Commercial credit cards: working capital, NOT rebates
It’s time to radically rethink how commercial credit cards are used, and explore their grossly underutilized working capital benefits
In light of recent turmoil in the banking industry, financial experts warn that a credit crunch may be on the horizon. The recent series of bank failures has sounded alarm bells for most financial institutions, especially as new research shows that 186 more banks will fail if even half of their uninsured depositors decide to withdraw their funds. Market experts are now predicting that most small-and-medium-sized banks will soon tighten their credit conditions, prompting a credit crunch across the country.
This would have serious repercussions for small businesses, which often face more difficulty securing the funding they need to survive and thrive, compared to larger firms that have ample assets and resources to leverage in times of trouble. Regardless of company size, CFOs who are looking to weather this credit crunch should start preparing now to reduce their business impact.
In this article, we’ll dive into what a credit crunch is, explore its root causes, and explain why financial experts in both the public and private sectors predict a credit crunch is looming. We’ll also share what potential implications a credit crunch has on businesses and, most importantly, provide practical advice on how CFOs should prepare their organizations to stay ahead.
A credit crunch (also known as a credit squeeze or credit crisis) is a sudden reduction in the availability of loans. It generally leads to stricter lending practices and makes it harder for businesses to obtain financing even if they are otherwise financially sound. This creates significant challenges for businesses, including less access to capital and higher interest rates on loans, both of which severely limit firms' ability to invest in growth.
A credit crunch also often spells cash flow issues for firms, particularly small-to-medium-sized organizations that rely heavily on credit to fund their operations. According to the 2019 Small Business Credit Survey, at least 70% of small businesses have some amount of outstanding debt, with an average amount of $195k.
A credit crunch occurs when there is a shortage of funds in the credit market, making it more difficult for borrowers to get loans. This can happen when lenders have a limited amount of funds to give out, are unwilling to lend more money, or have raised the borrowing cost to a level that most borrowers cannot afford. A credit crunch is usually caused by a combination of factors, including decreased consumer demand for goods and services, increased uncertainty about future economic conditions, and financial regulatory issues.
The recent failure of SVB, First Republic, and other banks, prompted many depositors to move their funds out from smaller banks in favor of banking giants like Wells Fargo and JP Morgan Chase. With less money in their hands, many small and medium-sized lenders will soon resort to adopting stricter lending practices, which in turn will trigger a credit crunch. It's important to note that this decision will disproportionately affect small businesses, who receive almost 70% of their loans from banks with less than $250 billion in assets.
The primary implication of a credit crunch is that it makes loans more expensive, or, in some cases, completely unavailable for businesses. Limited access to loans (and higher interest rates on those that are available) creates challenges for businesses trying to maintain their working capital and cash flow. This can lead to significant financial hardship, even for otherwise successful firms.
Businesses that rely heavily on customers' credit facilities will be in trouble since their customers may also face the same problems of securing credit, which can lead to payment delays and late settlement of accounts. As a result, firms may have to limit their operations and even lay off workers to stay afloat. This creates a ripple effect across the economy as other businesses suffer from decreased sales and profits due to reduced demand.
For small-to-medium-sized businesses, the impact of a credit crunch can be even more severe. Tightened lending can lead to difficulties managing inventory, paying wages, and meeting other financial obligations. Lenders also tend to favor large and established firms with a proven track record of repaying loans promptly whereas small businesses with limited trading histories and lower credit ratings often find it harder to secure funds.
CFOs must optimize their working capital to weather the credit crunch storm. To do so, they must prioritize cash management over profit maximization, assess their business operations to determine any cash drains and create contingency plans to manage cash flow. These optimizations can mean the difference between survival and collapse, especially during a downturn.
Below are 6 detailed tips for how your team should optimize your capital ahead of a credit crunch:
The right tools can make or break a finance team. Here are common systems and resources that modern finance teams use to streamline operations and manage their cash flow:
Centime is the only AP, AR, and Cash Management solution that syncs with your ERP and offers a fully integrated working capital line of credit. By unifying AR and AP into a single system, Centime helps finance teams eliminate silos and unlock a clear, comprehensive view of their cash flow. We also offer a short-term working capital line of credit to help you quickly access cash and make sure you have enough money to pay for things your business needs right away.
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A credit crunch can have severe consequences for small to medium-sized businesses. CFOs must prepare for the worst-case scenario by conducting a thorough review of their current financial position, devising a cash flow forecast, and putting the right financial tools in place to support their team.
By securing a line of credit now, optimizing working capital, and creating a comprehensive view of your cash forecast, CFOs can prepare for the inevitable crash and ensure their businesses survive and thrive - no matter the circumstances.
It’s time to radically rethink how commercial credit cards are used, and explore their grossly underutilized working capital benefits
Commercial credit cards are a valuable source of working capital, but they are grossly underutilized by small and mid-sized businesses
Small to midsize businesses (SMBs) are the backbone of the economy, but they often face more financial challenges that impact their overall growth and success. One of the biggest challenges businesses face today ismanaging their cash flow. Even...