Central to the many considerations a business owner must strategize around right now is fuelling the company with capital. Across all sectors, loans are often the lifeblood of businesses facing a steep downturn in sales and revenue.

What may be under-recognized in securing loans is learning how interest rates aren't the only factor that affect the cost and availability of capital. Who gets a loan is also a stickier decision for financial institutions, which is what encouraged us to report on the nuances of the cost of money.

Business funding in an economic downturn

The expense of borrowing capital is perceptively “high” at a time when interest rates are so low. But with today’s uncertainty mixed with consistent news of an impending global recession, financial institutions take on added risk. That leads to premiums, which may take business owners seeking loans by surprise.

The majority of entrepreneurs aren’t aware of premiums and how the cost of borrowing has increased, says Gary Friesen, Managing Director, Agriculture at ATB. He notes that when the market endures increased risk, government policy plays a role, such as the announcements of reopening phases in Alberta.

“That’s why management has to have serious conversations about the roadmap of their business, looking ahead at least 12 months,” Friesen says. “If you get a loan from your bank, are customers still going to come to your store once this wave passes, if it passes?”

But if trying to secure a loan is part of that future for a business, it’s a decision that has to be strengthened with foresight and planning.

Working capital questions

How can a business owner position their firm in the best possible light when approaching a financial partner for capital?

“Make sure you have a handle on your cash flow situation,” advises Friesen. He adds scenario mapping could be helpful, where the C-suite looks ahead to potential outcomes based on intelligent assumptions and many what-if questions.

Among the many questions that should be part of tabling those potential realities:

• What if interest rates climb? Will loans still be viable options?
• What if sales are underwhelming this quarter? And the next quarter?
• What if another COVID-19 wave strikes in the coming months and reverses the province’s economic recovery efforts?
• What if payroll cuts are necessary? Will the recouped expenses justify the loss of expertise and goodwill towards the brand?

This information on the business’s financial future can help to identify gaps in operations or cash flow challenges. At the very least, it’s an exercise that could only provide a clearer picture of how stable the footing is right now and will be in the coming quarters.

Addressing assets and repayment considerations

A core principle that every business owner must realize is that assets are not cash. Your headquarters could be a sprawling Apple-like campus, or you could own property across multiple locations nationwide. Still, all those assets may not translate into the ability to turn those assets into cash to pay back loans.

Assets may look good on paper to demonstrate the scalability of your business, but financial institutions want added confidence on company growth amid the hazy economic times the pandemic has brought to the world.

It can be tempting for businesses to apply for every government relief program available, but the federal loans are still just that—borrowed money. While the payment terms are more flexible than pre-COVID loans, business owners still have to pay that money back at some point.

Performing an internal audit and being realistic about cash flow momentum are two vital steps for business owners facing this pandemic and seeking capital. Sometimes, if loan applications aren’t successful, you get an opportunity to reassess the future of the business. If the financial institution is worried about your company’s sustainability, it could be a much-needed wake-up call.

When you’re not foreseeing a roadmap to paying back borrowed money, negative consequences loom for both the business and the lender.

“Are you confident about your business making it past this COVID-19 wave?” Friesen suggests management should ask themselves. “If not, you should reconsider getting any loans.”

“And financial institutions are going to have to make tough decisions, mainly because we can’t really see the exact end of this pandemic and the return to normalcy. We realize small businesses are the backbone, not just in Alberta but our country—and financial institutions will be having important conversations with customers on what the right steps should be going forward,” Friesen adds.