While many small business owners had hoped that the worst was over after these challenging last two years, it turns out that there is still one more obstacle they will need to face before the end of this pandemic: inflation. So, what can you do to prevent any further financial loss in the midst of increasing prices? In this episode, Gene Marks and Rohit Arora, CEO and co-founder of Biz2Credit, advise small business owners on how to offset the damage of rising interest rates and inflation.
Podcast Key Highlights
- How Are Inflation and Rising Interest Rates Impacting Small Business Owners?
- Small business owners are worried that inflation will lead to higher interest rates on both existing and future loans.
- They are also concerned about the shortage of people they can employ.
- What Are People’s Biggest Economic Concerns?
- People believe that the Federal Reserve will be forced to increase interest rates even more. Although this rise would reduce inflation, it could potentially lead the economy into a recession.
- There is significant concern that the current macroeconomic crisis, the unstable geopolitical situation, and the ongoing health crisis, could all culminate in another depression within several years.
- How Will the Economy Impact Employment Opportunities at Small Businesses?
- As everything begins to reopen, there will be a higher demand for services that weren’t available during the last two years, which means small business owners will need to expand their staff in order to keep up.
- Because job participation is 1.3% below what it was prior to the COVID crisis, small business owners are struggling to compete with the current wage inflation.
- A mild recession could lead to significant layoffs among larger corporations, consequently increasing the existing talent pool for smaller businesses that are looking to hire new employees.
- What Can Small Business Owners Do to Prepare for Higher Prices and Interest Rates?
- One step you can take to offset inflation is to analyze your fixed costs and see if there’s anything you can do to reduce them.
- Another way you can save money is to make sure your small business has a very strong digital presence.
- Prior to hiring any new employees, check to see how their salaries will impact your fixed costs. Otherwise, you may not be able to sustain their wages once an economic downturn hits.
- Lastly, always make sure you have at least 12 to 18 months of cash reserves at any given point of time; you should also try to get your business credit score and history in good shape so that you can qualify for a loan if money becomes tight.
Links
Transcript
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Gene: Hey, everybody. Thanks for joining us again. This is Gene Marks here with the Small Biz Ahead podcast from The Hartford. I am without my colleague, Jon Aidukonis, today. He’s either lying on a beach or serving tuna fish sandwiches in some restaurant somewhere, because we all know how much he likes the restaurant business. But I do miss him and I wish he was here for this conversation, but we’re going to have a good conversation anyway. Because I have a guest on who I’ve known for a number of years, who I’ve followed, who I’ve written about his company, particularly, his company’s Small Biz Lending Index. It’s Rohit Arora. Rohit is the CEO and co-founder of Biz2Credit. That’s B-I-Z the number two Credit. So, Rohit, first of all, thanks for joining me.
Rohit: Yeah, thanks for the opportunity.
Gene: Yep. I’m glad that you are here. You have been in the small business space for a long, long time. Your company Biz2Credit does what? Tell us a little bit about it.
Rohit: Biz2Credit, me and my brother, we founded the company in 2007, 2008 time period in New York with an aim to help small businesses get access to credit. So we were there in what used to be pre-FinTech era, and the aim always was to create a very transparent way for businesses to get access to credit. And also not just see the options, but being able to fulfill those options. So over the years, we have now done close to $8 to $9 billion dollars of lending. We have over 200,000 customers. We have 650, 700 employees in the company. And we have seen the whole life cycle of… when we started the company, we saw the Great Recession coming in to the COVID crisis and now we’re in a post-COVID crisis. So we have seen a lot of different business cycles. We have experienced that with hundreds of thousands of small business customers across the country, across different industries, age groups, and also different sizes. So it has been a very, I would say, eventful journey over the last 14, 15 years now.
Gene: Yeah, it is amazing. And like I said, in the small business space, you guys are very well known. When you say that you offer the financing, so is that your company itself? Will I borrow money directly from Biz2Credit? Or are you more of an intermediary?
Rohit: So our model is actually very interesting. So we are a marketplace where what we have done is that instead of typically what marketplaces do is that they will generate a customer request and then they’ll shop it around, and then they let other people fulfill that. So what we did over the years, what we realized was that generating the request for credit is the easier part. It’s more challenging to fulfill that. So we actually built a full fulfillment platform where we have a lot of, I would say, lenders and or investor groups that includes banks, that includes insurance companies, that includes credit funds and other folks.
