As Arizona small businesses head into the second half of the year, ongoing inflation continues to reinforce a K-shaped economy as AI adoption generates a reduction in demand for labor, faster than the economy can create new jobs.
While inflation is impacting all Arizona consumers across nearly all goods, it is not impacting all Arizonans equally. The wealthy minority are driving growth in consumer spending while everyone else struggles to make ends meet. Wealthy consumers are relatively immune to higher costs, while less wealthy consumers see more of their discretionary income going to operating vehicles and buying groceries. The result is a bifurcated market for small businesses in Arizona to target, where one customer group continues to demand premium quality and service items while the other is looking for value and ways to reduce expenses.
Arizona small businesses serving a less affluent client base are looking to lower the cost of their goods and services while still providing a basic level of service. Restaurants across the state may choose to swap out organic or farm fresh menu items for frozen, or more highly processed substitutes. Technology retailers may stock up on refurbished computers and phones versus marketing new inventory. Retailers may also partner with buy now, pay later (“BNPL”) firms to help customers finance their purchases.
The Arizona economy is particularly exposed to changes in consumer sentiment given the impact that tourism and the hospitality industry has on the state’s economy. Many Arizona small businesses rely on middle-class consumers to spend discretionary dollars. As more and more of the middle class fall to the bottom half of K-shaped economy, and as higher energy prices drive up the cost of an Arizona vacation, the state will inevitably feel the effects of higher costs and reduced demand.
However, the Arizona economy is poised to benefit from massive investment in the semiconductor and advanced manufacturing sectors which offer the promise of job growth and business opportunity.
Many Arizona small businesses are also eyeing AI technologies, which offer the promise of tremendous efficiency but remain largely unproven, as they work to incorporate new efficiencies into their businesses. Others are embracing AI wholeheartedly and investing in what they see as the next generation version of themselves. These investments are occurring across new technologies including natural language models, which are used to write customized sales content, uncover new markets, and optimize key business decisions. However, we also believe in the power of new AI technologies to streamline work and eliminate both blue and white-collar jobs in the state. In fact, we believe we are at the beginning of a workforce transformation that will lead to the elimination of many existing jobs and hopefully the creation of many new roles as the Arizona economy evolves.
Arizona small businesses should be focused on customer demand, cost of goods, operating expense, and free cash flow. Finding a dependable market at prices that are sufficient to cover the cost of the business is critical in a volatile market like the one we are experiencing today. Arizona companies operating in this environment should also maintain several financing relationships to help them finance growth and handle any volatility in cash flow. Having options in difficult times is critical to managing a durable business.
For Arizona small business owners, navigating the landscape of financing can be a formidable task. Whether you’re launching a new venture or expanding an existing one, securing financing for your small business involves a thorough understanding of market opportunities, cost projections, and timing. Here are important steps to set you up for success.
A well-prepared business plan is essential for securing financing. It allows you to articulate the opportunity, capital requirements, and expected returns. While traditional banks may require a detailed business plan, non-bank lenders might offer quicker funding with less documentation. Regardless, a comprehensive business plan provides clarity and demonstrates your preparedness to potential lenders.
- Determine Revenue Potential – Before diving into the financial aspects of your business, it’s essential to evaluate the market opportunity you’re addressing. Analyze the size of the market and the potential revenue you can generate. Consider the price point at which you plan to enter the market and ensure it aligns with customer expectations and industry standards. By accurately assessing the revenue opportunity, you’ll be better positioned to project labor costs, inventory expenses, and production costs.
- Project Costs and Understand Capital Needs – Once you’ve determined the revenue potential, it’s time to project your costs to operate a business in Arizona. This includes labor costs, inventory expenses, and production costs. If your business requires external financing, factor in the cost of capital. This means understanding the interest rates and fees associated with different financing options. Accurate cost projections will help you determine whether your business is economically viable and how much capital you’ll need to succeed.
- Address Seasonal and Volatile Cash Flows – Many small businesses in Arizona experience seasonal fluctuations and cash flow volatility. Unlike larger companies with stable cash flows and substantial assets, small businesses often face challenges in securing loans due to limited collateral. Understanding these dynamics helps lenders assess risk and determine loan terms. Exploring alternative financing options and building a solid business plan can help mitigate these challenges.
