There are many reasons to use small business financing, including getting out of debt. In fact, it’s almost impossible to find an SME that hasn’t taken a single loan or used some other type of credit. However, it’s also true that many small business owners aren’t very responsible when managing business finance. Due to this, many companies accumulate too much debt too fast. Therefore, they are unable to get a positive balance and fail over time.
Right now, due to the pandemic and the resulting economic crisis, SMEs worldwide are in a difficult situation. They’ve been hit extremely hard and over 20% of small businesses have already closed, most likely permanently. Quite a few more aren’t expected to make it as the global economic recession hits full force.
Right now, financing is the only option the majority of companies have to use in order to survive. Therefore, business debt is growing uncontrollably. This can lead to another crisis, and that’s when the COVID-19 recession hasn’t even reached full force yet.
Overall, the situation is bad. However, small businesses have no choice but to persevere. This means that they need to learn how to manage their debt with extreme care.
Small Business Financing Options in the Current Pandemic Reality
First of all, it must be said that small business financing goes down during any economic recession. It also takes a while to recover after such global turmoil. After the 2008 economic crisis, lending to SMEs was slow for over five years. It has only gotten better around 2018 and the 2020 crisis has erased all that progress ruthlessly.
The main problem is that a recession leads to greater economic volatility. Therefore, lender risks increase. As small businesses are a risk on a good day, banks and other big financing institutions become a lot more reluctant. That’s why they make eligibility requirements for loan applications more demanding.
However, this reluctance from banks in the aftermath of the 2008 crisis led to a change in the financing industry. The demand for loans was still huge, so there appeared alternative lenders offering business finance. These businesses are a lot more flexible in their eligibility requirements. They offer different types of business finance, each sui9ted to different circumstances.
Alternative lenders often have higher interest rates compared to bank loans. However, it’s reasonable because they take greater risks. They usually offer options like unsecured loans and small business financing for those with a poor credit score. Loan terms are often highly flexible, so business owners can negotiate fair terms.
Another method of financing that offers an alternative to banks is credit cards. Both personal cards for business owners and business cards for companies became very popular after the previous recession. There is no arguing the fact that this type of business finance is very convenient. However, cards usually have high interest rates and are not a good long-term financing option.
All these types of small business financing providers exist today as well. However, because of the high risks associated with the pandemic and global recession, they are now mostly inactive.
How Does the Slowdown of Lender Activity Affect Business Debt?
Lenders almost stopped loan origination today. However, business debt is still growing. That’s because SMEs are forced to use options that are often unsavory and come with huge interest rates.
Government relief programs helped curb this situation a bit. However, that type of small business financing has almost run out. Therefore, smaller companies need to look for loans elsewhere.
In these circumstances, there is no surprise that business debt is growing rather fast. Even government support programs come in the form of loans. They should be forgiven, at least in part. But that has yet to happen.
Therefore, business finance is now strained and billions of SMEs are on the brink of crisis. This is exactly the time when the majority of them are accumulating debt too fast. If you are one of those who have fallen into this trap of circumstances, the following tips might help.
How to Avoid Growing Your Business Debt Too Much and Too Fast
- Reevaluate your budget.
Before you start thinking about any type of business finance, you need to take a close look at your budget. Revise it completely to see exactly how much money you have available and how much debt you have already. Move from there to decide whether you should be looking for a loan or filing for bankruptcy. Unfortunately, the latter might be unavoidable for some businesses.
- Look into debt consolidation.
Once you’ve gotten a clear idea of your current debt situation, you should start looking for small business financing providers that can help with refinancing. Debt consolidation can be a good idea now, in particular, because interest rates go down during a recession.
- Cut your costs to the maximum.
Cutting your costs is one of the most important things to do when dealing with business debt. However, at this rate, you need to go beyond things like office supplies and utility bills. If your business is in serious trouble already, you should consider things like changing suppliers. You might also need to stop offering some products or services completely if they are too costly for you. Sadly, this also means letting go some of your employees. But remember that skimping on severance pay isn’t an option in this situation!
- Prioritize debt payments.
If you weren’t able to consolidate your business debt, you need to consider each individual loan. Then, think about which payments are a priority. You will be defaulting on some without a doubt. Therefore, the only thing you can do is to try reducing the damage.
In Conclusion: Use Small Business Financing Wisely to Avoid Getting Swamped by Debt
It’s true that business finance is hard to come by right now. but it won’t last forever. However, with such a distressing economic situation, the risk of your business debt growing uncontrollably is huge. Therefore, you need to be much more cautious about it than usual. The most important thing to do is to revise your budget and do all the cost cuts you can. It’s imperative to use what money you have with maximum efficiency. Even if this means reducing the number of your staff, products, and generally downgrading everything possible to stay within the new budget.
Kate Bregovic has been working in the financial planning and investment services industry for over 10 years. Now being a freelance writer, she is well equipped to provide advice on a wide array of areas. Follow her on Facebook!