Financial Uncertainty is Bad For Business: 5 Options to Access Working Capital

This “New Year” could mean “New Problems” for companies looking to access MORE working capital. The lending regulatory environment has forced many companies to look outside of traditional banks when they need to access working capital. The geopolitical environment, 2020 elections, and several big bank mergers including the latest CIT and Nebraska based Mutual of Omaha Bank have created an increased level of economic uncertainty when you need working capital the most.

So, what are your options when you need to access working capital to support your cash flow needs? Below are 5 options to consider to access working capital.

1.    Visit Your Commercial Bank:

I always advise companies to visit their commercial banker prior to making a big working capital decision because many banks are the cheapest cost of capital option and your banker may provide valuable business advice. Also, they will most likely have the answers you’re looking for because they’ve encountered similar companies with working capital issues that you're dealing with right now.

Keep in mind that the bank's low APR may come at a price in the way of “financial performance covenant restrictions” that may restrict your ability to make decisions or grow the way you feel is best for your company. Your low APR does nothing for your company if you turn away purchase orders because you don’t have a large enough credit line or the covenants are too restrictive to properly grow.

***Important*** Your commercial lender will also inform you of any options that you didn’t realize were available or that could violate your current loan agreement.  You don’t want to upset your lender by violating your loan agreements, which could be very costly if they see you have other UCC filings unbeknownst to the banker. Keep your commercial lender in the know and ask for their advice!

2.    Asset Based Loans:

Asset Based Loans (ABL) are specialized loans that collateralize your accounts receivable (AR), inventory, and equipment. Your bank may have an ABL department that handles these types of specialized loans, which come at a higher interest rate and may have tougher covenant restrictions.

Often, I find good companies with an ABL that just don’t fit the traditional bank lending policy matrix. The goal is to get back to a traditional bank loan if possible, and sometimes an ABL lender can get you there.

3.    Accounts Receivable Financing:

Accounts Receivable Financing is one of the best options when accessing working capital when a traditional bank line isn’t an option. Also known as “Factoring”, accounts receivable financing is a powerful tool that allows you to SELL your accounts receivable or invoices to a financial company like Prestige Capital (yes, I’m biased) at a discount. This is an incredible option for high growth companies, startups, or companies that don’t want bogged down with financial performance covenants.

Accounts receivable financing is NOT a loan or a line of credit, and there is no borrowing base certificate for you to maintain! In many cases, accounts receivable financing is on “Non-recourse”, meaning there is no personal guarantees required to sell your invoices. Yes, this is more expensive option than traditional bank financing, but companies have much more freedom and less restrictions than a traditional bank.

4.    Inventory Financing:

There are several inventory lenders that do an amazing job financing companies that can’t find traditional bank financing or who has a bank that doesn’t understand your inventory. In many cases, AR financing lenders and inventory lenders work together to provide an incredible service to companies that need access to working capital.

Often, bankers aren’t comfortable with your inventory because they don’t understand your business. Which is why inventory lenders are a great option because they only focus on inventory and know the best appraisers and really understand all types of inventory. This also means inventory lenders can provide far higher advance rates on your inventory than most traditional banks.

5.    Merchant Cash Advance:

Several Merchant Cash Advance (MCA) options have become increasingly popular due to the ease of getting fast cash and promises of “unsecured” borrowing. Be very cautious when accessing MCA loans, even if they’re with popular credit card companies because those MCA loans may violate your existing financial covenants and force you to exit your good banking relationship. Yes, MCA lenders may file a UCC lien on all assets and your other lenders will not be happy when they find it.

MCA loans may deplete your existing cash flow to the point where you find yourself in a worse cash flow crunch than before. So, be very careful when accessing an MCA loan and please talk with your commercial banker first.

Financial Uncertainty is Bad For Business:

Financial uncertainty is difficult for any small or large company to prepare for, but it’s always good to know your options. Talk with your banker and be honest so they can give you accurate advice. Talk to another commercial lender if you feel you’re being pushed out of your existing bank. Come talk to an experienced financial team at Prestige Capital if you want to sell your invoices with less restrictions. Our clients have a peace of mind knowing they have seasoned financial experts who treat them like family.

Cash Flow Made Simple: Prestige Capital

#2020 #NewYear #Finance #Business #Working Capital #Money #Finance