Navigating SMB Financing: What to Do When Banks Are in Trouble

Welcome to our monthly newsletter! In this edition, we will explore what's going on with the banking collapses you've probably heard about in the news. As a small business owner, it can be challenging to secure financing, especially when banks face difficulties. Our expert insights will help you navigate this situation and find alternative funding sources to keep your business running smoothly.

We will also share the latest marketing trends that small business owners should know to stay ahead of the curve in 2023. Our marketing team has compiled a top list of the latest strategies and tactics to help you attract and retain customers, increase brand awareness, and drive sales.

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Banks Failing, Capital Drying Up?

Adequate capital to invest in the growth of a business is crucial. Navigating financing for SMBs can be challenging, even in the best of times. As announcements come out about banks being in trouble, whatever you do, don't panic. The three troubled banks in the news had many issues causing their problems. Get the facts about what's going on.

Remind yourself every day that, in general, the economy is doing well.?The federal banking system is strong and well-prepared to monitor conditions and manage individual banks through their challenges. 3% unemployment means businesses are busy doing what they do to supply demand. Stuff happens when market conditions change; there will always be losers and gainers.

What's in the news:

Due to liquidity issues, stock banks and SMB lenders, Signature Bank, First Republic Bank, and Silicon Bank Corp., require additional funding. And if they didn't get it in time, they are being taken over by a quick-reacting federal system. But not all SMB lenders are in trouble.

The good news is that?Market Watch?recently reported that ". . . 102 of 108 banks listed showed expanding margins for the fourth quarter from a year earlier." Top performers expanded by at least 1% in a year, while banks with liquidity issues had less than 10% expansion or contraction. More on this in a bit.

First, what's the background?

What we care about most – is the health of SMBs, Small to Mid Sized Businesses. We also know that SMB financing is very important. SMBs have depleted cash reserves due to COVID shutdowns, supply chain issues, inflation, and payroll hikes. Delays increasing prices for fear of losing market share aren't helping recovery. Large balance loan payments for EIDL and Main Street loans are difficult to manage, especially during tough times.

Eroded profit margins make it harder to maintain an adequate balance sheet that supports additional lending. Playing the tax minimization game jeopardizes many small businesses' access to bank funds in the best of times. Rising interest rates make loans more costly, further digging into profit margins that may already be stressed. And now a bank failure – how serious are things becoming, and what should SMB owners be looking out for?

At the same time, the sources of most lending, banks, face their challenges. Years of lending in a low-interest rate market are now over – it sounds like it could be good news for banks on their income side, and it likely will be once banks get through the transition. But first, they have to deal with rising interest rates on the expense side along with stricter lending standards.

An existing low-interest loan portfolio means limited income from term loans and mortgage lending. That limited income portfolio now runs smack into higher borrowing costs to access capital and maintain adequate reserves.

As any small business owner will tell you, going into a cycle with a low-profit margin that then collides with higher costs and fixed revenue can cause sleepless nights. The need for profit runs smacks into obligations that can't be quickly unwound and which can quickly turn into losses. And that means serious problems for any business. Any savvy small business owner will tell you that under declining profit conditions, they have to turn things around fast – something that is hard for banks to do on their own.

Further adding to the problems is a slowdown in lending demand over the past several years. Five million small business owners turned to non-bank lending via EIDL. Some SMBs have stopped pursuing additional borrowing. And other SMBs with balance sheets that are underwater don't qualify, no matter how badly they need or want to access capital. Pressures in the housing market cool demand for real estate loans. All this makes it harder for banks to transfer into enough new, higher-interest-rate loans to support their balance sheets.

What to do next?

• Look for banks that are better prepared for rising interest rates and slowing loan growth. Look at a bank's net interest margin.?

Keep your eye on the FDIC insurance limits of $250,000 compared to your company's balance in each bank. Remember that many loan covenants require minimum deposits to support lending already in place – which may mean you have no option but to stick with deposits beyond what the FDIC will insure at your current bank. And stay tuned for further FDIC announcements on what will happen to uninsured depositors.

