Banks Increase Loan Loss Provisions What Does That Mean To You?

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2023

On Friday, January 13 most money center banks announced their year-end earnings and guided the street on their outlook for 2023. Here are a few of the main headlines:

  • JP Morgan Braces for Recession as loan loss provisions jump 49%
  • Provisions for credit losses (PCLs) at the U.S.’s top four lenders ballooned to $6.2 billion in the fourth quarter of 2022 – the most in over a decade, bar the Covid-19 pandemic’s earliest months.
  • PCLs collectively booked by Bank of America, Citi, JP Morgan, and Wells Fargo were up 35% compared with the previous quarter. They marked the third-largest amount since Q4 2012.

These headlines are only the beginning. In 2021the four largest banks in the U.S. released $21.8 Billion in loan loss reserves because the economy was strengthening. They are now clawing back $15.8 Billion because they are concerned about what lies ahead and preparing for the worst.

So for the average business owner on main street, in factories, production plants, and retail locations around the country, what does this increase at the banks mean to your ability to conduct business as usual?

  • Capital that has been readily available to grow a business will dry up
  • Credit will tighten and become only available to well-healed or investment-grade companies.
  • Start-Ups will have to self-fund or prepare for significantly higher rates
  • There will be closures in the fintech arena as they are unprepared to offset the bad loans issued during the past 0% rate environment.
  • Existing lines of credit may have lenfding limits reduced or withdrawn.

Tips To Get Through a Recession

  1. Become a cash-flow fanatic – If you are used to reviewing your financials monthly or quarterly. It’s time to step up that review to identify potential problems before they become real problems. Use the information to make strategic decisions, all with an eye toward the preservation of capital
  2. Monitor Accounts Receivable – In an uncertain economy, it becomes increasingly important to strengthen cash positions. Therefore, it’s time to increase efforts to reduce the outstanding receivables and work with clients to get paid before they become uncollectable and written off.
  3. Minimize Inventory Levels – If your warehouse is full of unsold inventory, it’s time to gather your marketing team to find the solution and turn the stock into cash. The last thing you want is to carry the high cost of warehousing into a recession.
  4. Hire cautiously or not at all – In a market where so many companies are laying off, use that as a leading indicator and hire sparingly and only if there are no other alternatives. Instead, use freelancers, independent contractors, or outsourcing to reputable providers.
  5. Increase Margins – Once you have reduced all overhead expenses and increased efficiencies. It could be the time to consider increasing your margins for an immediate boost in net profit and cash flow. Caution- It is difficult to raise prices in a recession; exploring the potential to reduce supply chain costs to expand margins may be a better idea.
  6. Analyze pricing strategies and product mix – There is traditionally a heightened demand for essential goods and services in a recession. There is also downward pricing pressure that should be anticipated and mitigated. Be open to innovation and ways to leverage existing clients to provide them with additional products or services you are able.
  7. Establish relationships with multiple suppliers – In case one of your primary suppliers’ stumbles, it is wise to ensure you have other sources so their problem doesn’t become yours.
  8. Draw down on available lines of credit – It is not uncommon to see banks reduce access to a LOC, lower available limits, or freeze funds altogether. Therefore, it is wise to draw down on open lines and keep the cash in a separate account, so it is there when needed.
  9. PRESERVE CASH and Lease new equipment – If you have dated equipment or an equipment failure on the production line. A sound cash management strategy suggests using equipment leasing versus using cash to fund the acquisition of needed equipment.

Conclusion

If you believe this economy is moving into rough waters. Prudence would dictate that any business owner, large or small, look at their organization and make adjustments to protect the franchise.

Have a great year, and good luck!

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