No matter its size, no business is recession-proof. And this goes double for small businesses. And with the increasing number of concerns about a future recession, it’s more than fair for small business owners to be looking into ways to financially insulate their businesses.
One of the best ways to protect your business is to increase your financial options. And one of the financial options small business owners ought to consider is a business line of credit. While a lump sum you’d get with a business loan is helpful and definitely has its place, a business line of credit offers more flexibility and doesn’t force you to start repaying upon access to the funds.
With lenders traditionally tightening their underwriting requirements in a recession, now is the time to consider the benefits of a business line of credit.
Key Takeaways
- Stabilize your cash flow with a business line of credit
- Cover payroll if you experience an economic downturn
- Gain a reliable supply of working capital
- Pursue recession-based investments and opportunities
- Taking out a line of credit benefits forward-thinking businesses
Benefits of Opening a Business Line of Credit in 2023
Odds are, the US economy is nearing a recessionary environment, with economists predicting a 70% chance of a recession this year. Opening a business line of credit gives your business a credit-based cushion. That credit can help you take advantage of new opportunities or simply take the pressure off your current expenses.
Let’s examine why several business owners are considering the benefits of a business line of credit this year.
1. Flexible Access to Business Funds
Recessions can hit hard and fast, and with that drop comes a drop in consumer spending. A recessionary environment doesn’t just drop your access to customers either; it can also make materials and even general inventory harder to get ahold of.
A drop in working capital and a lack of cash flow is the perfect recipe for a business closing its doors. Having access to a line of credit gives business owners the chance to weather the impacts of slow seasons or outright recessions.
2. Only Pay Back What You Withdraw
A line of credit benefits the business owner that doesn’t have a clear borrowing timeline. As a form of revolving credit, lines of credit only require you to repay what you borrow from or draw on the line.
As long as you stay within your credit line’s limit, you can continually draw on and repay until the line expires.
3. Improve Cash Flow
Decreased cash flow is one of the biggest threats to your business. And that threat gets even more menacing during a recession. On that, a study found that approximately 82% of small businesses fail because they need more capital to cover payroll, materials, and outstanding supplier invoices.
While not every business weathers a recession in the same way, businesses with already thin margins are at the highest risk when the economy takes a downturn. According to CNBC, these are the five industries historically affected the most by recessions:
- Construction
- Travel
- Manufacturing
- Hospitality
- Real estate
Industries that have high upfront investment and pay in sometimes have equally high margins – eventually. In an example like this, businesses may spend their first years building up a customer base and recognition while making a minimal profit. Once their initial investments pay off, (be it machinery, a facility, or even an aggressive marketing campaign) businesses like these can see much bigger profits. But this can only come to pass if a business is financially strong enough to make it through their opening years. A business line of credit can be a great tool for a company already in their journey to increase their financial options while making a bigger investment in their business.
Businesses with a lower profit margin can use a line of credit to help get them through slower seasons or while they are waiting on payment from customers.
4. Cover Unexpected Expenses
Recessions put pressure on every branch of your business. And that pressure can lead to the weakest branch snapping. In business terms, recessions force small businesses to perform in less than stellar conditions. You may be forced to spend more on materials you depend on or find yourself paying more for utilities.
These unexpected business expenses can leave you unable to invest in other areas of your business or prop up the battered arms of your organization.
Taking out a business line of credit adds a cash flow barrier to a business’s bottom line – meaning that unexpected expenses can now have a place in your budget.
5. Build Your Business Credit
Using a business line of credit responsibly and within your means is also a great way to potentially build up your business credit. Habitually drawing manageable amounts of your line of credit and paying them back on a timely basis can only be a good thing for your business.
6. Protection Against Revenue Dips
During the 2008 recession, the US GDP fell by 4.3%. Prices and expectations for supplies changed overnight and proved no business can be too prepared. We’ve seen similar supply issues over the past few years as a result of the pandemic and inflation. Having a line of credit is like having a first line of defense against downturns or increased prices. While you can’t depend on a line of credit solely, businesses with access to viable credit are often the most likely to weather downturns or outright recessions where cash flow cuts fast.
7. Help Meet Payroll in Slower Months
In slower seasons, recessions, or even with day-to-day operations like a large inventory purchase, it’s possible to use a business line of credit to cover operational expenses, like payroll. While this, once again, can’t act as a permanent solution, a business line of credit gives businesses the flexibility to test out new ventures or as a means to hold on during slower seasons.
If you’re expecting slower months ahead in 2023, take out a line of credit now as an additional layer of protection.
How Can a Line of Credit Help Your Business Expand?
Rising inflation, increasing interest rates, and a looming recession don’t affect all businesses equally. Where some businesses may be forced to hunker down for the length of a downturn, there are other businesses that may be able to expand during a recessionary environment.
Here are some ideas for how a line of credit can lead to new opportunities:
- Invest in New Inventory – It’s not just small businesses that face price fluctuations during a recession. Suppliers see it too. Pay close attention to your supply lines. While some suppliers will certainly raise prices, others looking to increase cash flow could do just the opposite. A business with a good line of credit could then take advantage of the timing and increase its inventory.
- Expand Your Marketing – While many businesses may choose to lower marketing costs during a recession, this just means that your business can take up a more competitive edge. Invest in your marketing during a recession to potentially increase your overall reach and find new customer bases.
Opting for a line of credit is both an offensive and a defensive measure for small business owners. Not all lines of credit are the same, so ensure you choose a lender that you can trust. At Kapitus, we specialize in getting ambitious business owners lines of credit (along with a number of other financing options) with strong track records of success.
Get ahead of the competition and take advantage of the multitude of benefits that could come with a business line of credit. To secure the financial future of your business, apply now for your line of credit.