While no one can predict with certainty that a recession is going to take place in the near future, we can discuss what funders might do if an economic slowdown occurs as many are saying will happen, including Deutsche Bank yesterday and Wells Fargo on March 24th. The story yesterday out of Deutsche Bank is their forecast of a recession happening in the latter part of 2023 due to rising interest rates as the Fed fights inflation.
“We no longer see the Fed achieving a soft landing. Instead, we anticipate that a more aggressive tightening of monetary policy will push the economy into a recession,” per the report by Deutsche Bank economists led by Matthew Luzzetti. Worsening the situation is the war in Ukraine which has caused further increase in consumer prices by backlogs or even canceled shipments in the global supply markets. So what effect will this have on business lenders?
Right now on business loan products of one year or less, it should not have much impact on any decisions made. Towards the end of this year while evaluating the economic situation is when some changes might be made for those short-term products. Lenders with loan products over a year have to start thinking about the ability of merchants to pay back after a year if certain types of businesses are expected to slow down or lay off employees due to shrinking demand.
As the fed raises rates the cost of capital for new credit facilities will increase therefore rates for some business owners seeking capital will be higher. The length of a contract could be shorter depending on the industry. Requirements such as time in business will lengthen and more historical financial data will be needed. Previous client status will not be as impactful. All of these things have been dealt with in some form or fashion since the pandemic and even before in other economic slowdowns.
However, all is not negative. If it's a minor recession, then many business types won’t be affected all that much. Some financing products could do even better than before. Businesses could find a way to take advantage of the economic situation with additional capital, buy a competitor out, or just use bridge capital to get through to the other side of a slowdown.
There are too many strategies to list that can take place given an endless number of circumstances involved. This will be an ongoing evaluation of the US and global economy which may sound typical but it’s different in the sense that inflation is rising faster than it has in 40 years. That must be dealt with, but some experts warn of stagflation.
Hopefully, Russia's invasion of Ukraine is over soon so at least that part of the global situation can resolve some of the problems, although I understand that is an optimistic view.
One thing is for sure, lenders of all types are watching this play out with an eagle eye.
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