Rohit: And based on the risk rated appetite, we actually build portfolios. We manage that. We do all these servicing, all the collections, all the renewals, everything end-to-end to our own digital platforms. So as a customer, you don’t feel the pain about from where are you going to get the best credit option because we are curating it. We are actually constantly looking at it and we have our own scorecards, risk credit scorecards that is used by all the lenders. So the benefit of that to a borrower is that while they get the best options available out there, they don’t have to go and individually shop it around, and then they also get things in a very time-bound fashion.
Gene: So, I do want to get into our main topic, which is inflation and interest and your outlook here, but before we even jump into that, you just mentioned you talking about what Biz2Credit does, I’m dealing directly with you, you’re going to find me the best source of financing. You will be my relationship when it comes to the lender, which is great. Just before we leave that, what does that cost? Does the business pay extra for this to you? Or is this something that your banks pay you for this service?
Rohit: Yeah. So for small business owners, they don’t pay us anything except for the interest payments that they have to make on the borrowed money. And that interest is typically risk rated. So we have products which are very close to bank lending rates. Now I think they’re almost matching it with Fed increasing the interest rates to some of the products which are, I would say, in mid-teens stuff to high-teens stuff. So depending on your risk, depending on your industry, depending on where you are in the whole risk totem pole. And then we also have factor products, which are actually non-interest products. So we give them options of either taking a term loan or what we call a future receivable, depending on their need, depending on their credit profile, and also depending on how much documentation that they can provide. So based on that, those products are available to them.
Rohit: And the good thing there is that for them to use the platform, we have something known as a virtual CFO platform within that where they can go and benchmark their business. They can see all the different things happening. How they measuring against other businesses, what other fees they are paying to other service providers. Now all that is totally free for them. So they don’t have to go and spend any money to use these platforms out there.
Gene: Well, listen, you deal with so many small businesses you’ve got a good outlook on really the sentiment and the feeling of small businesses. At the end of March, and we’re having this conversation in the middle of May, you wrote a column for Forbes… you write regularly for Forbes, a very popular column on small business strategy. And this column focused on how inflation and interest rate hikes hurt small business, obviously, rising prices, supply chain issues, increase of interest these of these have a huge impact on business’s ability to manage their costs, to price, to quote to their customers, to control their overhead and to get financing as well. So we know that inflation and interest rate hikes really do have that impact on small business.
Gene: Now, just this week, Rohit, actually today… and again, I’m giving this so I know this won’t be published for a couple of weeks, but in the middle of May, the National Federation of Independent Businesses released their sentiment survey, they do this every month, and they said that small businesses outlook their expectations are at a 48 year low, so not great. And I want just to get your comments on how you see right now the small business environment as both inflation and prospective interest rate pressures are really starting to have their impact.
Rohit: So in terms of inflation, I’ve been saying that from almost January onwards that things are going from bad to worse, when we have seen that in our data. We do these town halls once a quarter. And the last one we did was… actually, the one we did was recently in May, but prior to that we did one in early March. And we ran a poll among business owners who come, because we will typically invite either a senator, U.S. senator or a congress person in that. The business owners have been reporting inflation as one of their major worries for the last six months. It has really deteriorated over the last two months, especially after the Russia-Ukraine war started. So, I would say, this is a bad situation right now.
Rohit: We are going to see the next CPI report coming tomorrow. We foresee another six to 12 months of high inflation. Now that clearly means that for Federal Reserve to try to control that inflation, they will have to increase the interest rates. That clearly means that most of the small business loans, including the SBA loans are floating rate loans. So that means that every time Fed increases the interest rate their interest burden on existing loans are also going to go up quite a bit. So obviously, I would say, right now the number one worry for small businesses, and we did the poll the other day, almost 75%, 80% of the businesses said their number one worry is inflation. Number two worry is that lack of people that they can employ, even if they want to pay top dollar salaries in their world.
Rohit: So I think inflation is going to be there for quite some time. I think higher interest rates are also going to hit small businesses. Right now, the good news is Main Street economy is still doing pretty well. So it’s pretty decoupled from stock market and other things. My only worry is that as the Fed starts doing the quantitative tightening from June 1st, we could have some unintended consequences of that happening over the next three to four months where liquidity can tighten up. And if that happens then access to credit for small businesses will become more expensive and will also tighten.
