The American Credit Crisis—Why SMBs Need Working Capital More Than Ever

By Stoyan Kenderov, COO, Plastiq

America’s small businesses are in a full-blown crisis: a shortage of working capital. And to think that just months ago spending was high, government help was easily accessible, and loan rates and gas prices were low. The pandemic aside, it was “party time.” Then, things changed.

Today we face severe inflation and a too-strong dollar. Excess inventory has accumulated. High interest rates have made borrowing increasingly inaccessible, especially for small businesses.

The skyrocketing greenback is handicapping every business that competes against imports. And, every small US manufacturer that sells abroad is at a massive disadvantage.

Now, money is tight for smaller businesses, and new inventory is priced up by inflation. Any business with tight credit is facing a long nuclear winter—and this time, without emergency government assistance (i.e. free loans that are mostly gifts.)

How we got here

During the pandemic, the Payroll Protection Program (PPP) helped untold numbers of small businesses—and unfortunately some larger ones who didn’t need it—survive through 2020. With lockdowns in effect, consumers stayed home and bought stuff online, enough to keep the economy rolling. Credit eased for several quarters in 2021 even as PPP tapered off.

When vaccines took hold, demand for travel and activities returned. As normal life resumed to a large degree, paradoxically the economic environment began deteriorating. Demand for goods began to taper off, especially as inflation became noticeable. Then came 2022, a war began, inflation spiked, and credit started to tighten. Lenders imposed tougher standards.

Small businesses are especially dependent on inventory and working capital staying in balance. During 2020, they had learned to grab opportunities to shore up resources, fearful of being left without stock when supply chains fractured. It was the right thing to do at the time, to survive, but very difficult to gauge and time perfectly. Now some of their Open-to-Buy may be trapped in products from 2021 or 2020 that clog the warehouse, and many are discounting heavily to clear it out.

All this has snowballed into a financial Gordian’s knot, especially for smaller companies that need fresh inventory and working capital TODAY at low rates.

The crunch may last well beyond 2023. Finance experts and economists forecast even tougher conditions ahead. Inflation, for example, is not temporary. Once inflation hits 8%, it takes from 2 to 5 years to get back down to 4%. The dollar won’t be crashing anytime soon, given Europe’s energy strain and global instability.

High interest rates, of course, deter smaller businesses from borrowing. To finance new inventory and hiring, SMBs need to use every arrow in their quiver. When bank and SBA loans are out of reach, small business is caught in a vise. If they’re unable to sell older inventory, how do they free up funds for new inventory?

A working capital lifeline: credit card conversion

There is a working capital strategy that can buy you time and avoid bottlenecks, without costing anything. Particularly for expenditures that are within your credit limit, it involves taking advantage of credit card floats. Your first reaction may be: impossible, my suppliers don’t take Visa. That’s okay; they don’t have to.

If your suppliers don’t take credit cards, you can pay them by using credit card-to-cash tools. These are essentially services that translate your payment via credit card into a check or electronic payment to your supplier–or an employee. Suppliers receive payment in the form they expect and are unaware of the conversion.

There is a small “translation” cost for converting your credit card payment to a check or ACH payment. You can expect to pay about 2%, well below the rate on an SBA loan. You may already have credit cards that provide 2% cash back, or other perks that negate this ‘translation’ fee, so it can work out to a cost-free conversion of the form of payment.

Unlike business loans, credit cards are available without paperwork or delays—but they do have very high interest rates. To avoid ever paying interest, you can take advantage of the float. Every card has a few weeks grace period, but you can go interest free for up to 30 days longer if you time purchases for the beginning of the statement cycle. Your cards, in effect, become small working capital bridge loans with up to 50 days of float.

Extending credit card float into a bridge loan

It’s actually quite feasible for a business owner with good credit to achieve a considerably longer float. Many pair a ‘balance transfer’ credit card with their ‘purchase card’ – and pay off the purchase card near the end of the grace period. You can find balance transfer cards that offer 21 months interest-free as an initial promotion. Note that this technique requires your credit limit to cover both the original purchase card and the balance transfer card.

How scalable is this approach? Never as much as a business owner would like, but by carefully boosting credit scores and increasing credit limits, a small business can fortify its working capital and extend its buffer significantly. The key is to convert credit card payment into whatever form your suppliers take, and to time your purchases with the billing cycle of your particular card.

WIth inflation, high loan costs and tight credit likely to persist for years, there is no reason for smaller enterprises to forego this option for working capital. Even creditworthy businesses need real flexibility between different forms of payment. It needs to be free of net cost, or at last well below today’s business loans, and faster. The plastic-to-anything option can mean a business has enough working capital available in a key moment to continue operating. Nimble financing means success and even survival.