With another Federal Reserve meeting come and gone without an interest rate cut, American
businesses are continuing to struggle increasingly with their financial needs.

Many companies nationwide have found themselves trapped in debt originating from the near
zero interest rate era spurred by the pandemic in 2020. It may be hard to visualize how such low
rates could be a long-term trap for a company’s viability, but that is exactly what we are seeing
today.

Businesses across America are now unable to make payments on the debt they incurred during
the time of these low rates. The only issue: rates are higher now. As interest rates stay high,
and look to be sticky potentially into 2025, companies looking to refinance and search for more
capital find themselves in a difficult situation.

For many companies willing to take the jump and pay down their debt with new debt, a
borrowing strategy known as PIK, or payment-in-kind note, gives the issuer a chance to
delay making dividend payments in cash. In return for the delay, the issuing company
typically agrees to offer a higher rate of return on the note.

Nonetheless, stress is building underneath the surface. As PIK borrowing increases in the
credit market at these inflated rates, companies are increasingly struggling to find ways out of
debt and into profitability. In addition, highly leveraged businesses can find themselves in the
most trouble during periods of high economic uncertainty, like what the U.S. is facing today
because of unpredictable future cash flows allowing them to pay down the debt.

With a potential recession looming, fears of a significant material increase in default rates are
appearing more likely by the day. Even in this period of high default risk, many non-bank lenders
remain ready and eager to deploy capital to businesses in need. Bridge Business Credit, based
in Troy, Mich., is one such lender.

As a first-lien debt holder on the capital structure, all of Bridge’s loans are secured by various
forms of collateral, such as accounts receivables, inventories, machinery and equipment, and
owner-occupied real estate. This is what makes Bridge an asset-based lender. Asset-based
lenders can mitigate the potentially forthcoming risk of increased default through proper
analyses to determine the value of collateral used to back their loans.

Through due diligence in the underwriting process, lenders assess what portion of assets
should be loaned against to reduce the risk of losses in the case of default. Lenders like Bridge
must be even more thorough and consistent with the monitoring of their actively deployed
capital to ensure borrowers are using it for the right purposes, maintaining healthy borrowing
bases, and are not taking on any more debt that could pose risk to what is able to be recovered
in the situation of a default.

With the proper precautions and diligent monitoring, the risk of default and the losses derived
from it are significantly reduced for non-traditional lenders like Bridge.
The ability to skirt default does not rely solely on lenders, though. Borrowers themselves can
help reduce their own likelihood of default, even in times of increased risk, through a plethora of
important decisions and extra effort.

One important decision that all borrowers will have to make is where to get their needed capital.
While traditional bank lending certainly has its upsides, working with a specialized lender can
help create a personalized borrowing plan that is not bound to the same regulations as banks.

Although PIK borrowing has its own set of risks as mentioned earlier, it can be a necessary,
logical step toward future viability for many companies looking for extra capital.

And one of the most important steps in reducing the risk of default for borrowers is simply to
maintain an honest, consistent stream of communication with lenders during the borrowing
period. Through clear communication, lenders are more likely to be willing to accommodate the
rapidly changing needs of borrowers, thus decreasing the likelihood of default.

While default rates are likely to increase going into the fourth quarter of 2024 and beyond,
lenders and borrowers can work together to protect themselves from these risks, leading to
more stable and more profitable futures for businesses going forward.