SME lending: a brief forecast

Typically, recessions spell disaster for small businesses in multiple ways. Consumers have to make tough financial decisions which affect their buying patterns and, consequently, companies' profit margins. Businesses often have to lay off staff or close down branches to make ends meet. And, generally speaking, organizations struggle to get loans from banks.

However, this recession isn't like others we've seen before: Businesses aren't expected to dismiss employees en masse, and demand remains high in many sectors, particularly e-commerce. All that said, what's happening regarding lending? Should small to medium-sized enterprises (SMEs) expect to have to tighten their belts when it comes to loans? Let's find out:

The current state of lending

Many businesses are steadily recovering from the disastrous economic effects of the COVID-19 pandemic. Millions of SMEs had to shut their doors (especially those in hospitality) and, while some haven't reopened, plenty have resumed business as usual. Likewise, a considerable number of financial institutions have reinstituted their company loan policies.

Whether your business should look to lending to survive the recession will depend on your unique circumstances.

Should your business be borrowing money during a recession?

Unfortunately, the answer to this question isn't cut and dry. Whether you should reach out to a financial institution for assistance will depend on multiple factors such as inflation, a company's age and its value proposition. Although the Reserve Bank is trying desperately to curb inflation and interest rate increases, they're still skyrocketing. This means paying back any money you borrow during this time will be more costly than in previous years.

Additionally, although many traditional financiers have returned to issuing credit, this may change depending on how the economy behaves over the next few months. Consequently, small businesses may have to consider whether they wish to take the risk of borrowing money from alternative sources. One option is emerging fintech (financial technology) firms that may not have the track record to prove their mettle.

However, that doesn't mean small businesses should avoid lending altogether. Choosing to cut costs may be an SME's downfall if it means sacrificing their competitiveness. In some instances, borrowing money could be their lifeline. There are specialist SME lenders who can tailor-make their credit solutions to support small businesses specifically, offering them a degree of flexibility that might be their saving grace. At the end of the day, SMEs need to do the math to determine whether a loan will help boost sales in such a way that will both help them survive the recession and pay off their debt.

We understand that it's stressful to make big financial decisions during a recession, especially when taking legalities into consideration. If you have any questions about loans when it comes to the law, don't hesitate to reach out to the Law Offices of Donald W. Hudspeth, P.C.

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