Securing capital funding in today’s economy is no simple task. With rising interest rates, stricter lending requirements, and evolving financial regulations, businesses must be strategic in their approach. Here are key factors to keep in mind when seeking capital and strategies to strengthen your position for success.
1. Higher Interest Rates & Cost of Capital
The Federal Reserve’s monetary policy has kept interest rates elevated, increasing the cost of borrowing. Businesses should anticipate higher debt service costs and evaluate financing options carefully.
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Current Rates:
- The Prime rate stands at 7.50%.
- The 10-year Treasury rate is +/- 4.50%.
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Loan Rate Expectations:
- Lines of Credit & Short-Term Financing: Typically, borrowers can expect rates at Prime plus a margin of 1%-3%.
- Longer-Term Financing (e.g., equipment loans, commercial mortgages): These often track the 10-year Treasury plus a margin of 2%-4%.
Given these conditions, businesses should explore cost-effective financing structures, lock in rates where possible, and model different interest rate scenarios in their financial planning.
2. Tighter Lending Standards
Economic uncertainty has led banks and traditional lenders to tighten credit requirements. To improve the likelihood of loan approval, businesses should:
- Maintain strong financials and positive cash flow.
- Prepare a comprehensive business plan demonstrating stability and growth potential.
- Reduce risk factors by improving debt management and ensuring financial statements are in order.
3. Exploring Alternative Lending Options
As traditional lenders become more selective, alternative financing solutions have become increasingly viable. Businesses should consider:
- Non-Bank Lenders & Fintech Platforms: These options provide flexible terms and quicker approvals.
- SBA Loans: Government-backed lending programs can offer favorable terms.
- Revenue-Based Financing & Private Debt: Depending on your cash flow and business model, these options may be preferable to traditional loans.
4. Increased Scrutiny on Debt Service Coverage Ratio (DSCR)
Lenders are placing greater emphasis on DSCR to assess whether businesses can comfortably meet their debt obligations.
Understanding DSCR:
- Formula: DSCR = Net Operating Income (NOI) / Total Debt Service
- Interpreting DSCR:
- DSCR > 1.0: The business generates sufficient income to cover debt payments.
- Example: A DSCR of 1.25 means NOI is 1.25 times the debt service, which lenders view favorably.
To strengthen DSCR, businesses should:
- Improve cash flow management by reducing unnecessary expenses.
- Optimize pricing strategies and increase revenue streams.
- Partner with financial advisors—insightful planning with your TBG CPA can strengthen your loan request.
5. Weighing Equity vs. Debt Financing
While debt financing is more challenging, equity financing presents an alternative route. However, it comes with trade-offs, including ownership dilution. Businesses should consider:
- The impact of bringing in external equity partners such as venture capitalists or angel investors.
- Whether the long-term cost of equity outweighs the cost of debt.
- Strategic partnerships that provide capital without sacrificing control.
6. Industry-Specific Lending Challenges
Lending availability varies by industry, with some sectors facing greater challenges than others.
- Commercial Real Estate & Retail: These sectors have seen tighter lending conditions, but pockets of success remain.
- Strong Performing Sectors:
- Multi-Family Real Estate: Demand remains high, supporting continued financing opportunities.
- Industrial Real Estate: Warehousing and logistics properties are still attracting strong investment.
Understanding market trends within your industry can help businesses identify the best financing opportunities.
7. Regulatory & Market Changes
Changes in banking regulations, tax policies, and economic conditions can influence financing availability. Staying informed is crucial.
- Recent regulatory shifts may impact loan structures and requirements.
- Government incentives and loan programs could provide financial relief or better lending terms.
- TBG CPAs specialize in banking regulations and tax policy, helping businesses navigate complex compliance requirements.
How Commercial Capital Partners Can Help
With over 30 years of experience in banking and commercial lending, Commercial Capital Partners (CCP) provides expert guidance to help businesses secure the right financing. We streamline the loan process and tailor solutions to meet your needs.
Need Capital? Apply HERE. Want to discuss your options? Contact Pete VanPutte at pvanputte@tbgcappartners.com or (585) 259-518.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
