President Trump’s potential trade war with China and other countries has been dominating the news as everyone tries to figure out if the trade war will have an immediate impact on their lives. At the forefront of those searching for answers are small business owners whose companies may be impacted by a loss of revenue or importation of much-needed supplies. Another area where this may have an impact is in the issuing of commercial loans. Let’s examine the implications for financing for small to mid-sized businesses.
What industry are you in?
The quickest way to tell if a trade war will affect you is to figure out if your industry relies on one of the potential opponents. China, for example, is currently the key target of the president’s ire. Does your industry rely on Chinese raw materials, parts, or finished products? This analysis should be done at the industry level, as what impacts upstream providers or downstream clients will ultimately impact your company as well. The US has placed tariffs mainly on steel, aluminum and other heavy metals used in construction or manufacturing, while China has proposed tariffs on a wider range of items, the most impactful being tobacco, soy, and other farming products, as well as automobile and airplane manufacturers.
Whether or not your industry will be impacted by sanctions or tariffs will factor into lenders’ financial analyses, influencing their willingness to provide capital.
Why is this important?
Lenders only lend when they are reasonably confident that they will receive their investments back. Any interruption to a company’s revenue raises the chance they could default on their loan. That’s why lenders get nervous providing loans to certain industries during a trade war. If you’re a construction firm and rely on cheap steel to stay on budget and on schedule, a steel tariff raises the cost of your key material and makes it more difficult to obtain, thereby slowing production and extending the time it takes for lenders to recoup their investment.
Chinese imports mostly come from small businesses or food production. This means that when it places a tariff on soybeans they are directly limiting the revenue that can be made. A company that does big business with China cannot only lose out on revenue, it can also drive up costs for production and sales, leading lenders to be less likely to issue accounts receivable financing.
What you can do to improve your chances.
There are several things you can do to improve your possibility of getting approved for a loan. Make sure to carefully track sales and orders, and how they are affecting your bottom line. Having these numbers on hand, as well as the records from before the trade war, can show lenders what to expect in terms of repayment for their loans. Having a business plan prepared with contingencies for interruptions in sales or stocking can further help and provides an idea of how you will manage changes in supply and sales.
Finally, keep an eye on the news. Wall Street and the bigger banks are watching what happens closely. If a trade war seems imminent they will avoid trading, so be prepared to submit a loan request with a broker earlier, rather than later.
Nobody is sure what is going to happen with a trade war. It could pass quickly and without much traction, or it could significantly impact our economy. Keeping a cool head and having a broker ready to help you find the capital you need can help you prepare for whatever comes. If you are looking for a commercial loan, and need help understanding the best way to obtain one in the current lending market, we can help.