What Major Corporate Debt Has to Do With Your Small Business?

More Than You Might Think

It’s no secret that the state of the economy has an impact on how businesses fair within it. Even in the best of times, small changes or the prediction of shifts in the financial health of the nation can lead to major effects on all companies. Small businesses, though, are often among those most deeply impacted by these changes – and they may be in for a storm in the coming years.

The Corporate Debt Snowball

2018 marks the 10-year anniversary of the 2008 American financial crisis. Though we often feel as if we have made a full recovery from this dark period for businesses, the truth may be more complicated.

Instead of subprime loans, the next financial meltdown could come courtesy of the massive corporate debt our nation’s businesses have accrued. Estimates put the current total of business loans at over 4.3 trillion – and if a large portion of those start to default with the rising interest rates being seen in the current financial climate, that could mean serious trouble stemming from corporate debt.

What kind of impact does all of this have on American business? Interest rates have been stable and low for many years, but a slow creep upward has many companies concerned. Business owners are worried about what might happen in the new fiscal year, as the financial climate continues to teeter on the edge of a shift. Experts agree that their fears might not be unwarranted.

Direct Impact on Cash Flow

Many smaller companies have a limited amount of cash to work with. In the event of rising interest rates, the cash flow necessary for loan repayment may not be readily available. Short-term loans that are often required to compensate for shortages in cash flow may also be much more difficult to obtain or qualify for with rising rates or may no longer be affordable for businesses of this size.

What does this mean for these companies? Debts may not be payable right away, leading to higher interest rates on those specific debts. Investments may be slowed, expansion may be arrested, and the overall growth of these companies may grind to a halt until these issues can be resolved. Some may even face bankruptcy or closure – a common trend in recent years, especially in the world of retail. The pattern of companies shuttering their stores is one that is becoming possible to see a repetition of in consumer-driven other fields.

Indirect Impact via Changes in Consumer Spending Habits

When the economy changes, consumer spending changes along with it. Rising interest rates on things like home and auto loans can lead to less expendable income for consumers, which will cut into the amount they’re able to hand over for goods of all kinds. It’s simply more practical to cling to the cash one does have, rather than buying things that aren’t strictly necessary. While that doesn’t impact every kind of business, most who offer goods or services will feel the pinch.

Smaller businesses that rely heavily on consumer spending will be the most drastically affected, with reduced cash flow to show for this reduction. It becomes a natural reaction to hang onto every dime that crosses a company’s counter in this type of financial environment, meaning less will be spent across the board. Business spending is typically geared toward improving products and services offered to consumers, so as spending becomes restricted so do these improvements. When improvements slow to a stop, consumer interest and loyalty soon follows. The cycle leads to faltering business and – in drastic situations – even complete financial failure.

Long-Term Impact of Arrested Business Development and Growth

As mentioned previously, ballooning overall interest rates can have a serious and negative impact on a business’s ability to grow and improve over time. Business loans are harder to get in these turbulent financial times, and when they are available they are much costlier. They can also be more difficult to repay when a company does not have a fixed rate on their loans.

It gets worse from there. When you’re paying more in routine loan repayments, you’re cutting into your company’s profitability. This, in turn, makes it even harder to get the funds you need in the future. After all, who wants to lend money to a company that is seeing less and less profit, every year? Without the funds you need, expenses that are not strictly necessary – like those associated with investment in the improvement and development of new products or services and overall business growth – are typically cut from company budgets. This leaves businesses hoping to expand and grow stuck in a space where this is no longer possible.

How to Plan for an Uncertain Financial Future

With all this uncertainty due to corporate debt looming overhead, trying to plan for your business’s next few years can feel like trying to fend off an invisible attacker. You’re not sure if you or when you’ll be impacted, but you need to be prepared for if you are. The best solution for this scenario may be to talk with a legal professional who understands your individual concerns and can help you put your small business on a track to success – even in an uncertain financial environment.

The Van Horn Law Group of South Florida has been helping business both large and small navigate the American financial climate for years. Experienced in all manner of business litigation, company formation and protection, and more, they have the skill necessary to help you disaster-proof your business – no matter what the future throws your way.

It’s easy to convince yourself that you’re not in need of corporate legal help when your business has other matters to attend to financially. From marketing and product development to everyday expenses, there’s a lot for you to think about in terms of where your money goes. However, avoiding financial catastrophe should certainly be on the list for businesses in a climate that appears to be shifting toward uncertainty. To keep your company in the black regardless of what’s going on with national corporate debt, keep your corporate lawyer on speed dial.

Published by
Chad Van Horn

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