Gene: Fed chairman Powell had said that at the Federal Open Market Committee recently that rates are going to go up about a half of basis point. A lot of people feel that’s just not enough. That steeper interest rate increases are going to be needed, as you spoke to, to head off the effects of some of the pullback from this quantitative easing to head off all the liquidity, the extra cash that’s floating around in the system that is putting inflationary pressure on the economy. Do you think that the Fed will be increasing interest rates more? Are you foreseeing that in the next year?
Rohit: See, my take on that is that two or three things are going to happen. One is Fed will be forced to increase the interest rates more than what they have been projecting right now. Obviously, with increasing the interest rate and the quantitative tightening, the demand is going to go down. And that clearly means inflation will start coming down, which is good news. But that also means that the economy can actually go into a recession, actually. And that is not a good news for most of these small businesses, because once the economy goes into a recession then we have seen that it takes anywhere from nine to 12 months for the economy to start coming out of it. So that’s my worry.
Rohit: And the second thing is this time is very different because we have three big things happening together. We have a macroeconomic crisis because of all this excess money and supply chain issues. We have a geopolitical situation, which is extremely unstable right now. That means that oil prices and other commodity prices including food prices will remain elevated for quite some time. And then we have a health crisis, which is still ongoing. So I think that’s a very rare combination, because if you see the last time it happened there was World War I, which was geopolitical crisis, but then once it ended, we had Spanish flu. And then after that, we had 10 years of gap before we had The Great Depression. So, I would say, this time all three are culminating.
Rohit: Now that doesn’t mean that we’ll have a depression or anything like that. But that also means that we will have a period of very slow growth. We’ll have stagflation for some time. And unlike the crisis in 2001 and 2008, the Fed will not be able to do much, because this time Fed is the one which is actually trying to calm the economy, and there then they will not be able to do any quantitative easing easily. And for them to drop interest rates pretty quickly after they go off will be very tough until unless yes, the inflation just drops very significantly, which as of now looks tough to me.
Gene: Yeah, I think so too. I mean, many economists… I mean, Larry Summers, Secretary of the Treasury under Obama, he’s the one that’s saying it’s not going to be a very soft landing at all. And that the only way to really get out of this situation is for the Fed to raise rates more significantly than they’re doing right now. And that’ll have an impact on businesses all over. And it’s funny too, because you mentioned recession a lot of the clients I talked to they’re definitely concerned about a slowdown in the economy later this year. I mean, like you had said, right now, Main Street’s not doing so bad, and a lot of my clients not so bad. But as they look ahead in their order books, their backlogs and even their customers they’re talking to, many of them are telling me that they’re seeing a softening in demand, a little bit of pullback people getting a little concerned with pricing. And it would not be a surprise to see a downturn, a recession coupled with interest rate increase later on in this year.
Gene: And yet, Rohit, which is amazing to me is that they’re all still looking for people. These businesses are still looking to hire even knowing that these times are so challenging and volatile. And I’m curious, why do you think that is? You’d think we’d be pulling back and not wanting to hire anymore, but I’m not seeing that among my clients. I don’t know if you’re seeing the same among your customers.
Rohit: I think there are two different forces colliding with each other. One is obviously, high inflation but also there’s a very high point of demand out there. So if you see contractors they’re busier than ever, because a lot of stuff hasn’t happened in the last two years, same with travel and tourism, services in industries. Because what happened in the U.S. over the last two years and why inflation is also high is because a lot of that spending happened only in goods and not in services.
Rohit: So as that moves away from a good spending to services spending, we’ll still see a very strong demand for services, which is, most of the U.S. small businesses are services-oriented at the end of the day. Now, that’s a good news. That also means that inflation will slow down a bit just because of the fact that the amount of demand for goods is going to go down. So I think that’s a good news. And that’s what a lot of small businesses are anticipating. That’s why they’re still looking to hire more people right now.