• If you decide to shop for an additional bank partner, look for banks with improvements year over year on the net interest income / average assets (NII/AA) ratio.?It's not necessarily which bank has the highest net interest income / average assets (NII/AA) ratio, as some banks in trouble still had last quarter ratios of 3% or higher. Instead, look for banks with a one-year expansion of the NII/AA and watch out for those with declining ratios.
• If you carry high account balances with any one bank, consider spreading your risk.?Managing cash in multiple locations takes a bit more effort, but knowing that the FDIC fully insures you may give you peace of mind. But before you decide to do that, read on. You have to keep your bank covenants in mind.
• Please take a deep breath, and contact your bank manager for their input.?Generally, we advise you to stick with the local and regional banks. They are closer to being "on the ground" in your local market, aware of your business's role in the success of their client portfolio, and more able to make localized decisions, within reason, to support your business and get you SMB financing.
• Be prepared to educate your bank management on your business's status and industry.?The bank may be watching your sector from a high level but may not understand the nuances of your niche or where you stand competitively. Do what you can to boost the bank's confidence that you are a good risk for SMB financing and that they are a good partner for your business and vice versa. If they have a critique, don't get your backup. Listen carefully and ask for their suggestions. On the other hand, if you can't access management or feel the bank isn't listening, consider shopping around to see what you get as a reaction from other banks. Remember that right now, banks are looking for good-quality customers.
• At the same time, don't expect any bank to bail you out if your balance sheet is under water.?If you're not sure what that means, talk to your banker to get their view on how you're looking. Contact a financial strategist to advise you on how to make or keep your business "lendable." Give us a call; we're committed to helping business owners succeed under all conditions.
• Figure out what your obligations are to your current bank partner.?How much do you have borrowed? What do your loan covenants require for deposits to back up those obligations? For example, if you have a credit line with a balance outstanding, you probably must have cash and accounts receivable under 60 days past due that are more than that outstanding balance. Pull out too much money, and the bank can call in the balance due on your credit line. Don't go there!
• If you're worried about the cost of existing credit lines and other loans with adjustable rates, make an appointment to meet with your banker to discuss terming out these lines and loans into fixed-rate instruments.?If you have an EIDL loan, keep your loan payments current. That will be some of the best low-interest lendings you'll get, don't jeopardize the loans by getting into past due status. And If you have an EIDL loan, consider getting a life insurance policy – that loan is for 30 years and may outlast you. Don't make your SMB financing a problem for your successors to deal with. If you have Main Street Loans, meet with your banker to discuss options. Those are pricey loans, and you may have options depending on the quality of your assets.

The Bottom Line

• Take a hard look at your profit picture.?If your business is not making enough profit, raise prices, do it now! Look for high-quality customers who will pay a premium for what you can provide them. If you're selling B2B, invest in expanding your sales force to increase the flow of new, good-quality business into the pipeline. Need help figuring out how to boost sales? Reach out to us – that's what we excel at – the strategy and tactics of doubling revenue and tripling profit in both up and down markets.
• If you're selling B2C or B2B, consider how well your marketing efforts are doing to produce leads.?And look for additional input from marketing strategists who can point out ways to improve your results.?Give us a call, we've been studying what to do about marketing strategy for years, and we'd be happy to share our thoughts with you.
• Do your best to line up with good quality business partners.?Take a good look in the mirror to know the facts about where you stand, so you can build a good action plan to get where you want to be. Changing banks or spreading risk across multiple banks will take some time if you think that is needed.
• Get good advisors in place to help you work through any challenges your business might face.?It would help if you had an outside perspective to make good decisions when it comes to SMB financing. And making good decisions is what your job as owner and CEO is all about.

Contact us today for help with navigating these SMB financing challenges.

In Other News

What Small Businesses Need to Know About Marketing in 2023

As we wrap up Q1 of 2023, it's essential to stay ahead of the curve regarding marketing. The business world is constantly changing, and staying up-to-date with the latest marketing trends and strategies can help your small business stay competitive and grow.

