Small business owners are increasingly worried about the possibility of a recession. Many are wondering if taking out a loan or line of credit during tough times is a wise move. The answer is that it depends on your specific situation.
If you don’t have a significant amount of cash on hand, obtaining a business loan may provide a financial cushion during an economic downturn. It’s always best to have a backup plan when it comes to finances, particularly during periods of economic uncertainty.
It’s important to note that as demand falls and the economy worsens, banks often tighten their lending standards to mitigate the risk of financial loss. This can make it harder for entrepreneurs to qualify for a loan, particularly those who lack established credit histories.
Thankfully, there are alternatives to traditional banks and credit unions. Non-bank lenders are financial institutions that specialize in lending money to businesses during economic downturns. While they tend to charge higher interest rates, they offer a range of specialized benefits such as online communications, streamlined underwriting processes, fast funding times, and more.
One of the advantages of non-bank lenders is that they have fewer stipulations about how you can spend the money. Moreover, the cost of capital can be offset by revenue-generating opportunities. For instance, if you increase your revenue by $50,000 by spending $10,000 on interest charges, the latter will matter less in the long run.
If you think you may need additional capital in the future, it’s best to start looking for business financing now. According to Federal Reserve documents, the banking crisis is likely to lead to a recession later this year. The fallout from the crisis has also caused banks to tighten their lending standards further, particularly smaller banks that are trying to preserve cash.
In summary, obtaining a loan or line of credit during an economic downturn can be a smart move, particularly if you lack cash reserves. While traditional banks may not be an option, non-bank lenders offer a viable alternative. It’s important to consider the cost of capital, revenue-generating opportunities, and the lender’s specialized benefits when making your decision.
story by: entrepreneur.com