Untapped Sources of Liquidity to Help Your Business in Times of Need - dummies

Untapped Sources of Liquidity to Help Your Business in Times of Need

By Consumer Dummies

You may find that your business is in need of some liquidity to get through a rough patch. If you’ve run out of cash and can’t borrow any more, it’s up to the executive management team to identify sources of capital to work through the troubled times. Fortunately, potential capital sources are available which can assist your business in times of need.

Asset liquidations

Liquidating assets is often targeted by management as a quick and easy method to raise capital. This philosophy would appear to make sense if a company has unneeded or underutilized assets; selling them may help ease a cash crunch.

Although liquidating assets does represent a viable alternative, be careful of the following pitfalls with this strategy:

  • Values received: If you plan on moving older, slow‐moving inventory in bulk or selling old, unused equipment, be prepared to sell the assets at well below cost. Although the cash received is great, remember that you’ll have to explain the losses to investors, lending sources, and the like.

  • Collateral support: Certain assets represent collateral for loans extended to the company. If you liquidate the assets, not only may you be violating your loan agreement, you may also be reducing your capability to borrow.

  • Future growth: Liquidating assets that are unnecessary in the short term but that you’ll eventually need can be very expensive.

  • Management time: Liquidating assets often takes much more time and effort than anticipated, which means that the parties responsible for this function are distracted from their regular duties.

Lending sources

Your company’s primary lending sources represent a potential source of quick capital if needed. The key in approaching these sources is to have solid information available for review and a clear action plan on how the capital will be repaid in a reasonable time frame.

The following three examples demonstrate how you can squeeze capital from these sources:

  • Loan advance rates: Lenders provide borrowing capacity based on the value of the asset they’re secured by. For example, a bank may advance 80 percent on eligible trade account receivables.

    If your bank doesn’t want to work with you, then an asset‐based lender may be a better financial partner.

  • Asset sale lease‐back: Although asset sales may represent a source of quick capital to your business, they come with a number of potential problems. You may want to consider executing an asset sale leaseback where you sell the asset to a leasing company that in turn immediately leases it back to you. You achieve your goal of freeing up short‐term liquidity, and the leasing company doesn’t have to worry about finding a new lessee for the asset.

  • Restructure notes payable: You may want to consider restructuring any long‐term notes payable with the lender to lengthen the repayment period or move it to an interest‐only note for a short period. The goal is to reduce the capital outflow with the note agreement to better match it with the capability for your company to generate internal cash flows to service the debt.

If the difference between your business making money and losing money is 3 percent points, then you probably have bigger problems than just a short‐term liquidity squeeze.

Unsecured creditors

You can tap your vendors, suppliers, and yes, even your customers, from time to time to help manage potential liquidity issues. These parties are already in bed with you and stand to lose the most if your company fails. In addition, they stand to gain quite a bit if your business continues to grow and prosper.

Having customers step up with an advance payment, deposit on a large project, and so on can help ease a liquidity squeeze. Also, you can provide customers with incentives, such as a 1 percent discount if paid within ten days, to pay more quickly. If a customer has ample cash resources available and it’s earning a measly 4 percent, why not offer an incentive that provides a chance to save three times this much?

In addition, vendors and suppliers offer a relatively cheap and easily accessible source of capital to your company. Various strategies are available and range from requesting extended payment terms during a high sales period to terming out a portion of the balance due the vendors to be repaid over a longer period — in other words, instead of paying the entire balance in 60 days, see whether you can pay it over 12 months in equal installments with a nominal interest rate attached.

When needed, you can also evaluate your internal employees to determine whether you can secure added liquidity. In tight times, you may choose to defer a portion of your compensation, which will then be paid when the company hits certain milestones. Also, if you have paid commissions on sales when they’re booked, you may want to restructure this program to pay commissions when payment for sales are actually received (in cash) to better match cash outflows with cash inflows.

You must remember to be careful when going this route. You don’t want to appear desperate. You may actually find that payment terms tighten up and customers get nervous, which then produces the exact opposite of what you were trying to achieve.

Equity and off‐balance sheet sources

A number of external capital sources are also available to provide additional liquidity during a bind:

  • Owner personal financial strength: Business owners with ample personal wealth are often asked to pledge some of it for the benefit of the company.

  • Family, friends, and close business associates: This group is a natural source to secure capital for a business, as well as during a liquidity squeeze when they may be able to provide a bridge loan to get the company through a tight period.

  • Off‐balance sheet assets: You may have various assets that relate to the business, but aren’t included in the balance sheet or are restricted in nature.