Here are 7 important things we think you need to keep in mind for your marketing efforts in 2023:

1. Personalization is Key

Consumers are becoming more and more demanding when it comes to personalized experiences. They expect businesses to tailor their marketing messages to their individual needs and preferences. In 2023, focusing on personalization in your marketing efforts will be more important than ever. Using customer data to understand their preferences and create targeted campaigns that speak directly to them will be hugely beneficial, and having a solid email marketing strategy will make this process much easier.

2. Video Content is King

Video content has been on the rise for years - especially due to the pandemic and our increasing online presence - and shows no signs of slowing down in 2023. Videos are engaging and highly shareable, making them a valuable tool for small businesses looking to increase their reach. There is arguably so much more you can tell about your company through a video than any other content you make. Storytelling is an important aspect of marketing your business, and videos can be a great way for potential customers to get a feel for your business well before they engage with you face-to-face.

You can either invest in creating high-quality video content that showcases your products or services or just start getting really good with your iPhone, but the bottom line is that you would be wise to start thinking about a video strategy to showcase your products and business. That way, you can utilize them on your social media, website, or any other means where your ideal customers hang out.

3. Social Media is a Must

Social media platforms have become essential for small businesses in recent years, and that trend is set to continue in 2023. If you're reading this newsletter, then welcome! You likely already know this and are active on social media.

Social media offers a cost-effective way to reach your target audience, build brand awareness, and engage with customers. Make sure you have a strong presence on the platforms that matter most to your audience and regularly post engaging content.

Not only will you maintain the trust you have established with your existing customers, but you can open yourself up to the possibility of expanding your customer base to include people from different backgrounds, interests, and demographics. As a result, your business will be able to connect with a wider audience than you previously thought possible, leading to increased sales and growth opportunities.

4. SEO is Still Important

Search engine optimization (SEO) is a long-term strategy that can help your small business rank higher in search engine results pages (SERPs). In 2023, it will be important to continue focusing on SEO and optimizing your website for both users and search engines. This includes things like creating high-quality content, building backlinks, and ensuring your website is mobile-friendly.

Overall, SEO is an ongoing process that requires consistent effort and attention to detail. It can help your small business improve its online visibility and attract more traffic to your website, leading to increased sales and growth opportunities.

5. Customer reviews matter

Customer reviews are a critical component of a small business's online presence. A recent survey found that 90% of consumers read online reviews before making a purchase, and 88% of consumers trust online reviews as much as personal recommendations. This demonstrates how important customer reviews are in influencing consumers' purchasing decisions.

For small businesses, it is essential to actively encourage customers to leave reviews. There are many ways to do this, including sending follow-up emails after a purchase or asking customers in person to leave a review. It is also important to make the process as easy as possible for customers by providing links to review sites or offering incentives for leaving reviews.

6. Mobile optimization is essential

Mobile devices are becoming the primary way that consumers interact with businesses. Small businesses need to ensure that their websites, emails, and marketing messages are optimized for mobile devices. In today's world, consumers rely heavily on their mobile devices to access information and make purchasing decisions.

Mobile optimization refers to the process of creating digital content that is optimized for display and use on mobile devices. This includes everything from website design and email marketing to social media and SEO. By ensuring that your website, emails, and marketing messages are optimized for mobile devices, you can reach more customers, improve your search engine rankings, and provide a seamless and user-friendly experience for your audience.

7. Keep an Eye on Emerging Technologies

Technology constantly evolves, and small businesses that stay ahead of the curve can gain a competitive advantage. In 2023, keep an eye on emerging technologies like artificial intelligence (AI), augmented reality (AR), and voice search. If used properly, some of these new tools could boost your marketing and offer ways to automate your process. While these technologies may not be fully mainstream yet, they have the potential to revolutionize the way we do marketing in the years to come.

In conclusion, marketing is an ever-changing landscape that requires small businesses to be agile and adaptable. By focusing on personalization, video content, social media, SEO, and emerging technologies, you can stay ahead of the curve and achieve your marketing goals in 2023 and beyond.

If you're curious about outsourcing your marketing - we do that! Connect with our CMO, Robyn Goldenberg , or email her at [email protected]. We'd be happy to give you some insight into how we help small businesses with marketing.