Even entrepreneurs whose businesses have recovered from pandemic setbacks may be worried about economic conditions. Ninety-three percent of small business owners said they were worried about a potential recession in the next twelve months, according to a June 2022 survey of Goldman Sachs 10000 small businesses participants.
Access to capital during an economic recession is a valid concern. It’s always smart to investigate small business financing options before you need them and that becomes even more important in an uncertain economy.
Here’s how a recession can affect your small business loan options.
Types of Small Business Loans
It’s worth reviewing the most popular types of small business loans, and when they may be useful.
Lines of credit
One of the most popular types of small business financing, a business line of credit allows you to borrow money as needed, up to an approved credit limit. It’s helpful to have a line of credit available for emergency uses as well as working capital needs. In a recession, though, some lenders may close LOCs to new draws.
Line of Credit by OnDeck
Product Updates: No More Monthly Maintenance Fee! Monthly Payments and Extended Repayment Terms (18 and 24 month terms) NOW AVAILABLE! A line of credit can be a great asset to businesses who need capital on hand- fast. It allows you the flexibility to draw funds when you need it, and you only pay interest on what you use. Once approved, you can draw available funds quickly and easily without having to provide additional documentation.
Pros
- No monthly maintenance fees
- Monthly Payments available and Extended Repayment Terms (12, 18 and 24 months) Minimal paperwork
- As soon as same-day approval and funding sent by next business day
- Transparent pricing
- Use as much as you need, only pay interest on what you use
- Access available funds with one click.
Cons
- Not available in all states.
Funding Amount
Cost
Repayment Terms
Funding Speed
Term loans
With a term loan, you borrow a specific amount of money for a specific period of time. Repayment terms range from months to years, and payments are usually fixed. If you have an existing term loan going into a recession, you’ll need to be able to continue to afford the payments, even though cash flow may slow.
Term Loan by OnDeck
This is a great option for businesses with consistent revenue, seeking competitive pricing working capital products. OD is known in the industry for their transparency and speed to fund. OD is the largest online lending company, which provides confidence to users with finding the right long-term partner to help fuel their company's growth.
Pros
- One application, two paths to finance your business - applicants are reviewed for both a Term Loan and Line of Credit
- Minimal paperwork
- Fast approval time
- Transparent pricing
- “White Glove” customer service
- Access to multiple lending options.
Cons
- Need a minimum of 1 yr time in business
- $250,000 maximum loan amount
- Not available in all states.
Funding Amount
Cost
Repayment Terms
Funding Speed
Invoice financing
If you have a B2B business (your customers are other businesses), you may be able to get paid more quickly with this type of third-party financing. Invoice factoring or financing tends to remain available in a slower economic environment, but the creditworthiness of your customers that owe the invoices will need to be strong in order to factor those invoices.
SBA loans
These are a variety of loans guaranteed by the U.S. Small Business Administration. These loans are usually made by participating lenders such as banks. SBA loan programs include 7(a), 504 loans and export loans. (Disaster loans are made directly by the SBA.)
Business credit cards
Most small business credit cards allow the business owner to access a line of credit when you need it. Most cards carry variable APRs tied to an index like the prime rate, though some issuers offer limited time low-rate or 0% APRs.
Equipment financing
Businesses that need to purchase, replace or upgrade equipment may want to look into equipment financing or leasing to preserve cash flow. Because there is collateral, this type of financing may still be available during a recession though it can be harder to qualify.
Vendor financing
Suppliers often continue to offer net-30 terms to help sell their products. Supplier or vendor financing can help businesses manage a cash crunch by providing access to the items they need to continue to create and sell goods or services. Good business credit is often helpful when it comes to qualifying for net terms.
How The Economy Influences Access And Interest Rates Of Small Business Loans
As the economy tightens, lenders become more risk averse. In addition, rising interest rates affect the affordability of small business loans. Many small business loans carry variable APRs.
The Federal Reserve has raised interest rates multiple times in 2022, and is expected to continue with a few more modest rate increases. As rates in the U.S. economy have risen, interest rates on loans have continued to go up. Depending on the speed and severity of a recession, lenders may tighten standards or stop lending altogether.
2023 Recession and Small Business Loan Availability
There’s a great deal of economic uncertainty going into 2023. That doesn’t mean businesses won’t be able to get small business loans, but there may be fewer options, especially to businesses that aren’t well-qualified. It’s smart for business owners to review their qualifications and options.
Remember the three key factors that many business lenders look at are:
- Credit scores: Personal and/or business credit
- Revenues: Lenders may require business checking account statements for proof.
- Time in business: Well-established businesses often find it easier to get loans than startups.
Recession Proof Small Business Lenders
At the beginning of the pandemic, many small business lenders pulled back from making new loans while they waited to see whether
The best way to help protect your business during a recession is to build a recession- proof business. Businesses with strong cash flow will have more options, even if lending tightens.
Reviewing your business model and business plan, adding revenue streams, and continuing to increase your customer base may be crucial to survival.
Tip: Get free help to strengthen your small business through SBA resource partners like Small Business Development Centers and SCORE.
Several types of small business loans tend to be less likely to be impacted by a recession. These include:
Revenue-based loans and financing such as business cash advances, merchant cash advances and invoice factoring. Because the business qualifies for this type of financing based on revenues, businesses that continue to bring in revenues may continue to find options, though they may be more expensive than bank loans.
Business Cash Advance by Credibly
Credibly offers flexible repayment plans with fixed rates, based on future receivables. Ideal for seasonal businesses and those with high credit card processing volumes.
Pros
- Fixed payments
- Offers the ability to pre-qualify without affecting your credit.
Cons
- Must have at least $25,000 a month in sales, Max repayment term is 15 months
Funding Amount
Cost
Repayment Terms
Funding Speed
SBA loans including 7(a) loans and microloans. The Small Business Administration generally doesn’t make loans (except Disaster Loans); it guarantees them. One of the SBA’s goals is to expand access to capital and therefore they try to make loans available to borrowers who are qualified but have trouble getting traditional loans. That doesn’t mean they are easy to get; however you may be able to find options that work among the available programs.
Business credit cards continue to be available at the moment, though that could change in a full-blown recession. If your business does not have access to business credit cards, now may be a good time to shop for a credit card with a low interest rate.
Vendor financing is often still available even during an economic downturn, simply because suppliers need to sell their products, too.
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Gerri Detweiler
Education Consultant, Nav
Gerri Detweiler, a financing and credit expert, has been featured in 4,500+ news stories and answered 10,000+ credit and lending questions online. In addition to Nav, her articles have appeared on Forbes, MarketWatch, and Startup Nation. She is the author or co-author of six books, including Finance Your Own Business, and she has also testified before Congress on consumer credit legislation.