unprofitable customers.
- Renegotiate vendor contracts as possible.
- Owners should be prepared to "self-fund" loans in order to get the company through the storm. That may mean putting off an expensive vacation or home renovation.
- Maintain day-to-day activities. Business as usual - important for keeping the revenue coming in, and maintaining confidence with customers
- Consider strategic partnerships within the supply chain (and even with competitors!)
A couple of examples: a small IT company with about $1M in revenues, negative cash flow and $200k in debt found itself unable to extend its lines of credit (and meet payroll). It was forced to take a hard look at operations, reduce workforce, and renegotiate contracts to become cash flow positive.
As an example of a solid company pressured by its bank: a company that had been in business for 20 years, had about $5M in revenues and 15% EBITDA margins. Unexpectedly, the bank cut its revolving credit, which was used to maintain inventory. Since there was consistently level of assets and cash flow to collateralize, as well as a long history of stable performance - the only explanation for the change in lending is because of the bank itself.
Best of luck, and remember that just like reports of wars and plane crashes, much of the news focuses on sensationalist journalism that doesn't affect most people's day-to-day lives.