Rohit: I think the challenge would be that if we have a mild recession, then actually, that sounds counterintuitive, but that would be good for small business owners. Because what that’s going to do is it’s going to cool down inflation. It’s going to help them… And the biggest challenge in inflation today is wage inflation than anything else. So if that cools down, if we see more people coming back into job market… because right now job participation is 1.3% below what it was prior to the COVID crisis. So people still haven’t come back into job market. That also means that a lot of immigration that used to happen has stopped. So that’s also impacting the search for workers. So I think that’s going to happen.
Rohit: I think the good news is that small businesses are much healthier than what they were pre-COVID because they got $1.3 trillion incumbent money, which is almost grant money. So in short term they’ll be able to sustain it. But if this recession gets deep or very long then that’s a problem.
Gene: I’ll tell you another opportunity for them as well is, if we do have a recession, even a mild recession you know that larger corporations they take that as a first opportunity to lay employees off. And I talk about that with my clients and say, “If you’ve got the cash or the available cash or the financing you’re complaining about getting good skilled workers, there might be some opportunities to snap some up if there is a recession.” And some of these get laid off from their current jobs at bigger employers and just keep your eyes open. You guys at Biz2Credit also do the Biz2Credit small business lending index. Tell us a little bit about that. And I do know that your most recent index was actually fairly positive, correct?
Rohit: So, yeah, we have been doing it from 2011. And our aim always was that since we have so many different kinds of lenders on our platform that we can measure their approval rates. And we have seen an uptick in lending approval rates. It really fell down during COVID, and then PPP come along and then everything was more towards PPP. But we have seen the approval rates have actually gone up over last year, and they were actually getting better and better. And I think the only risk that I see there is that if, let’s say, the stock markets just fall too quickly or if there’s too much of tightness in the bond market, especially bond market, then there is going to be some tightness in access to credit for small businesses.
Rohit: Otherwise, I see that’s still going to be very healthy stuff. We are starting to see a lot of demand coming back for credit now, because businesses need money to sustain and grow. And we’re also seeing a lot of lending, institutions are keen to lend because they’re getting a very good yield. Obviously, once the interest rates start going up even more that can tighten the markets. But I still foresee that, we will see a decent increase in our lending index numbers until unless we are hit either by a deep recession or very massive tightness in the bond markets.
Gene: How much of an impact on this, do you think the real estate industry has? I mean, so many small businesses put up… they’re asked for personal guarantees they put up collateral, many of them, particularly, the smallest ones have to put up personal assets, homes or whatnot, and other businesses put up their own property that they own. The real estate market itself has been booming the past couple of years. Do you think that’s had an impact on those loan approval rates because there’s more value in the collateral that’s being offered?
Rohit: See, prior to 2008, seeing the value in the home was very important. I think what has changed now is that most of the lenders are still looking for a personal guarantee, but they don’t really take into account the home values anymore. Because what they have realized after 2008 is that a lot of this rises. Because prior to 2008, everybody used to believe that house prices only go one way. That was a lie, after 2008 people realize that home prices can also go down.
Rohit: But having said that, yes, if you have an asset, which is a appreciating assets, then what our data has shown is that as a business owner, you’ll keep doing well in your business. Because what we found after 2008 was the biggest drag for a lot of businesses was not their business. It was that they had a lot of these real estate assets that went below or underwater. And then for them even paying the mortgages on that became very tough. And then that got them into a lot of trouble. So obviously, it has an impact, but from a lending model and lending aspect, the value of the home or the equity in the home and the value of that has now been pretty much discounted because people have realized that, well, that’s a viable asset, but that doesn’t really count in case there is a default or there’s a slow payment out there.
Gene: That is a really interesting take. Okay. Thank you. So listen, we’ve talked about inflation. We’ve talked about recession, we’ve talked about rising interest rates. It’s definitely going to be a challenging year, at least a year for running a business.
Rohit: Yes.
Gene: Not like businesses haven’t been through this before. I mean, since the time of Cleopatra businesses have dealt with inflation and supply chain issues in their own ways. So people will navigate their way through this. And I’m curious to hear what advice you might have Rohit. I mean, you have so many customers that are going through this right now. If you were running a business, small business, not Biz2Credit, which is not a small business, what would you be doing in 2022 to navigate your way through this year of just higher prices and higher interest? What advice would you give for somebody like me who’s running a business?
