Following a period of historically low interest rates and robust markets, the past few years have presented choppy waters for companies in almost every sector. With high interest rates and accelerated inflation, businesses are looking to make adjustments to weather the current storm and prepare for any potential tempests on the horizon.
To help you persevere—and prosper—we asked experts from diverse fields of finance to provide an analysis of the current economy—and tips on how to manage it. Helping provide economic insight from Truist are Kathleen Farrell, head of Commercial Real Estate and Corporate Real Estate; Matt Roth, Building Products industry consultant; and Marcy Fink, head of Commercial Real Estate Credit Risk.
Find new ways to finance capital.
Today’s inflationary, high-interest-rate environment presents a single problem that no business can avoid—costlier and more limited access to working capital.
“In early 2022, capital was almost falling out of the sky. Now, it’s completely different. Cash flow, debt, service coverage, valuation—difficulties with credit access and cost are practically universal across the corporate world in mid-2023,” says Farrell. The result is a knock-on effect that drives up operating costs and makes weathering a recession exceptionally challenging.
The tightened access to capital is also highlighting the importance of access to multiple capital providers and products.Disclosure 1 Due to high interest rates and inflation, difficulties in accessing affordable working capital may leave you feeling that a plan is beyond your ability—but the truth is much less pessimistic. What you need is a plan that deals with this reality.
“When people in business get nervous, they can overlook ways to finance working capital that extend beyond traditional methods.”
Matt Roth,
Building Products Industry Consultant, Truist
“When people in business get nervous, they can overlook ways to finance working capital that extend beyond traditional methods,” says Roth. “Many companies don’t realize they can increase access to capital by moving into a more formal asset-based lending program that has higher advance rates against accounts receivable and inventory. Some companies can even access significantly more capital by lending against enterprise value to solve for a strategic need.”
This, Roth stresses, is where optimism and planning come together. “We can help model out various recapitalizing scenarios for your company, as well as look into private equity options for an infusion of funding.”
Manage costs and tangibles.
One of the immediate steps you can take to strengthen your position in economically uncertain times is managing expenses. A smart place to start preparing your business for this is inventory management.
During the pandemic, supply chains experienced significant disruption that led to businesses stacking inventory. “With supply chains returning to normal,Disclosure 2 one important cost-cutting measure is renormalizing previous purchasing habits and inventory sales ratios,” says Roth. “Along with potentially destocking, this can help rebalance inventory cost.”
Roth also recommends looking at equipment upgrades to cut costs. “In a downturn economy, running equipment until the wheels fall off to save money is tempting—but investing in upgraded tech can reduce labor hours per product, maximize output levels, and drive down the need for new employees, while boosting retention,” he says. “Some of the biggest recent success stories involve manufacturers that took that upgrade risk ahead of the pandemic and solved for cost issues and worker shortages before either problem ever kicked off.”
It’s equally important to recalibrate your approach to managing the equipment that’s still running well. With a possible recession ahead, it’s smart to preserve liquidity for the future without touching any revolving credit facility you might have. One of the best ways to do that is refinancing existing assets like used equipment. If you have a piece of equipment that’s largely or fully paid off, you can raise capital and cut costs by refinancing. Backing your borrowing with an asset allows a lender to offer you better terms than they might on an unsecured revolving line of credit or unsecured term loan.
Roth also recommends looking into hedging certain aspects of your business to defray costs and boost liquidity. Construction, airline companies, and other transportation industry businesses may be able to protect profits by hedging diesel, natural gas, and crude oil, for example.
How does materials hedging work? Simply put, a business anticipates that costs will go up, so it prepays or locks in pricing with suppliers at current prices. The strategy enables businesses to keep favorable and predictable costs for a known period of time.
The materials hedged vary from industry to industry, but the same strategy can be deployed in any industry when used for interest rates for equipment purchases.
If you’re concerned about rate movement, Truist can couple a hedge into an equipment finance deal, provide a forward starting rate, or offer a lock-in rate on equipment you plan to purchase in the future. When it comes to cutting or insulating against costs, even in an uncertain economy like today’s, there are plenty of creative ways Truist can help.
Assess real estate conditions.
For business leaders in any industry, paying attention to commercial real estate is crucial to navigating economic uncertainty. Why? “Even if your business isn’t directly attached to the real estate market, keeping an eye on the residential housing market can be helpful,” says Roth. That’s because housing impacts everyone, and new construction trends can often be first-in and first-out of a downturn.
While the current real estate market isn’t a one-for-one match for the Great Recession of 2008, Roth emphasizes residential real estate’s importance as an economic compass. “Despite similar problems in the 2023 market, unlike in 2008, housing isn’t overbuilt at the moment,Disclosure 3 and that’s a huge tailwind.”
Fink agrees that businesses can take heart from residential real estate demand—both generally (as a sign of conditions) or specifically (as a way to grow their business). “For anyone with the mindset and access to equity, there will be substantial opportunities to acquire key properties and key sites. If you’re willing to play the long game and push investment horizons beyond five to 10 years, you could have an excellent shot at owning and controlling high-value sites and submarkets.”
“If you’re willing to play the long game and push investment horizons beyond five to 10 years, you could have an excellent shot at owning and controlling high-value sites and submarkets.”
Marcy Fink,
Head of Commercial Real Estate Credit Risk, Truist
Consider mergers and acquisitions.
Does M&A activity have a place in a conversation about how to weather uncertainty? Yes. With careful planning and expert timing, some companies are using mergers and acquisitions to address various challenges.
The first line of opportunity is with real estate. As noted above, current conditions may be right for some businesses with a long-term investment horizon to expand their property holdings.
But there’s more, explains Roth. “Acquiring smaller companies and rolling them into your operations doesn’t just get you real estate, but also equipment, clients, and employees. You’re beating possible drops in demand and the hiring crunch while gaining scale and purchasing power,” he says. “The economy may have your sector flat right now, but this can mean it’s a great time to capitalize on an opportunity that gets you through the storm and possibly turns you a considerable profit on the other side of it.”
Build and reinforce business relationships.
Among the numerous strategies for navigating current economic conditions, one tip stands above all the rest—work with professionals you trust. “In 2021, when you could get 12 quotes on a transaction from banks and other institutions, relationship lending wasn’t a high priority for a lot of people,” says Farrell. “With decreased access to capital and a hunger for sound advice, it is. During tough times, you want bankers, advisors, and experts who can catch you if you fall.”
The more your lending partners and advisors know about your needs and challenges, the better chance you’ll have of safely making it through a bumpy economy. Developing long-term relationships with clients allows Truist to provide not just products, but advice tailored to each client’s circumstances. A strategic relationship like that can not only help you survive, but potentially thrive.
It could be lower effort to sit tight and hope economic conditions level off, but Truist experts agree that proactive approaches to working capital, cost cutting, and asset management are a much better approach.
“From the start of this downturn to the present, there’s been this persistent hope that things will abate and inflation and rates will go back down,” says Fink. “And that’s probably true to an extent. But this cycle has already stuck around for longer than we anticipated on the front end, so whatever stage of the business lifecycle you’re in, we’re here to help if you need it.”
Get tools to navigate uncertainty.
To explore the growth strategies that work best in today’s economy, download the Truist Purple PaperSM “Transforming macroeconomic uncertainty into opportunity” or contact your Truist relationship manager.