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RIGHT OF CENTRE: Borrowing now or later

Sandra Husbands

RIGHT OF CENTRE: Borrowing now or later

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THE ISSUE: Is now the best time for businesses to seek credit?
THE current economic recession has created a cloud with a silver lining: interest rates have dropped and banks are looking for business. Theoretically, businesses should borrow – especially if they are preparing for the recovery. But is this situation “all that glitters is not gold”?
Bankers are really in a catch-22 position. In times of recession, there are more loan defaulters, fewer borrowers and plummeting profits. Lending therefore is important, but can borrowers really repay during a time of crisis, so should they lend?
The bigger issue, however, is whether businesses should borrow in a time of crisis – an unprecedented crisis – and if so, who?
Businesses need to exercise care in borrowing at this time because it is uncertain when recovery will take place in the developed world or in Barbados. When demand is down, it is generally not a good time to borrow, no matter how attractive the interest rate.
Things to consider would be if the rate is fixed or variable. If variable, avoid this kind of loan like the plague. It can rise unpredictably, causing financial difficulties later.
Where you are in the recovery chain will matter. Tourism enterprises can be among the first to look at borrowing to prepare for recovery. If no worldwide recovery of jobs has occurred yet, then sit tight.
There has been some recovery in the American job market, so another important signal to borrow would be a renewed marketing thrust by the Barbados Tourism Authority to see if we can draw tourists to our shores from North America.
Borrowing then should be timed to accommodate the lag of eight to 12 months before travel picks up  and this should be balanced against the time required to complete readiness for growth.
If you are in the retail sector where your market is dependent on local job recovery, it would be foolhardy to pursue further borrowing until domestic tourism operators start to experience recovery.
Hold on until tourism figures rise to grow jobs and boost local consumption by individuals.  
Businesses that are dependent on Government procurement could pursue borrowing only if Government’s budget indicates that it is utilising a counter-cyclical approach to the recovery and will therefore be putting contracts into the domestic economy to stimulate growth.
In that event, investment in upgrades, training and equipment would be prudent to catch the wave early, and as the economy picks up, so will private sector opportunities.
Business start-ups at this time are a big risk and it would be unwise to start a business that might require capital because the gestation period for different types of businesses would put the capital at risk.
If you are pursuing export to a market that still has energy, such as Trinidad and Tobago, or is recovering like Guyana and Jamaica, then an investment in marketing and new services or products would be worth the risk.
However, think carefully and do your risk assessment before proceeding to a bank or borrowing from an over-eager loan officer.
A good rule of thumb is to look before you leap, because borrowing in these economic times is truly a matter of timing.
Sandra Husbands is a businesswoman and former president of the Barbados Small Business Association.