While numerous economic indicators continue to plunge, lenders have been tightening underwriting guidelines to reduce their risk exposure.
This shouldn’t surprise anyone considering the fact that we all can see the impact of inflation first hand, and most of us have either been laid off or know someone who has. Rising costs and layoffs have led to declining consumer confidence, which unfortunately also then leads to further a reduction in revenue for small businesses.
To put into context just how dangerous that is, you just have to know what percentage of America’s workforce is employed by small businesses.
Most people drastically underestimate the number. Do you think it might be 10%? Maybe 20%? Is it possible that it could even be as high as 30%?
The real number is significantly larger.
The percentage of the American workforce employed by small business is a staggering 46%.
Entrepreneurs tend to be survivors, though, so rather than simply caving to tough economic times, many tend to seek funding to bridge the gap. This helps them survive, and in many cases, thrive through economic slowdowns. Unfortunately, many entrepreneurs today are facing another challenge—they’re unable to find or get approved for the funding they need.
“That shouldn’t be the case,” says business credit expert, Amanda Webster. “There’s no question that a weakening economy has led to more stringent underwriting guidelines, but that doesn’t mean you can’t still get funding for your business.” As the Chief Operating Officer of the business funding firm, Fund&Grow, Webster works with entrepreneurs in virtually every industry, and says she doesn’t generally see them having a challenge getting funded.
But as the noted financial expert, Dr. David Phelps outlined in a recent article, smart money—which includes institutional funds managed at giants like Blackrock, Vanguard, and Bridgewater, tends to move into specific sectors during economic uncertainty. The money managers behind these financial firms also and focus on capital preservation rather than growth at times like we’re facing today. This leads to not only stricter guidelines, but also more competition for a smaller pool of available capital.
“It all comes down to knowing what’s available on the market today, and understanding what lenders are looking for. This enables you to apply and negotiate in a way that maximizes your chances of getting funding in the first place, as well as maximizing how much you receive,” she explains.
Webster says the key is starting with a proper strategy.
“There are thousands of options available, and each performs differently in different situations so it’s critical to match your credit choices to your unique situation. It’s not a matter of just applying for everything you can find.”
Now when you think of borrowing money for your business, you probably think about talking to your local banker or maybe even applying for an SBA loan. Those are the traditional choices, and were some of my first thoughts. But Webster says there are better options for most entrepreneurs.
She explains, “Hands down, the most underrated business credit option available are credit cards. It’s not even close.”
We all know the things we can easily use credit cards to pay for, like software, supplies, and even contractors fees. Webster says that we’re not limited to certain types of purchases though. “You can use a business credit card to purchase literally anything—you just have to understand the process for doing that without it being treated like a cash advance.”
This is a hard concept for many to accept, according to Webster. It’s understandable that people feel this way because most of us have never heard of anyone using credit cards to purchase large assets like vehicles or real estate, so it’s a foreign concept. But it is a legal and completely acceptable practice. The biggest stumbling block to acquiring business credit, however, Webster says is the myth that we won’t need to sign a personal guarantee.
“Until you develop a strong credit profile for your business by consistently using it properly, you will be required to provide a personal guarantee. There is no way around that, and anyone who tells you otherwise is either uninformed or lying,” she said.
A personal guarantee is essentially a promise to personally repay the debt in the event that your company is unable to. It’s a common clause in many contracts today, including phone and internet services, utilities, and commercial rent, to name just a few. So personal guarantees are a standard part of business, and it could even be argued that if someone is worried about a personal guarantee, they may not be as committed to the business as they should be. Whether you believe that or not, lenders see it as a sign that you have skin in the game.
Webster says that over time, if a business’s credit is managed properly, the personal guarantee can eventually be eliminated. She explains this typically takes a minimum of five years of consistent effort towards building and improving your company’s credit profile.
So despite the legitimate concerns about the state of our economy and today’s more stringent underwriting standards, plenty of credit options are still available for entrepreneurs. It just means stepping outside your comfort zone and getting educated about how credit really works.
