It’s no secret – credit is tighter and cash is scarcer today.
Nearly two-thirds of companies have taken steps to address a diminished ability to borrow, according to a recent survey by the Association for Financial Professionals. Plus, the recession has caused a payables-receivables crunch that has companies scrambling for operating capital.
Cashing in
A November 2008 study sponsored by American Express revealed that three-fourths of finance executives considered reducing operating expenses more important this year than last.
Companies can wring cash out of their operating budgets by putting their insurance out to bid, looking for a better deal and targeting discretionary expenditures, such as client entertainment, seminars and capital spending, said Matthew Stanley, vice president and senior relationship manager at Umpqua Bank.
Salary freezes, staffing reductions and selling off less-productive assets are also options, he said.
Tightening trading partners’ credit standards is another method to ensure a steady cash flow.
For example, Ron Frederiksen, president of Vancouver-based RSV Construction Services Inc., said he spends “a lot of time making sure our clients can pay – our billings are flawless.”
For some companies, it may make sense to offer early-payment discounts or to call customers before a bill is due to remind them.
“We’ve tightened up our credit policies and are watching our receivables closer than ever before,” said Eric Olmsted, president of Vancouver-based On Line Support Inc.
Properly managing the cash you have is also key.
Historically, companies with large amounts of cash used “sweep accounts” – every night the cash was swept into commercial paper, then as needed, it would sweep back into a checking account. Commercial paper consists of short-term, promissory notes issued primarily by corporations, according to the Federal Reserve.
But confidence in asset-backed commercial paper plummeted in late 2008, Stanley said.
Frederiksen said he has pulled all of RSV’s cash out of sweep accounts and put it in FDIC-insured cash accounts, taking advantage of the Certificate of Deposit Account Registry Service.
By setting up multiple deposits in different banks but managing it through a single bank, CDARS offers FDIC insurance on deposits of up to $50 million.
“In all my years in business, I have never had to manage money like this,” Frederiksen said.
Credit where credit is due
Perhaps prompted by fear, some companies are drawing on their corporate lines of credit – even when they have no immediate need for cash.
Companies would rather pay interest on cash but have it available than take a chance that the bank might reduce or even revoke a line of credit later.
How valid this fear is depends on the health of the financial institution, said Jim Jones, vice president of business lending at iQ Credit Union.
“We don’t anticipate revoking lines of credit,” Jones said.
But Stanley said that as a general rule, most banks are instituting interest rate floors on revolving lines of credit when they come up for renewal because the prime rate has fallen so low it doesn’t make sense for the bank to use a prime-based rate anymore. Many banks have tightened their working lines of credit and business borrowers experiencing cash flow problems often attempt to restructure their debt to minimize cash outlay, Jones said.
For example, he said, they might extend the term of a loan, ask to lock in a specific interest rate for a longer period of time or request a reduction in interest rates.
But despite the media’s touting of a “credit crunch,” most commercial banks are still making loans, Stanley said.
Nationwide, commercial and industrial loans increased 15 percent between September 2007 and September 2008, according to economic research by the Federal Reserve Bank of St. Louis.
But as an industry, banks “are doing a better job of underwriting deals,” Stanley said. “We need answers to the details.”
He said customers should be prepared for it to take longer to get money and should be forthcoming with corporate financial information.
“Communication is paramount.” Stanley said. “I cannot emphasize that enough.”
Banks are also focusing on relationships, not transactions, he added.
Put bluntly, banks are no longer interested in making loans to companies who do not also have deposits and other services with the bank.
“Banks want the full-meal deal,” Stanley said.
Dave Dahlstrom, chief credit officer at Riverview Community Bank agreed.
“If you don’t have a relationship with a bank yet, get one started,” he said.
Dahlstrom indicated that banks are more strictly adhering to the “5 ‘C’s of credit:” character, capacity, cash flow, capital, collateral and conditions.
You could add a sixth “C” as well – communication.
Other options
But what about companies that aren’t “bankable?”
They still have capitalization options, albeit they’ll pay more. Dahlstrom listed several possibilities, including owner’s personal reserves, SBA loans and private lending sources, such as angel investors.
Frank Nichols, president of Vancouver-based Silicon Forest Electronics Inc., said at one time, the company arranged “self-financing” through a subset of shareholders. These shareholders formed a separate leasing corporation, which bought equipment and leased it to Silicon Forest.
“It was cheaper than regular leasing companies,” Nichols said.
If a company is short on cash, it may consider a “finance company,” otherwise known as an asset-based lender. Assets treated as collateral include accounts receivable, inventory, equipment and real estate.
Doug McDonald, managing director of Bellevue-based Access Business Finance, said his firm has financed about 400 companies in the last 10 years, including several in Southwest Washington.
In the last 10 years, 90 percent of commercial and industrial loans have been made by banks. Now, the pendulum is swinging back, McDonald said.
“Before, we could spend a large portion of our time marketing for transactions,” he said. “Now we don’t have time to market.
Access Business Finance’s volume began picking up in late summer, is accelerating in January, with more acceleration yet to come through April, when financial statements are due.
McDonald said borrowers can expect to pay a 4 percent to 10 percent higher interest rate on asset-based loans.
Silver lining?
Despite worries about cash, some companies see a silver lining on the economic storm clouds.
Silicon Forest Electronics has not been severely affected yet, mainly due to diversification, Nichols said. While the industrial and instrumentation sectors are struggling, the medical, military and aerospace sectors are doing well, he said.
Selling the right product can also help.
For example, On Line Support helps companies cut costs, which is currently a popular commodity.
“We had our best year ever last year,” Olmsted said, “and things are looking good so far this year.”
Other firms, said Stanley, are looking to grow market share by acquiring weakened competitors.
As Olmsted heard at a recent legislative breakfast, “a recession is a terrible thing to waste.”
Treat the disease
“Reduced cash flow is a symptom, not a problem,” said Matthew Stanley, vice president and senior relationship manager at Umpqua Bank. “To develop a solution, you must find the cause.”
Cash flow problems should really be termed “profitability problems,” and there are many possible causes, Stanley said.
In recent months, companies have had to deal with rising costs for energy and fuel, health insurance and workers compensation premiums, commodity prices and minimum wage levels.
“Even well-run businesses have had issues,” Stanley said.
Reluctance to spend is another cash flow killer. In a declining economy, customers tend to delay large purchases or buy in smaller quantities.
The economic slowdown also creates problems in accounts receivable when customers take longer to pay. This has a domino effect down the supply chain, leaving many businesses strapped for cash.
“We have had customers (paying) 30 days (late) who have never done that before,” said Eric Olmsted, president of Vancouver-based On Line Support Inc.
Once a company has identified why its cash flow is insufficient, it can move on to solutions, Stanley said. Some problems require a management solution, others may require a lending solution.
