How to Optimize AP for a Credit Crunch

In the wake of the pandemic, the Federal Reserve has increased interest rates at the fastest pace in decades, leading to widespread economic uncertainty. Thanks to this contractionary policy – and the subsequent stress it places on the banking sector – many experts now anticipate a looming credit crunch. With this in mind, let’s examine how business leaders can optimize their accounts payable workflow to offset the adverse effects of a credit crunch.

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Why Do Experts Predict a Credit Crunch is Coming?

There are several major reasons that experts today predict a credit crunch is in our future, including:

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Banks are becoming more cautious with their lending. According to Goldman Sachs, small banks with a low share of FDIC-insured deposits will reduce new lending this year by 40% while other small banks will reduce new lending by 15%. This could result in a 2.5% drag on the total stock of bank lending. As bank lending shrinks, the likelihood of a credit crunch grows.

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Big banks are preparing for potential losses. In recent quarterly earnings reports, a trend emerged as banks increased their provisions for loan losses. For instance, Capital One raised its provisions for credit card losses by 300% to reach $2.26 billion. This shows that banks anticipate a rise in defaults and more unprofitable loans this year, both tell-tale signs of a credit crunch.

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Distressed loans are surging. Based on data from Bloomberg, the percentage of loans trading below 80% of their face value has increased by about 26% in the past two months. This dip amounts to a total of $127 billion lost.

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Contractionary monetary policy impacts money supply. The U.S. M2 money supply has declined for the last 15 months, with a notable drop of -2.2% compared to the previous year by February. This decline shows the most rapid decrease since the 1930s. One of the reasons for this is that when banks provide loans, they generate new money. The decrease in M2 is not only indicative of the Fed's reduction in its balance sheet but also reflects a decline in overall consumer activity.

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What are the Impacts of a Credit Crunch?

A credit crunch occurs when banks and online lenders have fewer funds to lend out to borrowers. It doesn’t take long for businesses to feel the subsequent pain of a tightening economy. This decline in loans can significantly impact finance teams by making it harder and more expensive to secure loans or working capital.

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One of the most significant challenges is that credit crunches limit external financing options for businesses, making it more challenging to borrow cash from a bank or online lender. This forces finance teams to rely more heavily on their savings, which might not be sufficient, leading to potential cash flow issues.

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In addition, if a borrower can obtain a loan from a lender during a credit crunch, they typically face higher borrowing costs due to financial institutions' increased caution and risk aversion. Banks raise interest rates on their loans to offset their lending risks, but these hikes chip away at lenders' profitability.

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Lastly, a credit crunch typically hinders firms' investments and overall economic growth. Without easy or quick access to external cash, fewer teams can obtain the funding they need to take advantage of investment opportunities and growth initiatives. These limited funds can have long-term consequences on firms' growth and profitability.

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To mitigate these effects, finance teams need to ensure they have robust cash management strategies in place, explore alternative financing options, and closely monitor market conditions to anticipate potential credit crunches and adjust their strategies accordingly. More on that in the sections below.

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How Does a Credit Crunch Affect Accounts Payable Teams?

When the credit faucet tightens, companies often find themselves with fewer financial resources. As a result, AP teams must optimize their payment strategies to make every dollar count.

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During a credit crunch, businesses often see a decline in orders. This requires every team, but especially cost centers like the back office, to do more with less. In this environment, cash becomes paramount, and better management of days payable outstanding (DPO) and cash flow forecasting becomes crucial. AP teams must adapt to these challenges to ensure their organization’s financial stability.

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5 Tips to Optimize Your Accounts Payables for a Credit Crunch

In the face of a credit crunch, now is the time for AP teams to proactively optimize their operations to help navigate financial challenges. Here are five key steps to make sure your AP is helping your bottomline when cash is tight:

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1.) Focus on Cash Forecasting and Tracking Accounts Payable

In uncertain times, knowledge is power. AP teams should prioritize cash forecasting and track key performance indicators (KPIs). By understanding where your business stands with financial obligations, you can make informed decisions and take proactive steps: monitor cash inflows and outflows, assess payment patterns, and identify areas for improvement. This data-driven approach will help you steer your AP ship through the stormy seas of a credit crunch.

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2.) Streamline Your Accounts Payable Process for Efficiency

Efficiency is paramount amidst tighter economic periods so streamlining the AP process will become a key driver of success. Embrace technology to automate manual processes, reduce human errors, and eliminate paper-based tasks that needlessly drain time and money. Leverage cutting-edge AP automation tools to digitize invoice processing, payment approvals, and vendor management. By optimizing your AP process, you can unlock operational efficiency and free up valuable resources to weather the storm.

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3.) Stretch Out Your Days Payable Outstanding

Cash reserves become a top priority during a credit crunch. One strategy is to extend your days payable outstanding by negotiating better payment terms with vendors. However, striking the right balance is crucial. Be mindful of maintaining positive relationships with your suppliers, as their support is essential for ongoing business. Better communication and agreements can help you navigate the balance between preserving cash and nurturing vital partnerships.

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4.) Optimize Your Payment Mix in Alignment with Goals

Optimize your payment mix to align with your overarching goals. For example, if bolstering your bottom line is a priority, explore credit card options that offer cash-back rebates. Credit card payments not only offer financial incentives but also provide better speed and security than paying via check. In short, they can be a reliable and efficient option to maintain liquidity while enjoying the benefits of rewards programs.

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5.) Secure Alternative Funding Sources

In the face of financial challenges, it’s also best to proactively secure alternative funding in case you need help covering vendor payments or operating expenses. Explore options such as short-term loans, lines of credit, and invoice financing to bridge any gaps in cash flow. For example, Centime offers an embedded, cost-effective, unsecured line of credit that is crafted to meet short-term cash requirements. With a streamlined application process, Centime Credit Line and Credit Card allows businesses to apply easily for working capital, qualify quickly, and get funded immediately.

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Looking Ahead

In the ever-changing business world, navigating financial challenges with finesse is essential. As a credit crunch looms, optimizing AP operations becomes evermore critical for financial resilience. By focusing on cash forecasting, streamlining processes, stretching DPO, improving payment mix, and securing access to working capital, AP teams can fortify their businesses against the challenges of economic uncertainty.

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In these challenging times, adaptability and decision-making are the guiding lights. In addition to our tips above, remember to embrace the power of technology, foster strong relationships with your vendors, and keep an eye on your overall financial KPIs. With these principles at the helm, you’ll not only navigate your team through a credit crunch, but emerge with a stronger, more resilient AP function.

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*Centime is not a bank and is not authorized by any federal or state agency to engage directly in core banking activities.
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*All banking products and services available through Centime are provided by FNBO and are governed by the applicable agreements and related disclosures provided to you by FNBO. Member FDIC.
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‍*While Centime facilitates traditional banking activities (such as the acceptance of deposits or extensions of credit), these services are actually provided by our banking partner, FNBO.
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*Centime may provide support services to FNBO, as permitted by applicable law, to facilitate the delivery of its bank products and services.

**Deposit placement through ICS is subject to the terms, conditions, and disclosures in the applicable agreements. Although deposits are placed in increments that do not exceed the FDIC standard maximum deposit insurance amount (“SMDIA”) at any one destination bank, a depositor’s balances at the institution that places deposits may exceed the SMDIA (e.g., before settlement for deposits or after settlement for withdrawals) or be uninsured (if the placing institution is not an insured bank). The depositor must make any necessary arrangements to protect such balances consistent with applicable law and must determine whether placement through ICS satisfies any restrictions on its deposits. A list identifying IntraFi network bank

How to Optimize Accounts Payable for a Credit Crunch

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