Need a LOC? How to Navigate a Chaotic Banking System to Support Cash Flow Needs.

It is simply not an overstatement to suggest that Credit Availability is the lifeblood for SMB’s (small and medium sized businesses). When it comes to bridging the time between service or product delivery and cash collection or financing the purchase of any material asset, community banking has been the typical and invaluable go-to source of capital.

Our core belief in the viability of the banks around the US that have supported SMBs heretofore has in recent months been significantly and potentially irreparably challenged by the recent 2023 banking crisis. A banking crisis on both sides of the Atlantic has triggered fears about the health of the global financial system, with two of the biggest banking failures in US history and the rushed rescue deal for embattled Swiss banking giant, Credit Suisse sending shockwaves through the global markets.

But how did it happen, what comes next, and perhaps most importantly, how should SMBs navigate this crisis and where should they turn for funding?

Seeds of a Crisis 

The Federal Reserve and other central banks have hiked interest rates at an unprecedented pace and to the highest level since the 2008 financial crisis as they try to contain persistently high inflation. This action has presented big challenges for the likes of Silicon Valley Bank (SVB), many other banks, and their clients which are typically fast-growing but often loss-making businesses that have a long runway to being cash flow positive.

Banks have been buffeted by a perfect storm of mark to market losses on long-maturity bonds in investment portfolios as well as having to pay higher rates on deposits to stem outflows of deposits to higher yielding money-market funds. SVB tried to raise fresh capital to bolster its balance sheet, which ultimately proved unsuccessful. Word of instability at the bank spread quickly amongst influential venture capitalists leading essentially to a classic “bank run.” Fears of a broader banking crisis quickly started to spread as investors recognized the increasing risk of capital flight to higher yielding instruments and greater perceived stability.

This sparked fears for smaller regional lenders in the US and has hit the shares of stocks such as First Republic, Western Alliance, East West Bancorp, Fifth Third Bancorp and KeyCorp – all of which are still trading far below where they sat before the crisis erupted.

Rising rates have not only made it much more expensive for clients to borrow money, but also created a credit crunch; capital availability has become much more challenging in recent quarters.  

Preparation and planning in advance of any funding plan is critical, including thoughtful articulation of the business plan and budget and how it fits and complements an optimized capital structure

What are the Implications for the Financial System, Markets, and Credit Availability?

We have seen swift and decisive action taken by central banks, regulators, and government officials as they try to contain the threats facing the global financial system and contagion spreading through the markets. It remains to be seen whether such action will prove sufficient. Markets have been calling for a blanket guarantee on all US deposits to provide certainty the industry and depositors want and arguably, need, but thus far there has been no clear indication of such a comprehensive guarantee.

The FDIC currently insures deposits up to $250,000, but the idea has been floated to increase this and provide new protections for uninsured deposits. The hope is that deposits will stabilize on the back of such implied protection. But more measures could be needed if markets demand it. US Treasury secretary Janet Yellen said the FDIC could insure all deposits on a ‘case-by-case determination’ if any more failures pose a risk to others and present contagion.

Meanwhile as it relates to interest rates, the US Federal Reserve and other central banks are in a tough spot. Combating persistently high inflation is paramount, but the “price to pay” from tight monetary policy and unprecedented rate hikes in terms of the triggering of chaos and realized losses within the banking system are significant.

To put it simply, all of the above has had “sub-optimal” effects on:

1. Availability of Credit, in particular from the weakened regional and smaller banks whose deposits are more at risk (as well as their overall economic model!)
2. Pricing of Credit: Prime is now 8.5%; even quality Borrowers are paying double-digit interest rates
3. Willingness to take even measured levels of risk; buying a short-term treasury note yielding almost 5% with no credit risk typically “trumps” a loan entailing risk

How to Navigate Challenging Credit Conditions?

ScaleHouse’s recommendations for navigating the current stormy conditions in banks and capital markets are as follows:

1. Preparation and planning in advance of any funding plan is critical, including thoughtful articulation of the business plan and budget and how it fits and complements an optimized capital structure. Preparedness builds credibility and supports and improves chances of economic success.
2. Consistent execution against your funding plan, inclusive of comprehensive and dynamic financial analysis to evaluate credit and valuation metrics.
3. Development of professional and prudent messaging and communications to prospective lenders and capital providers.
4. Development of a highly tailored “go-to-market” funding strategy inclusive of an array of non-traditional and alternative funding sources.

ScaleHouse offers world-class financial advisory consultative services to support tackling the above and other recommended actions. Reach out to us if you’d like to talk more about how we can best advise on and support your funding plan.