Rising inflation and unpredictable interruptions in the supply chain are expected to eat into the profits of both manufacturers and retailers in 2022, according to the financial turnaround experts at Resolute Commercial Services (Resolute).
“Any organization that depends on credit to finance its operations is likely to have difficulty in the coming years,” says Nathaniel Curtis, senior managing director at Scottsdale-based Resolute. “Setting up a business for success in the next few years will require taking a hard look at the current debt liabilities, how the company’s debt is being used, and how it’s structured.”
Debt for nonfinancial businesses has grown steadily since 2010. Between 2010 and 2019, business debt grew at an average annual rate of 5.5%. That growth increased significantly to 9.1% in 2020 due to the pandemic. By the end of the year, debt for nonfinancial businesses in the United States totaled $17.7 trillion or 82.4% of the country’s gross domestic product, according to a report by Deloitte.
Curtis recommends that business owners begin reevaluating debt now to avoid financial threats to their companies in 2022 and the foreseeable future.
“Debt evaluations have not been a standard business practice for almost 30 years,” says Curtis. “But all organizations should begin evaluating their reliance on debt now. Inflation will push up interest rates across the board, causing critical financial stress for businesses that are not prepared.”
Follow these four steps to evaluate business debt, according to Curtis:
- Restructure financed capital away from interest bearing lines of credit, especially those with floating rates. When possible, minimize reliance on loans and credit cards to finance business operations or equipment. When debt can’t be avoided, seek fixed rate loans.
- Lock in long-term interest rates now for any necessary debt, as it is likely interest rates will begin to rise in 2022.
- Monitor accounts receivable to ensure payments are being submitted in a timely manner. It is not beneficial for a business to extend interest-free credit to customers by allowing continued late payments.
- Evaluate supply chain partners’ reliance on debt and plan accordingly. Have a backup plan for any suppliers who may have difficulty fulfilling orders or maintaining the financing needed to fund their business.
“A well-prepared company should have detailed strategic plans for managing credit-related issues throughout the entire supply chain,” says Curtis. “If you don’t have these plans in place, it’s time to create them.”
Curtis also says that strategic acquisition plans may be needed for both partnering organizations and competitors that may not be able to rehab their debt. He says business owners should consider beginning favorable contract renegotiations that strengthen their organization’s control over the supply chain.
Resolute is an independent business advisory firm focused on diagnosing and resolving the challenging issues impacting middle market companies. Founded in 2008, Resolute provides solution-oriented fiduciary, financial, business, and real estate advisory services to financial institutions, corporations, law firms, state and federal courts, and trustees across the country to maximize value.
To date, Resolute has provided services in 36 states, with a strong presence in the Southwest and Mountain West regions. Its experienced staff has managed over $1 billion in distressed assets and sold more than 75 assets/enterprises with a total value of more than $250 million.