“Credit crunch” is more than a buzzword. Nearly nine in ten small businesses say it’s impacting their growth, a new Goldman Sachs survey finds. One in five say it’s causing them to doubt their long-term survival. Even still, building financial resilience in tough times is possible. On this page, we’ll explore the causes of the current economic climate, how it’s impacting small businesses, and cover credit crunch business strategies that can help you come out on top.
Credit Bubble vs. Credit Crunch vs. Credit Crisis vs. Recession
Although many terms, such as credit bubble, credit crisis, and recession, are used interchangeably with credit crunch, they refer to different things. The credit crunch business strategies we’re covering will help in most of these situations, but knowing the difference can help you adapt your approach. While a credit bubble often leads to overly lenient lending practices amidst consumer spending, a credit crunch follows when the financial bubble bursts, leading to heightened credit standards and a restrictive financial market.
Credit Bubble
A credit bubble occurs when financial institutions are eager to lend and obtaining funds is easy. Businesses often leverage their assets to obtain working capital or purchase assets, and prices increase. Due to increased demand, lenders often fail to perform their ordinary checks before lending, and loans are given to organizations that can’t afford them. The bubble inevitably bursts, and prices fall, causing investors to lose significant sums.
Credit Crunch
Credit crunches often come on the heels of a burst credit bubble or during an economic downturn when lenders are wary about losing more money. Lending standards increase, and less money is lent.
Credit Crisis
A credit crisis occurs when a credit crunch goes unchecked and results from long-term structural issues in the financial system. It’s more severe and lasts longer than a crunch. During this stage, lending almost completely dries up, and cascading effects occur throughout the economy. The 2008 global financial crisis, which caused financial hardships for virtually all businesses and caused numerous bankruptcies, is a prime example.
Recession
A recession can occur during a credit crunch or crisis, as well as in other circumstances. Recessions are long-lasting economic slumps that include a period of declining economic activity. These slowdowns cause people and businesses to spend less, which increases unemployment rates while lowering income and economic activity further.
The Impact of a Credit Crunch Impact on Business Borrowing
“The banking situation is currently much less dire than feared,” EY notes. The organization credits “a swift policy response by the Federal Reserve, Treasury and Federal Deposit Insurance Corporation (FDIC) to reassure depositors and provide liquidity to the banking system, including via the Bank Term Funding Program (BTFP)” for the shift. Even still, businesses are navigating financial crises due to many borrowing-related challenges.
Reduced Access to Credit
The hallmark sign of a credit crunch is reduced access to credit. Lending is significantly down overall.
Tightened Lending Standards
To reduce risk, lenders raise their lending standards. For example, higher credit scores and stronger cash flow are typically required to obtain funds.
Increased Borrowing Costs
Businesses pay more to borrow due to rising interest rates. Just 29 percent of businesses say they can afford a loan, given the high interest rates, Goldman Sachs reports.
Additional Business Challenges During a Credit Crunch or Credit Crisis
Beyond borrowing, businesses encounter a myriad of challenges, including economic uncertainty and unstable industry stability, which demand a strategic review of business funding options to ensure continuity and adaptability in a volatile market.
Weak Sales
Nearly half of all small businesses are reporting weaker sales than usual, according to the latest Small Business Credit Survey. Cash inflows suffer as a result.
Slower Payments and Increased Bad Debt
Cash inflows take an additional hit as customers, also impacted by the credit crunch, begin to make slower payments and non-payment rises. Presently, 55 percent of all B2B invoices are overdue, and bad debt rates have reached nine percent, Atradius reports.
Cash Flow
The credit crunch and cash flow issues are undeniably linked, with a further 54 percent reporting uneven cash flow, per the Small Business Credit Survey.
Covering Expenses
Businesses struggle to make ends meet between cash flow management challenges and an inability to secure working capital through loans. In all, 81 percent say they’re struggling to cover the costs of goods and services or payroll, while 54 percent have trouble keeping up with operating expenses, the Small Business Credit Survey reports.
Debt Payments
Making payments toward existing debts creates additional challenges, with 32 percent reporting difficulties making payments per Small Business Credit Survey. Moreover, 35 percent of businesses have variable interest rates, Goldman Sachs reports. Of these, 88 percent have seen interest rates increase on their current loans or lines of credit, with 25 percent reporting a five to ten-percent hike.
Navigating Business Challenges and Opportunities
With ongoing economic uncertainty, small business owners must strategically adapt to maintain their growth and sustainability. As interest rates prompt banks to tighten their credit requirements, securing financing becomes increasingly challenging. The continuous shifts in the banking sector, including bank failures and sharp rises in inflation, have intensified the credit crunch. Business leaders must prepare their businesses by considering alternative lenders and revisiting growth plans to mitigate the impacts of market volatility. By understanding these dynamics, companies can better navigate these times and secure necessary business funding amidst challenging lending market conditions.
10 Effective Credit Crunch Business Strategies
If you’re experiencing issues like those outlined above, the following economic downturn survival tips can help you weather the financial storm.
1. Conduct a Financial Analysis
Long-term planning in an economic crisis can seem like a pipe dream, but adapting to market contractions starts with a thorough review of your current finances. Invest extra time in your cash flow analysis to identify opportunities for improvement and detect potential shortfalls before they occur.
2. Improve Cash Flow Management
Explore ways to accelerate and increase your inflows while slowing or reducing your outflows. For instance, find ways to get your clients to pay faster and more fully, such as by adjusting your invoicing processes or leveraging invoice factoring.
3. Protect Your Customer Base
Maintaining client relations in a recession is crucial in preserving cash inflows. Strengthen customer service channels and proactively conduct surveys to ensure you’re meeting their changing needs.
4. Cut Unnecessary Expenses
Cost-cutting techniques in a recession go deeper than trimming wasteful spending. It’s essential to review every single expense your business has and determine if it’s vital to operations or ongoing success. However, be mindful of cutting expenses like R&D or marketing, as these can hinder your growth coming out of a recession and give competitors an advantage.
5. Explore Ways to Work More Efficiently
Managing a business during a credit crunch often means making hard personnel decisions. Before you reach that stage, work proactively with your team to explore ways to work more efficiently. You may be able to cut back on labor costs by leveraging technology and automating processes or reengineering your current processes.
6. Negotiate with Suppliers
Connect with vendors to see if there are ways you can reduce your costs. They can help you find more affordable solutions, offer lower rates, or be willing to provide discounts based on your order volume or early payment.
7. Create New Revenue Streams
Addressing risk management in an economic downturn is crucial. You may want to diversify if your business relies on a limited number of revenue streams to make ends meet. Consider adding new products or services, creating new pricing tiers, or developing a subscription-based offering.
8. Optimize Inventory Management
One of the best recession-proof business practices is to manage your inventory better. Review your ordering practices to ensure you’re not keeping unnecessary stock on hand, and consider liquidating stock that you don’t need.
9. Renegotiate Existing Debts
Don’t overlook existing debts when trying to improve business flexibility during a crunch. You may be able to negotiate lower payments, reduced interest rates, or find another solution that works for you and your creditors.
10. Explore Alternative Financing Options
Traditional bank lending may not be an option for most businesses, but alternative funding options are still available. Invoice factoring, for example, can accelerate payment on your B2B invoices. It may also help mitigate risks during a credit crunch because credit checks are used to establish trade credit guidelines.
Request a Complimentary Factoring Quote from Viva
With decades of experience serving small and mid-sized businesses across the country, Viva Capital offers fast and flexible funding with competitive rates. To explore how invoice factoring can benefit your business or get started, request a complimentary factoring rate quote.
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