Lending and Credit

How Business Cycles Impact Business Borrowing Needs

Industry AnalysisBusinesses, as well as the industries in which they operate, go through 4 distinct cycles of expansion and contraction. Understanding these stages can be crucial for lenders to understand the borrowing needs, abilities and risks of their business customers.

Dev Strischeck, Principal of Devron Risk Advisory and former Sr. Credit Policy Officer, lays out a clear description of these four stages in his webinar on “Industry and Management Evaluation”. Dev summarizes these four business (or industry) cycles as follows:

  • Early Expansion (or Recovery), where borrowers seek funds and capital to support sales growth and new ventures
  • Late Expansion (or Boom), when companies need funding to continue sales initiatives and expanding capacity
  • Early Contraction (or Slowdown), requiring borrowers to fill aging accounts receivables and slowing inventory turnover
  • Late Contraction (or Recession), forcing businesses to borrow to meet fixed outlays, slow collections and losses as well as liquidation

The astute lender knows that it takes more than just analyzing individual borrowers, but also requires an careful understanding of where the industry in which a company operates falls within a cycle. Industries in decline will overtake an otherwise strong individual company if that business lacks a strategy and direction for hedging its exposure by expanding into new industries. Unfortunately, many lenders lack the knowledge or resources for analyzing borrowers’ ability to repay debt based on both the business performance and the industry’s life cycle.

Dev will cover these critical tools for managing borrower risk in his upcoming webinar “Industry and Management Credit Evaluation“, July 20 from 2:00 – 3:00 pm ET.