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Strategies for Companies Seeking Debt in Rising Rate Environments

By Adam Torkildson. Originally published at ValueWalk.

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Small and medium-sized companies are the pillar of the American economy. They create jobs, drive innovation, and support local communities. According to the 2021 Small Business Profile, small businesses account for 99.9% of all US businesses and employ 46.8% of the total workforce.

Yet, many small businesses find it difficult to secure business loans from traditional lenders. Banks are becoming more conservative in their lending practices, and as interest rates rise and the economy slows down, it is becoming increasingly difficult to obtain favorable loan terms.

However, with the proven strategies outlined in this article, small businesses can make themselves more attractive to lenders and improve their chances of securing business funding.

5 Strategies for Securing a Small Business Loan

Be Realistic:

Lenders are looking for companies with a clear understanding of their financial situation. These companies have a realistic idea of how much money they need to sustain growth. When requesting a loan, it is advisable to include a thorough plan of how the funds will be used and ensure that the requested amount is justified. It also helps to answer the following questions:

  • What are the short-term and long-term goals of the business?
  • What are the company’s current financials?
  • What is the company’s history of profitability?
  • Why does the company need the loan?
  • What is the repayment plan?

Use the “Insurance as Capital” Financing Strategy:

Businesses that already have some traction (but may still be pre-revenue) can make themselves more attractive to lenders through an insurance strategy that helps de-risk their business model. Some experts call it “insurance as capital”. 

This financing strategy entails obtaining a specific type of insurance policy called Performance Guarantee Insurance. Under this policy, the insurance company is insuring a company’s financial performance up to a certain amount. Nemo Perera who runs Edge Management, a firm specializing in helping clients employ the strategy says, “by leveraging an insurance company’s balance sheet through a meaningful risk transfer mechanism (policy), that mitigates the most pressing concerns of investors. We are able to enhance the creditworthiness of the entity with a billion dollar insurance company’s balance sheet.”

A significant advantage of this financing strategy is that it helps businesses obtain loans with more favorable terms. The lenders become favorable because they are protected against the risk of default, which allows them to offer better terms to the borrower. Companies in higher-risk sectors like Greentech, ESG, and Cleantech can benefit from this policy.

Businesses interested in using this financing strategy should speak with an insurance broker specializing in Performance Guarantee Insurance.

Get an SBA-Guaranteed Loan:

The Small Business Administration (SBA) is a government agency that assists small businesses. One of the many ways they do this is by guaranteeing loans made by traditional lenders. When a lender considers a company too risky for a loan, the SBA can step in and secure a portion of the loan.

Getting an SBA-guaranteed loan can be beneficial because it reduces the risk for the lender, which often results in more favorable loan terms for the borrower. After applying for a business loan with a participating lender, the SBA reviews the application and determines if they will provide a guarantee.

Interested companies must meet certain requirements and use the loan proceeds for specific purposes such as working capital, inventory, or equipment purchases.

Use a Well Prepared Business Plan:

It is vital to have a well-prepared business plan when applying for a business loan. This document should outline the company’s goals, financials, and repayment plan. It should be clear, concise, and provide enough detail for the lender to get a good understanding of the business.

Also, include information on the target market, sales and marketing strategy, competitive landscape, and management team. This information will help lenders understand that there is a well-thought-out plan for growing the business.

Apply with a Good Credit History:

Lenders consider the business’s credit history when making a loan decision. They will want to see that the company has a good track record of repaying debts on time.

Businesses can develop a good credit history by paying all bills on time and maintaining an excellent credit-to-debt ratio. Experts also advise against using too much of the available credit, as this can hurt the credit score.

Summary

Despite the immense contributions of small and medium-sized businesses to the American economy, they often face significant challenges in securing loans. Fortunately, there are several strategies that business owners can use to increase their chances of being approved for a loan. 

By being realistic about the company’s goals and prospects, using a performance guarantee insurance policy, and having a well-prepared business plan, small business owners can make their company more attractive to lenders, improving their chances of securing business funding.

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