Allow me to ease your consciousness by saying that no one can predict exactly when the next recession will come. Recessions can be like hurricanes to an economy. While the short-term pain is no solace, it often clears the landscape of unwanted debris and clutter. The last recession led by the housing bubble was painful, but put mortgage financing on a more parochial path going forward. With that said, just like a good Boy Scout, you should always be prepared for a potential tightening of credit.
Now is the opportunity to become well capitalized, when banks are lending and money is obtainable. This spigot will shut off to all but the best capitalized with the best credit when things go south. You should take steps to build and strengthen your credit history and, if possible, lock in capital now. Remember when the economy is good, capital is available to almost everyone. In bad times, it’s available only to those with the best credit and track record in managing their finances.
Whatever will be the cause of the next recession bubble, it will likely trickle-down to affect your business. Depending upon the capitalization of local and community banks, they will still lend, after all, it is their business mission, but don’t count on it being easy. The new players on the lending block that we have introduced before, the so-called Fintechs, will also disappear to only a necessary core. They will be burdened more so with bad debt than traditional lenders. During economic downturns, the Small Business Administration becomes the lender of choice. The SBA doesn’t make loans, but it does guarantee certain loans, and guess what? When an arm of the federal government like the SBA is willing to guarantee your loan, your chances of getting approved go way up.
If you haven’t been introduced to the financial concept of factoring yet, you should. This is also a method to obtain cash on an expedited basis. If the story of Drake Grey of Bowtie Marketing sounds familiar, take heed. “I was constantly checking my mail looking for checks that would pay the immediate bills. My clients would always pay, but their delayed payments meant that I was constantly delaying my rent. I occasionally had to tell employees, ‘I’m sorry, but I have to delay your paycheck.’ That’s hard.” That’s as tough as it gets without closing your doors for good.
So what is factoring? Factoring receivables is the act of selling your business’s outstanding invoices to a financing company for a discount. Through factoring receivables, factoring companies will buy your business’s accounts receivable for a discount and then collect your customer’s payment.
In essence, they are similar to a debt collection firm, whereby a creditor sells their debts to the collector for a fraction of the amount outstanding, but now their risk is off the table. Let’s say that you have $10,000 in accounts receivable from ABC Company. They are continuously late in making their payments to you. You have offered them the standard 2/10 net 30 deal, but to no avail. A factoring company like Bluevine.com will give you $8,000 and then they will attempt to collect what they can from ABC Company. While in this example it cost you $2,000, you immediately obtained $8,000 to keep your business going.
Keep an open mind regarding factoring accounts receivable if the situation presents itself.