By Adam Burroughs
All companies must generate liquidity to survive, no matter their size or industry. Positioning your company in a strong cash position now provides a very important financial buffer, helping you to meet challenges and to survive. But doing so also positions the business for strategic opportunism.
“No one can make it in any market, let alone a volatile market, absent liquidity,” says Andy J. Arduini, SVP, group head, Global Advisory, Supply Chain & Financial Institutions, at Huntington.
“COVID-19 has changed everything,” Arduini says.
“For many, credit is less available as creditors have become more restrictive. Companies in many industries are facing severe revenue pressures, which have a corresponding impact on cash flow and the ability to raise capital of any class. There’s a polarized issue of more demand and less supply that’s really creating this market disruption.”
Many companies, in particular small- and medium-sized enterprises, are struggling to attract financing as their asset bases shrink as a result of weaker economic activity, he says, and that is leading to less debt-raising capacity.
This liquidity starvation has also complicated reopening, as companies are struggling to get their financial footing because they’re starting from a depressed position. They need liquidity to get back up and running, and they may need to look beyond traditional sources to get it.
“The most important thing that a company should know is that there are options,” Arduini says.
Business Liquidity Options
- Cash: Companies sitting in cash-rich environments can use strong strategic plays, such as an acquisition, that could set them up for long-term success. Vulnerable competitors, suppliers or complementary businesses could be prime opportunities for cash-rich businesses to grow.
- Lines of credit: While still a viable option, these are now being provided with a higher degree of caution and under tighter conditions as financial institutions react to weaker market conditions, and a softening in the financial performance of many companies.
- Government-guaranteed lending space: The Small Business Administration, for example, is stepping up to help companies with programs such as its Economic Injury Disaster Loans, available to eligible small businesses, private nonprofits, and U.S. agricultural businesses. Similarly, the Export-Import Bank of the U.S., which supports U.S. exporters primarily though credit insurance and loan guarantees, is working creatively to help both small and large companies by extending relief provisions for exporters and financial institutions that may have been affected by COVID-19.
“Having your mind open to government alternatives right now can really benefit you,” Arduini says. “Many companies that historically wouldn’t have required government support are now finding themselves in a position where they need that type of credit enhancement to get the liquidity they need."
- Receivable sales: In recent years, there has been an uptick in receivable sales activity. When an institution purchases a receivable, dissimilar to lending, it is granted an ownership interest in the receivable and it can pursue the party that owes the receivable, normally an investment grade company, directly for non-payment. This feature, among other considerations, generally enables the institution to provide greater liquidity against a receivable than is available through a line of credit. Many companies historically viewed this unitarily as “factoring”, which while valuable for the right companies tends to focus more on smaller companies and distress situations and is normally more expensive than a line of credit. For medium- and larger-sized businesses, there are a variety of techniques available that can produce more liquidity than a line of credit, often at a similar or discounted price with more favorable accounting treatment.
- Supply chain finance: This enables small- and medium-sized companies to raise liquidity through programs established by their larger customers. In these programs, the large customer, commonly known as an “anchor” or “buyer,” arranges facilities with financial institutions and other concerns that enable its small- and medium-sized suppliers to sell receivables the anchor/buyer owes it at a discounted price to the financial institution. Often through these programs, small- and medium-size companies can access greater levels of liquidity on receivables at lower interest rates than they are able to obtain on their own. Over the last several years an uptick in the availability of these programs has occurred. COVID-19 has led to increased program issuance as larger companies seek to provide solutions to suppliers to add stability to their supply chains.
More than a recessionary lifeline
Arduini says many of these alternative strategies accelerated out of necessity in the wake of the Great Recession, offering companies a financial lifeline during challenging times. But since then, the products have become more mainstream.
“Times are changing, and opportunities for funding diversification have become a lot more prevalent,” Arduini says. “These types of products aren’t being used just to save struggling companies. They’re also being used to help stronger companies be even stronger. And in times like these, they create situations where you can get the liquidity that you need that may not be available under traditional means.”
For more information on alternative strategies for generating liquidity, contact your relationship manager.