By Ben Johnston, Chief Operating Officer of Kapitus
Businesses face a number of challenges today, including the residual effects of ongoing inflation and elevated cost of capital due to a higher interest rate environment; the impact of proposed tariffs driving up the cost of materials; and a tight labor market making it challenging to hire skilled workers. These factors combine to make it a tricky landscape for business growth. Here are a few key things to consider.
Tariffs:
President Trump has proposed considerable tariffs on the import of foreign goods and materials across our largest trading partners. Tariffs of this scale and breadth could, over time, make manufacturing in the U.S. more economic relative to importing goods and materials from abroad. But in the short to medium term, these tariffs are likely to drive inflation significantly higher and cause significant disruption to the global supply chain, threatening many U.S. businesses who rely on the global supply chain to source the components, raw materials, and finished products they sell. We can expect these tariffs to both spur inflation and lower overall consumption, slowing the economy.
Businesses that import critical goods and materials from abroad should determine if it is possible to source these goods and materials domestically. If domestic production would prove uneconomic, business owners will need to pay close attention to the tariffs being levied and which countries they are impacting most. Working quickly to move production from one country to another could prove valuable should certain countries receive stiffer tariffs than others with similar production capabilities.
Growth and Expansion:
Businesses should be judicious in their expansion plans right now. In uncertain economic times it is important to focus on services that provide a demonstrated value to customers. Before expanding services or opening a new facility or new office space, it is important to thoroughly test the market to determine demand and pricing power. Make sure that anticipated sales will more than cover anticipated expenses and be sure to have access to sufficient capital to cover several months of operating expenses in case sales take longer to materialize.
For businesses who borrow money to purchase inventory, acquire equipment, and fund expansion, it is important to maintain multiple financing relationships. Banks have been pulling back from lending to businesses, and having contacts at multiple lending institutions can help secure the fastest and lowest-cost capital when borrowing is required. We have also seen the equipment finance market impacted by banks’ reduced willingness to lend, making it more difficult for business owners to finance their equipment purchases. If businesses are having trouble obtaining financing they should:
- Speak to as many potential financing sources as possible.
- If purchasing equipment, work with the equipment vendor to explore financing options through that vendor’s financing partnerships.
- Talk to the local bank to understand their lending criteria and collateral requirements for commercial loans.
- If those resources don’t prove fruitful, there are a number of independent non-bank lenders that are willing to lend money quickly, albeit at higher rates than a bank.
Fortunately, businesses with strong credit profiles and a history of financing essential use equipment have quality options both with banks and non-bank lenders. However, business owners should expect a higher cost of capital than in years past and therefore should calculate the cost of the financing relative to the expected profits that the financing will generate, to ensure a positive return on investment.
Cutting Costs Through Efficiency:
There is no silver bullet for cutting costs without compromising efficiency. However, businesses looking to reduce overhead while maintaining or increasing efficiency will likely need to do so through automation. Accessing new technologies that allow businesses to operate with fewer employees and faster processes will make the business leaner and more scalable. Examples of scalable technologies being employed by businesses today include: installing software that can better manage inventory; implementing robotic processing tools to perform repetitive tasks inside warehouses or processing facilities; and deploying AI tools to allow employees to access critical information and draft standard communication faster and more accurately. These investments save time and allow the business to operate with fewer employees, reducing friction created by growth and allowing the business to operate at a lower cost-base.
With ongoing inflation, it is prudent for business owners to look for ways to lower overhead costs, capitalize on potential efficiencies, and consider offerings that may be more appealing to customers in a slowing economy. Here are some things to consider:
- Inventory: Assess current inventory levels and review job needs frequently so that you aren’t holding more inventory than you need to operate.
- Cashflow: In uncertain economic times, it is important to pay close attention to cashflow. Businesses should ensure that they have sufficient cash on hand to weather a prolonged period of reduced sales. This means exploring improved payment terms with vendors, working with financing companies to understand what financing is available to the business, and looking closely at ways to turn fixed expenses into variable ones.
About the Author:
Ben Johnston is the Chief Operating Officer of Kapitus, one of the most reliable and respected names in small business financing. Kapitus provides growth capital to small businesses and has provided over $7 billion to over 50,000 small businesses since 2006. Kapitus offers multiple loan products to small businesses, including SBA loans, revenue-based financing, equipment financing, cash-flow based factoring, revolving lines of credit, and invoice factoring.