Five Things to Discuss With Your Borrowers

Despite the robust economy as reflected by solid GDP growth over the past few quarters, many small businesses are facing some serious challenges. If these challenges are left unchecked, some of these businesses could face significant financial obstacles in the coming months. As a banker, you can be proactive by talking to your small business borrowers about these challenges and how you can help overcome them. Following are five things to include in your discussion.

1. Dealing with Disruption

Almost every industry today is having to deal with some sort of disruption. These disruptions are usually caused by technological advances, especially the Internet and digital technologies. For example:

• Amazon, eBay, and other online sellers have completely changed the game for retail businesses. So has the dominance of retail giant Wal-Mart. Small retailers have to be cost-conscious and nimble to survive in today’s retail landscape.
• Uber, Lyft, and other ride-sharing services are threatening the existence of the taxi cab industry, which has had a monopoly on driving customers from point A to point B for more than a century.
• Carvana, TrueCar, and Vroom enable customers to buy cars without ever having to set foot in a traditional dealership.

Ask borrowers if there are any technological developments in their industry that have the disruption potential of an Amazon, Uber, or TrueCar. If there are, discuss things borrowers could be doing right now to maintain their competitive advantage as they prepare for an uncertain future.

2. Finding Affordable Labor

Last September the unemployment rate fell to its lowest level in nearly 50 years. The economy is now essentially at full employment as there are more jobs available than there are people looking for work. This is great news for workers, but it can present tremendous challenges for growing businesses looking to hire and retain employees. Highly skilled and trained employees in particular are in high demand and can often pick and choose from attractive, well-paying jobs. Ask borrowers if they have thought about their current and future labor needs and whether they have a strategy for meeting them. For example, will they need to offer higher wages and better benefits to attract and retain employees? If so, can they pass the higher costs on to customers, or will they have to absorb them? Also, do they have succession plans for replacing older workers who may be retiring in the next few years? For example, are they identifying and grooming younger employees to fill these positions?

3. Managing Tariff Costs

The tariffs that were implemented in early 2018 on imports of steel, aluminum, and other foreign goods have had a serious financial impact on some industries. In a survey published in October by the National Center for the Middle Market at Ohio State University, one-third of respondents said they expect their profits to suffer as they absorb higher costs due to tariffs. The biggest impact of the tariffs will be on companies that produce and move goods, such as manufacturers, wholesalers, construction companies, and retailers. Nine out of ten wholesalers, six out of ten manufacturers and construction companies, and half of retailers said they expect their costs to rise due to tariffs. Most said they plan to pass higher costs on by raising prices. Ask borrowers not only whether tariffs are affecting their business, but also if they’re affecting businesses along their supply chain. Do they have alternate supply sources lined up in case current suppliers raise their prices due to higher tariff costs? And do they plan to pass along higher costs by raising their own prices?

4. Handling Rising Interest Rates

The Federal Reserve continued its aggressive rate hike campaign last year in an effort to bring interest rates up from historical lows to more normal levels. The Fed has stated that its goal is to bring the federal funds rate up to 3.0 percent in 2019 and 3.5 percent in 2020. Ask borrowers what impact rising interest rates could have on their overall financial picture. This is especially critical for borrowers carrying a lot of debt at variable rates. Also talk to borrowers about derivatives and hedging tools that could help mitigate interest rate risk and the impact of rising rates on their business.

5. Preparing for a Slowing Economy

Finally, you should talk to borrowers about how prepared they are for a slowdown in economic growth. Some economists believe that the strong GDP growth we saw in 2018 was due largely to the corporate tax cuts and that this impact will start to wane this year. The Federal Open Market Committee (FOMC) is projecting GDP growth of 2.5% in 2019 and 2.0% in 2020. Ask borrowers what the impact will be on demand for their products and services if the economy cools down and if they have contingencies in place to address these scenarios. Give us a call if you’d like to discuss in more detail these and other questions to ask borrowers 417-881-0145.