Is A Bank Line Of Credit Smart In A Recession?
Posted on January 21, 2015 in Factoring
How can a business professional see a recession coming? If you look at economic trends in your industry and in the world at large, you can start to see the kinds of indicators that will allow you to identify a recession as it is forming. The hardest thing for new business owners to do is to buy into the signs that financial hard times are on the way, because everyone has this overriding feeling that bad things won't happen to them. When you accept a realistic point of view and understand that the economy is something that affects everyone, then you can see why contingency planning for a bad economy is so important to every business.
The Warning Signs Of A Recession Are Usually Easy To See
The warning signs of a recession are usually easy to spot, which is probably why they tend to go unheeded for long periods of time. Long before major corporations start laying off employees and small businesses have to consider shutting down their operations for good, the signals that something is brewing can be seen. For example, when the Federal Reserve continually drops interest rates, it is usually done to stabilize the economy. One or two corrections are often enough to accomplish the job. But when prime interest rates are dropped several times in a relatively short period of time, then that is a bad sign.
Another way to see a recession coming is to keep an eye on the banks. When an economy starts to slow down, banks will often react by reducing the amount of regular lending they will do to small businesses. When the bottom fell out in 2008, it was after at least 12 months of news stories about how reluctant banks were to lend operational funds to small businesses. In most cases, a recession will hit small to medium sized businesses first, and then move up to large corporations.
Large Corporations Usually React To News Rather Than Financial Results
One of the things that does not help an economy that is on the brink of recession is the predictable reactions of large corporations to potentially bad economic news. While an economy is still hanging on and trying to avoid a recession, large corporations will start cutting jobs and pulling back on spending to minimize financial damage. It is frustrating because these actions by large corporations are usually the events that push an economy over the edge.
Large corporations take these preventive actions because these actions are part of the corporations' contingency plans for avoiding significant losses during a recession. The ripple effect throughout the rest of the economy can be devastating. A recession can be just as much the result of panic and conjecture by the business world as it is the effects of a financial collapse. In some cases, all it takes is for the business world to believe it is in a recession for that recession to actually take place. Once the recession begins, it can be difficult to stop.
Banks Become Even More Reserved When A Recession Hits
Another element that perpetuates a recession is the reluctance of the banks to release funds to small to medium sized businesses. For many of these companies, bank funding is their contingency plan for when an economy goes bad. But when that bad economy causes the banks to close their vault doors, then those businesses are left scrambling for other solutions. This is why it is common to see large corporations laying off employees before small businesses do. Large corporations are taking preemptive measures when they lay off employees before a recession hits, while small businesses are usually reacting to a lack of funding caused by the recession itself.
A small to medium sized business that relies on a bank to supply its funding in a recession is in for a rough ride. Banks will usually require collateral for funding in tough economic times, and physical collateral is not always something that small businesses can easily produce. The downward spiral gets enhanced when a small business cannot secure the bank funding it needs during a recession and that business is forced to make decisions that could eventually lead to its demise.
A Bank Line Of Credit Is Not A Reliable Financial Tool In A Recession
What about the small to medium sized businesses that already have lines of credit through their banks? What can those companies expect when they try to use their lines of credit to meet payroll or pay vendor bills? A bank during a recession is going to be reluctant to extend the line of credit for a small to medium sized business. The business owner is going to need to find a way to exist with the line of credit that he has and accept the fact that financial help is not coming.
Banks also tend to raise interest rates on lines of credit during a recession, and they also become very strict about the rules associated with that credit source. If your payment is late, you can expect late fees and you can expect your interest rate to go up. If you miss a payment, you could have your line of credit revoked. The proper solution is a business line of credit that does not rely on the mercy of the bank.
1st Commercial Credit Is Your Recession Funding Solution
1st Commercial Credit is an invoice factoring organization that can create a flexible business line of credit based on the strength of your invoiced sales. During a recession, your company is still taking in purchase orders and generating invoices to clients. But the drop in sales due to slow economic times, and the rise in past due invoices, puts a clamp on your company's cash flow. That is what sends you looking for bank funding in the first place. If you could fix your cash flow, then you would not need the bank line of credit to make your payroll payments and pay your vendors.
We use your outstanding invoices to creditworthy clients as collateral against cash advances that are sent directly to your company bank account. We have billions of dollars in resources that can be used to make sure that your company has the kind of cash flow it needs to survive the recession. We turn your invoiced sales into a flexible business line of credit that cannot be taken away and is always available when you need it. We do not charge any set-up fees and we do no have any per month or per invoice minimums. We can make sure that you always have cash flow, even when your competition is drowning in bad economic times.
Our process utilizes the credit scores of your clients and not your company credit score. That means that we can help you if you have bad credit, or no credit history at all. 1st Commercial Credit is not a bank, which means that we will not arbitrarily take away your funding. As long as you have invoiced sales from creditworthy clients, then 1st Commercial Credit can provide the business line of credit you need to beat the recession.