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10 Liquidity Options for Businesses During COVID-19 Outbreak

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Liquidity is one of the most important factors in your business. It means whether you can pay your current obligations using your existing assets. In simpler terms, can you pay your bills and make payroll this month? It’s easy to see that liquidity is a key factor in keeping your doors open over the next few months of uncertainty.

Even if you aren’t worried about making your payments in the short-term, should you be looking into liquidity options now?

The short answer is: yes, especially if you’re conducting some scenario analysis to help with decision making. We’ve gathered 10 great ways to increase your liquidity and cover expenses during the current economic conditions. Whether you need them today or may need them in the future, it’s a great idea to freshen up on your options.

1. Reduce Overhead

Reducing overhead can help get your business through tough times. It’s best to be proactive with this and begin taking steps to reduce costs before you’re faced with financial trouble. Here are some ways you can start:

  • Eliminate non-essential expenses
  • Freeze hiring for open positions
  • Cancel business travel and opt for video conferencing
  • Reduce hours of part-time staff where possible
  • Eliminate non-essential part-time and salaried workers as a last resort

2. Negotiate with Lenders

As the COVID-19 outbreak continues, it’s important to nurture your relationship with your current bank and credit card companies to strengthen their trust in your business. Remember that everything is negotiable. Here are some things you can consider:

  • Review the terms for all business loan agreements and revolving lines of credit (RLOC)
  • Consider refinancing debt to extend terms and reduce payments
  • Negotiate reduced interest rates on loans and credit cards
  • Request a credit line increase for credit cards and ROLC
  • Negotiate to pay only interest on the debt if finances become tight

The best way to start this is to request a meeting with your banker and the decision-maker at your bank. A face-to-face meeting is ideal, but with the COVID-19 restrictions, you’ll need to stay 6-ft apart. Or, opt for a video conference as a last resort.

Plan ahead and make sure to have up-to-date financials ready to present to them. Outline your plan to pay back the debt and steps you’re taking to reduce costs in the immediate future. All of this will help build the bank’s confidence in your business.

You should be prepared to offer a personal guarantee or additional collateral in order to secure additional financing. This will show that you’re committed to the business and are stepping up as an owner.

Read More: Planning and Managing Your Banking Relationship During COVID-19

3. Special Government Programs for COVID-19

There are special programs being developed through the government for COVID-19. It could take a while to receive funds because the programs are still being created, but it’s good to start the process now.

We’ll be posting government programs as they become available in our: Coronavirus Business Resource Center.

Business owners can apply directly to the SBA for an economic injury loan. You will need to document the loss of revenue from the COVID-19 disaster, which your representative at Signature Analytics can help with.

Check out additional information here: https://business.ca.gov/coronavirus-2019/.

In the meantime, you should prepare for submitting a full lending package to the SBA, including all the information listed here:

  • 3-year federal business tax returns
  • Current interim (end of last month)
  • AR & AP agings (end of last month)
  • 12-month projection prior to COVID-19
  • Reforecasted 12-month projections
  • Spreadsheet of the loss of revenues calculation along with fixed expenses for the same period
  • Updated Personal Financial statement for all owners, greater than 20%
  • 3-years federal personal tax returns

All of the above items will be required. The SBA will make credit decisions based on a complete package for each and every business. Get a head start gathering these items and put them in a secure drop-box or data room (current best practice)

If you need help putting your lending package together for the SBA, Signature Analytics can help. We have experts available to help you get the funding your business deserves.  Contact us today to get started on this process.

4. Financing Options

Check your terms with current vendors and negotiate an extended payment period. Increasing your payable terms out to 30-180 days, depending on your relationship with the suppliers, can help you cover urgent invoices.

You can also look at financing companies to secure additional funding. They may offer more flexible terms than traditional lending sources, but they’ll also look at your collateral in much greater detail. Consider some of these options:

If you choose to use a financing company, make sure you look at the total cost of the funds. They will have more fees and higher rates to offset the increased risk.

5. Use Business Assets

Your accounts receivable and equipment can help you get cash in a pinch.

An asset-based lender will provide your financing based on your monthly AR. This is a great option for businesses with creditworthy customers. Furthermore, factoring your accounts receivable might be a solution too. Selling your accounts receivable can increase your cash fast, but you won’t receive as much as if you were to collect the invoices in full yourself. You’ll incur a fee, plus the receivables you sell will only be sold at a percentage of their full value. Make sure you know the down-side to each available solution.

In addition, you can use existing equipment as collateral for loans. Companies like Ford Financial and LendSpark will arrange an appraisal of the equipment and could grant you a loan based on its value. Always, understand the full cost of this type of financing before committing.

6. Use Real Estate

Real estate is one of the best forms of collateral that a business owner may have available. Know that the process could take a while, so try to prepare in advance as best as you can. Here are some things to know:

  • Underwriting, appraisals, environmental reporting, and other due diligence can take 30-60 days
  • Loan-to-value (LTV) ratio is generally less than 85% of the appraised value, meaning you can’t count on the full value of the real estate
  • Some SBA lending programs allow an LTV ratio of up to 90%

If you choose SBA options, make sure you’re working directly with someone who has done hundreds of SBA loans in their career. There are lots of requirements and specific paperwork to complete because SBA is a government guarantee of the loan. The process will take quite a bit of time and having the help of an expert is crucial. Harvest CRE is an option.

You can choose to work with banks. They may have more conservative terms and will likely want you to have a deposit account at the institution.

Non-bank lenders, such as Harvest Small Business Finance, may be more flexible with terms. Plus, you will not have to move your deposits to them in order to receive the loan. However, they can be more expensive. Just check your options before you commit to anything.

What about home equity?

Home equity is another great option to add liquidity if your owners have this option available. Owners can refinance their personal properties for potentially lower rates right now.

7. Friends and Family

Your friends and family know you and understand your business. You can lean on your existing relationship with them to secure funds. Be transparent with them and provide a solid plan on repayment, including a return on their investment. Sign and document the terms of the loan just like you were dealing with a bank or private equity.

Mixing personal and business relationships, especially with money involved, can be tricky. Be prepared for this to affect your personal relationship, whether for better or worse.

8. Merchant Card Advance

(Warning Read the Details) A merchant card advance can be helpful in a pinch. If you receive most of your revenues by credit card payment, you can secure an advance from the merchant card. In return, the merchant will take a percentage of your future sales until the loan is paid, or you can arrange daily or weekly payments instead. It’s an easy way to get money, but it also comes with higher rates and fees, so look closely at the repayment plan. Make sure you have a dedicated way and plan to pay this debt off.

9. Mezzanine Finance

Mezzanine financing is an industry-specific, strategic capital that can be used for growth. This unsecured debt is usually subordinate to senior lenders. HCAP Partners is a solid option.

10. Private Equity

Private equity can give you cash in return for a stake in your business. Beware of investors who are looking to take advantage of the current situation. On option during this pandemic, ask for convertible note terms so you can refinance the note and protect your ownership position.

Final Thoughts

As you navigate through the COVID-19 outbreak, you can think outside the box for ideas on liquidity. Remember that everything is negotiable. With the uncertainty ahead, make sure you’re asking questions and preparing your financials. When you do need financing, you’ll want to let your numbers tell your story and show how your business is performing.

And if you want a trusted advisory by your side to help guide you along the way, contact us today.

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