The backdrop of macro factors facing small businesses as we enter 2023 is as follows: higher wages, a strained supply chain, increasing interest rates, a Republican-led House with a Democratic-led Senate, liquidity and asset repricing occurring for banks and credit unions, and ongoing geo-political uncertainty worldwide. The lending environment facing small businesses will be challenging as we enter 2023, but this should not deter small business owners from prospering in the coming year.
Small business owners have demonstrated the resiliency to survive and thrive in the face of higher interest rates, a global financial crisis, a pandemic, and much more. Despite the strength of small business owners, they must retool their financial house to take advantage of conventional, alternative, and government lending programs delivered by partners looking at longevity.
Using history as a resource, small business owners must find ways to maximize efficiency, control costs, organize, and understand the business’ capital needs. In a rising rate environment, most companies shrink as the funds that can be used for reinvestment are now earmarked for higher borrowing costs. In this article, I will provide the three crucial steps small business owners need to take now to secure financing in the coming year.
1. Get your financial house in order
The first thing is to get your financial house in order. This includes organizing your records, financial statements, history, business plan, and other documents. By doing so, the small business owner can conduct a self-assessment of their business, serving as the foundation for building their strategy. Small business owners should do a comparative analysis of their business and their competition’s performance in the market. They should be frank and forthright about issues that will come up during due diligence.
Next is for small business owners to create a business story. They should look back and note the factors contributing to the success, competitive advantage, and recession resilience. By creating a clear narrative for the year-to-year growth, a banker will clearly understand what a small business owner has done for the last few years. Anyone reading this information will see that they are looking at a business that survived the COVID-19 pandemic and kept business profitable.
The idea is for each small business owner to control their narrative through a well-documented and organized financing package instead of providing documents that lead to confusion and questions. A small business owner that is frank and forthright about the issues that come up during due diligence has a better chance of being trusted by investors.
2. Have a budget forecast & cash flow projections
The second thing to do is to have a budget forecast and cash flow projections for the coming twelve months inclusive of a staffing plan, as that is a large expense line item in most businesses. When presenting your package to any financing institutions, they will want to see you have a recession playbook for the next twelve months, which is best explained with a budget and cash flow forecast.
If the owners are considering taking on new debt for growth or an acquisition, they must know what factors can derail the business plan. Small business owners should take stock of internal control measures that can be implemented to ensure an unbiased view of evaluating business success. It is crucial to know how flexible the business strategy is, how the management team pivots with market conditions, and more importantly, how the business identifies headwinds to course correct.
Displaying your commitment to good business practices when presenting a package to capital investors will increase your chances of securing funding. Establishing how you plan to repay debt, and how you have possibly repaid debt in the past, will improve your credibility with investors.
3. Be specific about your business’ financing needs
The third and most crucial step is to be clear about the capital needs of the business. Are the business needs short-term, long-term, transaction-based, or development related? Asset purchases are long-term in nature and are repaid from net profits. Short-term working capital needs are met within the Cash Flow Collection cycle and gross operating margins of a business. If you need working capital, then don’t request a term loan, or if you need financing for a one-time purchase order and don’t ask for a working capital line.
Knowing the difference between what you seek and how it will be repaid is the key to success. Show how debt repayment occurs on the same basis as forecasted business performance — best, real, and worst-case, respectively. Look at historical performance, show the ability of the business to absorb the debt, address the lack of repayment, and what factors make repayment highly likely.
Understanding what you need for your business and being prepared to show your financial statement, cash flow projections, and budget will help communicate your message very clearly to capital providers. When presenting the financing needs of your business, it is important to be clear and straight to the point.
Alternative lending options can support growth
The small business landscape can change with natural competition between non-bank lenders as they are the most likely institutions to provide higher-risk loans to SMEs as opposed to traditional banks or credit unions. The entrepreneurial spirit of the small business owner and a deep-seated desire to succeed will lead the economic recovery in the United States. This will result in continued growth and capital support for small businesses.
Despite the looming fears for the upcoming year, the environment in 2023 will be supportive of accounts receivable financing, purchase order financing, and short-term working capital. By getting their financial house in order, creating a budget forecast and cash flow projections, and being specific about their business needs, small business owners can lay the foundation for securing financing in the coming year.
Sundip Patel is the co-founder and Chief Executive Officer of AVANA Companies, the holding company for ESG fintech platforms serving entrepreneurs and investors since 2002. Sanat Patel is the Chief Lending Officer of AVANA Companies, as well as a co-founder of the legacy company AVANA Capital.