Published April 26, 2023
Pain. Federal Reserve Chair Jerome Powell promised all of us some of that when interest rates began rising to curb inflation. And he wasn’t wrong – consumers and businesses are feeling it.
But some are feeling it more than others, and it was always going to be true that businesses with less access to flexible capital would be the ones shouldering more of the pain promised by Powell.
That means if your business falls into this category – and the great majority of businesses do – it’s especially important to reevaluate your capital strategy.
But how should that strategy look in the face of continued uncertainty? Here are five best practices to help guide your thinking:
- Maximize access to capital. Ensure you have relationships for working capital, equipment/technology, projects, acquisitions, and even real estate. This may mean working with multiple lenders, depending on your situation.
- Preserve cash and cash flow. This is important at all times but absolutely essential in times of decline. Leveraging low-cost, 100% financing debt is often preferable to sending cash out the door to invest in low-dollar but mission-critical capital expenditures. Similarly, using your bank revolving line of credit to fund equipment/technology purchases may also lead to unnecessary cash and cash flow disruptions.
- Concentrate more on the benefit of the investment than the cost of capital to obtain it. Rates are rising everywhere, so focus on your cash flow and how the payments fit. Understand when your investment could start affecting your financial results and match that time horizon with the payment stream to begin calculating a cost/benefit and ROI. Remember, the most expensive capital is equity (your cash), and overreaction to higher rates might lead you to believe the opportunity is not worth the price. But even with rising rates, the ROI is often still there. That’s why nearly half of all businesses are still investing capital into decline.
- Specialty relationships matter. Having a real estate lender that understands your type of need may lead to better overall terms. So can partnering with a working capital lender that can fund a project need without disrupting your primary line-of-credit relationship. Having maximum access to capital is often a function of seeking partners with deep experience in what you need and what you do.
- Talk to your lenders. Not doing so is perhaps the biggest mistake many businesses make. Proactive conversations with your network of lenders about your challenges, concerns, opportunities, and vision can be the difference between their ability to fund against those issues or not. Bring your needs to the table and brainstorm. Get creative. Most businesses find this invaluable.