Funding Strategies For Businesses To Weather a Recession

A growing number of business leaders and economists have warned that the U.S. is headed for an economic slowdown or possibly even worse, a recession.  Are your clients prepared?

Surging inflation is driven by a tsunami of fiscal stimulus from Federal and state governments, and supply-chain constraints resulting from pandemic restrictions have made it necessary for the Federal Reserve to begin tightening the money supply and increasing interest rates.

The Russian invasion of Ukraine made matters worse by precipitating a leap in prices for energy, agricultural commodities, and metals. The Fed will probably need to tighten faster and harder than initially anticipated. Economic pundits have begun to reduce forecasts for economic growth and start discussing the possibility of the “R” word. 

The time to prepare is now.  Financial brokers can use the following strategies to help small and mid-sized companies plan ahead to weather a recession.

Accelerate Cash Flow

The key to surviving a recession is cash flow management.  In a recession, cash flow is often reduced due to a number of things including customers stretching their accounts payable to conserve cash. As a result, business owners may experience a deceleration in their own cash flow and may have to use available credit facilities.  Having high accounts receivable balances outstanding for an inordinate amount of time can be detrimental to the sustainability of a business.  A double hit to cash flow and available credit can seriously impair a business owner’s ability to meet its financial obligations. Accelerating cash flow with invoice factoring through a factor company, such as Capstone, can help to reduce this dual impact.

Invoice factoring accelerates cash flow by speeding up the transaction cycle. Instead of waiting 60+ days for customers to pay, business owners can convert their outstanding invoices to immediate cash. They will have more cash available to fund operations and reduce the need to draw down available credit facilities.

Avoid Slashing Key Programs and Personnel

When an economic slowdown occurs, it is common practice for businesses to cut operating costs in order to conserve cash.  A mistake many businesses make, however, is cutting key sales, marketing, and product programs.  These programs are the link to customers as well as the marketplace, and the source of future growth.  Cutting key programs may cost business owners much more in the long run than they will save in the short run.

The pandemic spawned a change in the labor market making hiring and retaining personnel a major challenge for many businesses. Cutting headcount to reduce operating costs and conserve cash should be carefully evaluated to avoid recruiting costs and problems hiring people that may delay ramping up when the economy recovers. 

By resisting the urge to implement drastic cuts in these areas, business owners will be able to position themselves to capitalize on the recession and potentially scoop up market share that competition left behind through their cost-cutting.  

Increase Working Capital Facilities

Adequate working capital and the right type of facilities are also critical to weathering a recession. 

If a business owner needs additional working capital, they should apply now. The Federal Reserve’s monetary tightening and interest rate increases, combined with the possibility of a recession will make it more difficult if the business owner delays. In a tight monetary environment, banks and other traditional financial institutions tighten their credit requirements and favor larger customers while reducing their credit exposure to small and mid-sized companies. 

Work with a Factoring Company

During a recessionary period, smaller community banks and other traditional financial institutions may not be able to provide adequate working capital because of lending limits. Also, many businesses may find they will fall outside the acceptable risk threshold to access and retain lines of credit as well as more traditional business funding from these sources.  Let the prospective client know that you may be able to help in the event they are unable to qualify for increases to existing credit facilities or new facilities. 

While these financial sources prefer to lend to businesses with only positive financial performance, stable cash flows, and predictable revenues, factoring companies, such as Capstone, can often work beyond these issues and provide funding based on the quality and financial strength of a business owner’s accounts receivable.   Many businesses also often require faster approvals and access to funds than banks and other typical lenders can offer. Because of these obstacles to obtaining traditional loans, business owners should consider business financing alternatives, such as invoice factoring and P.O. financing.  

Invoice factoring and P.O. financing won’t tie up availability and can be used to supplement existing credit facilities. They are easier to obtain than bank loans, and the terms are more flexible. Alternative financing facilities can be custom-tailored to meet a client’s business requirements. More importantly, approval is based on the financial strength of the prospective client’s customers, instead of the business’s credit profile.

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Business owners can survive a recession and be in a position to take advantage of opportunities by implementing the above strategies now.  They will also avail themselves to more funding options when they are not operating in crisis mode and when the financial health of their business is at its strongest.   

Whether we’re simply seeing an economic slowdown or a full-fledged recession, Capstone is here to help your clients stay focused on what they do best – running their company.  We have the experience and resources to custom-tailor invoice factoring and P.O. financing programs for your clients.