- Time Your Market Entry – The timing of your market entry can significantly impact your business’s success. Evaluate whether the market for your product is currently growing or if it’s in decline. Consider any seasonal aspects of your product and whether you’re introducing it at the optimal time of year. Additionally, assess the overall economic climate in Arizona and how consumer spending might affect your product’s success. If you can confidently answer these questions, you’ll be in a better position to time your market entry effectively.
- Plan for Future Capital Needs – Forecast your financial needs a year in advance to secure better rates and terms.
- Keep an eye on the future – Arizona, and the world more broadly, is changing fast and that means both technology and customer taste is changing faster than ever. This is both an opportunity and a risk. New technologies will allow Arizona business owners to reach broader markets and employ greater automation. However, the rapid dissemination of technology and ideas can lead to rapidly changing tastes and needs, requiring nimble product development, sales, and marketing teams.
Understand the types of loan products available and which ones align with your business needs. For example, SBA lending, invoice factoring, purchase order financing, equipment financing, merchant cash advances, small business lines of credit and term loans (which may be offered by companies that also offer merchant cash advance but structure some products as loans).
Arizona small businesses also have options through traditional and alternative lenders. Banks who maintain a deposit relationship with a customer may be willing to offer lower cost lending products, however, banks are generally more conservative than alternative lenders in terms of which businesses they will extend credit to, the amounts that they are willing to extend, and the time it takes to make a decision on credit. Here are some key differences:
- Traditional Lenders (banks and credit unions): Small businesses seeking capital should speak to their bank or credit union to determine if they would qualify for a term loan, line of credit, or equipment finance product. If they do quality, they are likely to receive superior pricing to most other forms of financing. However, banks and credit unions are regulated entities and therefore must be extremely conservative when lending capital. In the wake of the failures of Silicon Valley Bank, Signature Bank and First Republic, these institutions have only become more conservative. As a result, the application process can take weeks and require considerable amounts of information including financial statements, tax returns, work orders and a business plan. In many cases, personal guarantees and specific collateral will be required, and for younger businesses without a strong history of profitability, acceptance rates can be low.
- Alternative Lenders: Alternative lenders, like FinTechs, offer loans and factoring products to small businesses, with the ability to make offers in a matter of hours and fund within one or two days. This is done by leveraging business cashflow information as well as credit profiles on the business owner and on the business itself. Many alternative lenders generally require three to four months of bank statements, a driver’s license, and proof of ownership. However, some alternative lenders whose primary business is processing credit cards (the merchant processing industry) may underwrite using only the credit card cashflow and may not require bank statements. This can limit the total amount of cashflow the underwriter is able to see to only revenue that the business books using credit cards and can limit the total amount of capital the applicant qualifies for. Decisioning is often based on a combination of human underwriting and algorithmic decisioning models that take into account both customer generated and third-party data. Alternative lenders often charge more for their capital than banks and credit unions, but generally do not require collateral, are able to accept a wider range of applicants – many with imperfect credit profiles – and are frequently able to deliver capital much faster than other lending institutions. Alternative lenders may require as little as an application, three months of bank statements, approval to pull credit and a driver’s license in order to underwrite and approve a customer.
Additional Tips for Securing Financing
- Maintain Financial Health – To enhance your chances of securing financing, keep personal and business finances separate, improve your credit score, and regularly review your financial health. Demonstrating reliability and preparedness to lenders is essential for obtaining favorable loan terms. Remember, expecting instant approval with minimal documentation is unrealistic for most loan requests above $25,000.
- Consider Alternative Financing Options: Explore various financing options, including non-bank lenders, to find the best fit for your business.
- Prepare Financial Documents in Advance: Have recent bank statements, tax returns, profit and loss statements, and balance sheets readily available.
- Establish Relationships with Lenders: Build strong relationships with lenders to facilitate a smoother loan application process.
Ben Johnston is the chief operating officer of Kapitus, one of the most reliable and respected names in small business finance. Kapitus provides growth capital to small businesses and has provided more than $8.5 billion to over 50,000 small businesses since 2006. Kapitus offers multiple loan products to small businesses, including SBA loans, revenue-based finance, equipment finance, cash-flow based factoring, revolving lines of credit and invoice factoring.
