As a business owner, have you ever felt like an accordion, or perhaps more accurate, the subject of a magic trick where forces are pulling you in opposite directions that are difficult to be reconciled?
In today's environment, that appears to be the feeling of many small family businesses, where the cost of goods is exploding due to out of control inflation, while, at the same time, the cost of capital from lenders is increasing with the Federal Reserve Bank indicating more increases are on the horizon. It is a recipe for operational and economic disaster, coming sooner rather than later.
Following several years of relative growth and outside unanticipated governmental support (PPP, EIDL, ERC), coupled with lenders being "accommodating" and "flexible," the current economic climate is VERY different. The Fed recently announced a half point increase in lending rates, which will almost certainly, and immediately, drop to borrower lines of credit nationwide. For borrowers that were transacting right up against their lines or collateral values, this news should spark conversations with trusted professional advisors to consider strategies to weather the financial storm, take actions to ensure that the business is (or soon will be) providing maximum productivity and profits to ultimately protect the asset(s) that the operating business (and ancillary businesses) provides.
In any enterprise's ordinary course of business, borrowers look to line availability to fund purchases of inventory, make capital improvements, maybe even look at additional lines of business. However, under the current economic climate, the costs of those items are increasing (even if you enjoy leverage from economies of scale) every day due to the burgeoning debt and worldwide inflation setting in everywhere. Admittedly, it will be commonplace to consider raising your prices as a solution, but does price increases really solve the problem of increasing costs without sufficient availability to capital to fund the purchases? No, it does not.
What is a borrower to do when, quite literally, these four walls are closing in on operations (even if you do not see it today, if you look to the near horizon you can see it approaching)? Solutions do exist, and reasonable plans can be put in place, but flexibility and options are key to finding the best solution on an appropriate timetable.
The best, and most blunt, advice this author can provide for borrowers facing down this tsunami is to address it head on. Connect with your professional advisors, even for a check in to explore options (be it lending flexibility, ways to achieve greater volume leverage, requiring shorter payment terms, conducting additional diligence on customers, communications with your lender, or other more aggressive tactics and strategies). Regardless of the correct solution, the earlier a borrower looks at the impending impact of the adversity coming from inflation to cost of goods (and labor) and the real world impact of rising interest rates, the sooner that borrower is on to success in emerging from the storm.
It can be done – and will be done by many – but the best successes will come to those who are early to act and can take advantage of market factors, including competitors that are slow to respond, and plan out a victorious direction.
Success starts with ownership and management, progresses to use of ideas from trusted advisors, and ends with execution of a timely and well-developed plan. This approach can avoid true and overwhelming distress and possible adverse actions forced on the business.
The author and his practice team at Wickens Herzer Panza are well versed in the options available to help solve these distressors. Please do what is best for you and call a day too soon rather than a day too late.
This article provides an overview and summary of the matters described therein. It is not intended to be and should not be construed as legal advice on the particular subject.