In recessionary times, cash is king.
To be clear, I don’t know whether the U.S. is heading for recession. However, the signs do seem to point in that direction. In these uncertain times, you may be wondering what to do, money-wise.
For starters, stop using cash flow to finance growth. We all are guilty of doing this, and when times are good it often doesn’t matter. However, using your cash flow to pay for something that can be financed can catch up with you as the market begins to tighten.
Recently, I encountered a business owner facing an inventory and liquidity dilemma. When deliveries started taking 34 weeks during the pandemic instead of eight weeks, this business owner decided to minimize the impact of the supply chain shortages and bulk up on inventory. I don’t discourage the stockpiling of inventory during a shortage, but I do discourage the use of cash flow to do it. As a result, the company started getting products to customers faster, but lost much of its liquidity. The business had increased its inventory by $3 million to protect against supply chain disruptions, but now has no cash on hand for other parts of the business.
Your new mantra, heading into a slower-growth period: Maintain balance and flexibility. Here are three other options for you to consider:
Tap an asset-based credit line. Asset-based lines lend against inventory and accounts receivable. This should be a consideration for any business that has a significant amount of either. Typically, you should be able to borrow at 80 percent of accounts receivable and 50 percent of inventory.
Open or extend a line of credit. To start, if your company doesn’t have a line of credit, you need to get one. A line of credit affords you the ability to deal with seasonality and emergencies, without tapping into your cash flow. Be sure not to use your line of credit for any long-term investments. Lines of credit usually have to be paid down once a year, hence why they don’t work well for large purchases/investments. If you’ve already had a credit line for a period of time, consider asking for an increase.
Consider purchase order financing. This kind of financing is used when a company receives a large order that they are unable to fill due to lack of cash on hand to purchase the raw materials. Business owners can finance up to 100 percent of the cost of raw materials/manufacturing of the product. Purchase order financing can be a good option even if you don’t have the best credit score, but it can be on the more expensive side.
These suggestions come with a very significant caveat: Steer clear of predatory lenders, which are well aware of your rising concerns regarding inflation, supply chains and worker shortages. With traditional lending getting more expensive as the Fed raises rates, bad financing instruments may start to look more appealing. Don’t fall for it. Yes, the expectation is that credit access will continue to get tighter but accepting any short-term online loans from predatory lenders can quickly send you into a debt spiral that’s nearly impossible to escape.
When in doubt, speak to a trusted business or financial advisor. Ask about the methods I’ve outlined above or a term loan before taking on any additional debt.
Ami Kassar is the founder and CEO of MultiFunding, a Philadelphia-based consulting firm that specializes in helping business owners across the U.S. develop creative, cost-saving alternatives for their business debt needs and structure. He can be reached by e-mail at firstname.lastname@example.org or online at multifunding.com.