Rohit: See, I think the biggest advice is that where small business make the biggest mistake is that they just get into a habit of having very high fixed costs. So I think that’s very important. You need to analyze your fixed costs. You need to reduce them. Let’s say, you’re signing a new lease right now or your lease is up, commercial real estate is still pretty weak. So find a place… A lot of big companies are laying off people or they are as the stock price goes down, they’re subletting their offices, they’re doing a lot of other things. So you have to think about that. Think about your hard cost. Think about your hardware cost. Think about things that you can get out of in case of a recession. So I think that’s very important. You can have higher variable cost but low fixed cost. I think that’s very important. Point number one.
Rohit: Point number two is, as any small business in the post-COVID world whether you are a retail business, you are a consumer-facing business, you are a services business, you’re any other business, have a very strong digital presence, because that’s going to help you immensely during a downturn, because it’s less expensive to have a very strong digital presence. And it’s also less expensive if you can actually distribute your product or services online because the world is your market, so that’s a very important aspect.
Rohit: I think the third thing, I would say is that when you are hiring people right now, it’s again a question of fixed cost versus variable cost. So sometimes it’s better to give them joining in bonus or what we call hot skill bonuses than giving them very high fixed salaries, because it’s very tough to reduce that. Then just give them one time bonuses which is still a variable cost. So I think those are some of the things that people need to figure out.
Rohit: And then I think the fourth thing is that any small business needs to understand that they should have at least 12 to 18 months of cash reserves at any given point of time, because that’s important. Because if a downturn comes in and you are running low on cash, then it’s very tough. So if you don’t have a relationship with the lender, build one right now. If you haven’t filed your tax returns for 2021 and your financial year is… the calendar year, just do that. Get all your paperwork ready. Have some credit relationship with some lender somehow, during times when things are still good, because it will really help you when things get bad because you will have a prior history with them.
Rohit: And also be very good with your business credit history. Because a lot of people are very aware about their personal credit scores and their personal credit histories, but they’re not good about their business credit history. So I think that’s important that you ensure that you have enough money in your account. You don’t do a lot of non-sufficient fund issues. You balance your books really well, between account payables and account receivables. You have enough cash. You go and collect your money, you go and negotiate some very good deals with your suppliers. So I think those are the things that you have to do.
Rohit: And you have to prepare now. You cannot start preparing when there is a slowdown coming risk, slowdown is coming that’s for sure. Whether it leads to a recession or not, nobody knows, but slowdown is coming. Money is going to get expensive. Demand is going to go down. Those are just extremely… you’re almost 100% sure. And even if that doesn’t happen if you’re prepared for the worst, you’ll get the best outcome out of it.
Rohit: A lot of people, a lot of business owners they’re taught all the time about all this, most of it is that you need to be optimistic, which is great. But optimistic doesn’t mean that you don’t prepare for the worst because that’s very important that during these times all hands on the deck. So you have to really focus on your business. That’s the other thing you can’t be careless about your own business. You have to cut your costs, you have to be lean and mean, and you need to just ensure that you’re preparing. That if I were to, as a business owner, see a dip in my revenues for six months, then I will be able to survive. And have a very honest and upfront conversation with your employees also about these things here.
Gene: What makes me laugh is that every point that you are bringing up about being tough with your cash, managing your overhead, reducing your fixed costs, tying your compensations, your performance, having 18 months of available cash, having those conversations with your employees, it doesn’t take a recession to do that. I mean, we should be doing that all the time. It reminds us of what we need to do, but it’s always this should be your common practice for running a business. And you are right. I’m sure you meet a lot of business owners that are romanticists or optimists. My best clients they know math really well, and they know how to buy something for a buck and sell it for three, even in a slowdown of economy. And so those are really good lessons to remember.
Gene: Rohit Arora is the CEO and co-founder of Biz2Credit. Rohit, I want to thank you so much for joining. I’ve learned a lot from this conversation. And I hope our audience will walk away with some really good advice on dealing with the slowdown this year.
Rohit: Yeah, and thank you for your time.
Gene: Thanks, Rohit. My name is Gene Marks, you’ve been listening to the Small Biz Ahead podcast from The Hartford. If you’d like any advice or tips or help in running your business, please visit us at smallbizahead.com or sba.thehartford.com. Thanks so much for joining us. We’ll be back with another episode real soon. Take care.
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