Small business owners have to realize that the process of raising capital hasn’t always been as simple as it is now. Banks have made it easier to get credit for small-sized companies. Fintech startups are expanding lending options on the internet. The business lending market has appeared so promising that even tech giants like Amazon, Square and Paypal have launched into the market.
The way the next recession will unfold is difficult to forecast. I’ve written about what entrepreneurs need to do to ensure their businesses are not impacted by recessions. A key tip is to have a well-capitalized business. It is important to improve and build your credit rating and should you be able take the opportunity to lock in capital now. Keep in mind that when the economy is healthy capital is accessible to nearly everybody. When times are tough, capital is restricted to those who have the best credit rating and history of handling their financial affairs.
It is essential to keep in mind while you prepare for one of the most significant hurdles for small-sized businesses should they experience a new recession: a possible severe and substantial decrease in financing for small businesses.
It was exactly what happened 10 years ago , during the Great Recession. Bank loans dwindled and a lot of small businesses went under. The economy eventually recovered and small-sized businesses rebounded. Regional and community banks played an integral part in this revival and also witnessed the growth the new players that offer small-business financing. This includes online business lenders which are part of the fintech revolution. BlueVine, my company BlueVine can be considered one of them.
This is the bad news in case there’s another recession. Although we have more options now the likelihood is that another recession could bring about a significant disruption in small-business lending. In reality the impact of a credit crunch might last longer for small business owners during the next recession.
A reason for this is that community banks have experienced an extensive consolidation phase which saw many being acquired or closed which means there are fewer of them to be a part of a new revival.
However, the large banks, just like previously, are likely to reduce lending to small businesses drastically. Furthermore, the tech companies that sought out potential opportunities in financing for small businesses could pull out of this market when they first notice the possibility of losing credit.
Like small-sized companies, the key to the survival of fintech lenders as well as success is having sufficient capital to withstand the storm. This is essential even during good times. Fintech companies like Dealstruck and BizFi failed or stopped due to insufficient financing.
Another crucial aspect is to have several product lines. As I’ve stated in the past many times, the days of one-trick pony in the field of fintech is over. The availability of different kinds of financing products is a huge advantage as lenders try to meet the varied needs of small companies in a time where credit is scarce.
The availability of more products permits the lender to be more flexible, as they can adjust their offerings according to changes in credit conditions. For instance invoice factoring is an extremely excellent product to have times when the cycle shifts since the company financing it does not take the risk of small business credit. They’re taking on the risk of the payor. It’s a highly resilient credit structure in a declining market.
Long-term finance, including term loans for multiple years, are more risky during a down market. But having this as an option could be vital when the market picks up and more small-sized businesses look for capital to expand and grow.