Access to capital is one of the largest obstacles small and medium-sized enterprises (“SMEs”) face in today’s markets. With the recent run on regional bank deposits causing smaller banks to tighten credit standards to levels usually associated with a recession, it’s no longer easy to borrow from community banks and regional lenders. At the same time, Russia’s invasion of Ukraine and China’s threatened invasion of Taiwan are causing global tensions to rise to levels not seen since just before World War II. As a result, the days of easy, low-interest rate lending are over, and SMEs should expect banks to resist renewing loans they were content with before. Additionally, they’ll likely increase interest rates for the few(er) SMEs they lend to.

So how can a small business survive these challenges, access capital, and even thrive?

The first step is to carefully examine your borrowing needs to reduce the dependence on bank funding. Now is not the time to make risky business decisions that rely on ready access to loans. Instead, accumulate cash and place it in FDIC-insured deposits, being very conscious of FDIC deposit insurance limits of $250,000. If necessary, open a new account at another bank also insured separately by the FDIC. The Securities Investor Protection Corporation (SIPC) provides similar insurance, but it’s also limited to $250,000.

(Note: While money market savings accounts at FDIC-insured banks are generally safe, it’s easy to be lured by higher interest rates at uninsured money market funds, but they are not insured and should be avoided in times of stress on the financial system).

SMEs should also review margins on their products and be prepared to cut unprofitable or marginal offerings. Overhead and payroll should also be examined. Both tend to rise in good times, but in challenging economic conditions, it’s time to consider slimming down.  While good help is hard to find, poor performers can be very expensive and cause a loss of business.

Another consideration is to examine your supply chain for weak links to China. While the country has become a significant supplier to U.S. small businesses, COVID-19 demonstrated just how fragile the connection could be. If the Chinese make good on the threat to invade Taiwan, all trade with China will cease immediately, and there won’t just be supply chain shortages, but a complete cessation of the supply chain itself.

All countries that border the South China sea are also likely to be affected, and SMEs should immediately identify replacement suppliers within the U.S. or with NATO allies. Small businesses that rely on computers and other devices that use chips from China should purchase spares to keep on hand while looking for similar products not reliant on the Chinese.

One attractive strategy while examining your supply chain is to take advantage of the potential scarcity of products and become an onshore supplier to businesses like your own. Also, where applicable, take advantage of opportunities to sell to companies that are relocating back onshore. Many major chip companies and other suppliers are moving out of Taiwan and China into the U.S. and SMEs could look for opportunities to service companies moving back onshore.

Is it also time to consider a merger with a complimentary business? While venture capital is in short supply, there are still investors interested in profitable SMEs, particularly those with a history of growth, either through same-store sales or through mergers and acquisitions.

While it can be difficult to find a merger partner when you’re accustomed to making the decisions yourself, the diligent can often find another business owner with similar values and work ethic. While it’s a good time to avoid debt, equity is still available for mutually beneficial mergers.

TAP Advisory Partners can assist you with any or all of the above strategies.

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