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Facts: Some Small Business Owners Should Consider A Line of Credit in Case of a Recession.

Recently Bank of America (BOA) conducted a survey that small business owners should prepare for a recession. The behemoth institution claimed that, “More than 2/3rd of business owners have taken steps for an economic downturn.” Forecasting is extremely important for financial markets and no one can truly predict what Mr. Market is going to do. Of course, finance pundits, companies or banks that have been in existence for more than a quarter of century can be a slight exception – why? Historically, having survived other economic downturn and recessions, these companies that lived thru the darkness of it and survived financially can be a resource for future outcomes. The key word here is “resource” not “certainty.” Consequently, despite all of this, it is empirically difficult to predict with 100% certainty when an economic downturn or recession will exactly occur. This article is not a dissertation about the subject matter, nor a thorough case study about multitude facets of “economic bubbles”, but only a short piece to analyze and reiterate a couple of points made by BOA about small business preparedness for a recession.

Below here’s a timeline table 1 of the Great Depression onward. You will notice what the Gross Domestic Product (GDP) concentration was, the duration of the recession and the length to the next recession. Notice the last row depicts The Great Recession (Dec 2007 – Jun 2009) with a duration of 1 year and 6 months, and the length to longest Next Recession clearly was the Recession of (Jul 1990 – March 1991) with a length of 10 years until the Next Recession. Currently the length of the Great Recession of 2008, which occurred due to housing collapse subprime mortgage crisis in the United States in relation to the global financial crisis has reached 11 years and 4 months in length. Could this historical table below be indicative that another recession is looming around the horizon? The answer to this question is not exact or definite, but it is imperative to study the relevant trends.

Table 1. Great Depression and Other Recessions onward

Source: National Bureau of Economic Research

Point Number One: Based on BOA survey, “69% of small business owners who started preparation for a recession, only 19% had opened line of credit (LOC).” The bank did not stipulate a range for the number of businesses (i.e. 330) that participated in the survey. As such, this could be more of a marketing endeavor to entice owners to open LOC. Is this bad or good? This is dependent on the impact of an actual recession. For instance, as a small business owner if you obtain an unsecured LOC, by the way most big banks will issue a secure LOI due to many risks of default associated with the borrower. An unsecure LOC is more flexible than a secure LOC because of many factors, but one major aspect of it is no submission of collateral. Your business and personal assets cannot be seized if you default on payments, however your interest rates (i.e. 6.75% as opposed to 4.25%) will be much higher.

  • Imagine: (1) having a LOC whether secure or unsecure during a recession and 50% of your business submerge in negative cash flow due to departure of many customers for six months straight; and the disbursed capital you withdrew in advance must be paid to satisfy the debt – not a very good situation.
  • Now: (2) imagine in the same situation, you have fluctuations in monthly cash flow, revenue is decreasing each month, and you need more inventories from China to keep your business afloat during the economic downturn, having a LOC will be a very good solution.

The point is as a small business owner, assuming you meet all lender’s term and criteria based on credit profile and other risks profile, an unsecure or secured LOC most likely will save your business during a recession.

Point Number Two: The survey also stated, “48% of business owners felt the national economy would improve over the next year, down from 55% last fall.” Again, the institution does not give a range for average of businesses of where the percentages were extracted. Is the 48% coming from 200 business owners who took the survey or 1,000? That would have given a better accurate perspective, especially when the reference is about the “national economy.” The important note to absorb here is that the percentages are down – meaning many other factors could have contributed to declining owners’ sentiment, in addition to the cost of healthcare and impact on trade wars as the survey alluded to. As a small business owner these percentages can help determine whether it is time to secure a LOC from a lending institution. As table 1 above showed, recession will always occur. Even before recent economists and Government started to keep track of these trends, they also occurred and were documented in many ancient civilizations and empires pre-dated the current ones. Ultimately, the best way for a small business owner or any investor to prepare is to acknowledge the trends and pay close attention to robust research conducted by major institutions or independent research firms, because no one truly knows the exact year, month, date, and time.

Source:

Imani, Moise. Small-business owners are preparing for a recession, survey finds. MSN/Money, 30 April, 2019 https://www.msn.com/en-us/money/smallbusiness/small-business-owners-are-preparing-for-a-recession-survey-finds/ar-AAAKi1r

By: Ibsen Alexandre

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Ibsen Alexandre offers his opinions about real estate finance, business, and investment at www.Refivest.Com and other real estate publications. He can be reached at ibalexandre@refivest.com

The opinions expressed herein are those of the author(s) and do not reflect the view of a particular firm, its clients, any respective affiliates nor any Media Platform. This article is for educational general purposes only and is not intended to be and should not be taken as solicitation for investments nor lending.

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