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Feb 3, 2021

Liquidity Options for Small and Medium-Sized Businesses

Liquidity is the most important element of survival for small- and medium-sized businesses. It refers to the ability to cover short-term financial obligations using existing assets.

Financial planners recommend businesses should keep at least three to six months worth of expenses to maintain business operations in case of an emergency.

What if the situation does not quickly get back to normal like the current situation caused by the COVID-19 pandemic?

Small and medium-sized businesses face unprecedented cash flow problems. At the same time, their value is tied up in resources such as equipment, inventory, and invoices that may take time to be converted to cash.

So, what liquidity options are available to these businesses?

We have outlined some actionable ideas to keep funds flowing and get through the short-term cash crunch. However, you should review your business financial needs and decide whether you should make some internal changes rather than take external loans, which may be expensive.

Reducing overhead

Reducing unnecessary company costs can help avail cash to run your business. Carefully examine your business spending and identify the ones you can cut back.

  • Cut unnecessary monthly subscriptions such as trade publications not adding value to the company anymore.
  • Restructure your organization and identify efficient ways that can be introduced to the daily operations cost-effectively.
  • Introduce part-time work options for staff and adopt a virtual office to reduce payroll costs as well as downsizing the need for a physical office.
  • You may also freeze hiring until you can stabilize company finances. Outsourcing services such as marketing agencies may also be significantly cheaper than hiring full-time marketing employees.
  • Cancel all business travel and adopt video conferencing.

Sweep accounts

Smart entrepreneurs invest in sweep accounts, which are the most profitable banking products for businesses.

A sweep account links your business checking account with your investment accounts, such as a stock fund or money market accounts. At the close of each day, sweep accounts automatically transfer funds from your business accounts once a pre-set target is achieved for safekeeping and earning high interest.

Sweep accounts are very crucial for maintaining business liquidity as funds can be easily and conveniently accessed when required. Therefore, you can look into your sweep account if you need emergency cash to finance your business.

Negotiating with creditors

Renegotiate with your suppliers, landlords, lenders, and vendors on how you can work with them to meet your obligations.

Extending time to pay your suppliers and vendors can temporarily boost your cash in hand. If you usually have 15-day payment terms on your supplier invoices, you can renegotiate a 30-day or 60-day payment terms, giving you enough time to arrange your finances before paying.

You can also reach out to your landlord as early as possible before you start missing payments and try to work out a payment plan that ensures your business remains afloat. Some states have issued a 90-day moratorium on commercial and residential evictions during the current pandemic.

Renegotiate your business loans to defer payments or extend debt terms with smaller monthly installments. Some lenders may consider reducing interest rates on loans if you maintain a good credit standing and contact them early enough.

You may also request your lender for overdraft protection with relief assistance such as lower interest rates or waiving fees on late overdraft repayment.

Early invoice submission

Learn to submit your invoices as quickly as possible to enable your customers to plan to pay you early enough.

Some of your customers may decide to help by paying before their terms. You may also encourage this by offering a discount on early payments. For instance, if your buyer used a 30-day payment term, you may offer a 2% discount if he pays within 20 days or up to 5% if paid within ten days.

Small business loans

There are several types of loans for small- and medium-sized businesses that can help boost business growth or working capital needs. These loans vary depending on business needs, loan period, and the terms set by the lender. Some small business loans include:

  • A small business line of credit – works the same way as a credit card where small businesses can access funds up to a specific limit. Most lines of credit do not charge interest unless the accounts are overdrawn.
  • Working capital loans – are short-term debts used to finance expenses or fluctuations in company revenues. Working capital loans are usually unsecured and are repaid within 30 days to 1 year.
  • Small business term loans – small businesses can access term loans of between 6 to three years where the interest and the principal amount are amortized over the agreed term. Term loans range from $30,000 to $5 million for most lenders and can be secured or unsecured.
  • Inventory loans – a small business can obtain a credit to pay for supplies that may not be sold immediately and use the same inventory as collateral. This way, the company will manage to carry out the production process without any cash flow hitches.
  • Equipment loans – small businesses can agree with a lender to finance the acquisition of equipment. The small business makes a 20% down payment of the purchase price, and the lender funds the remaining 80% to be repaid over a specific period.
  • SBA loansSmall Business Administration does not lend money to small businesses. Instead, it works with lenders by setting guidelines for loans made to small businesses. This helps reduce the risk faced by lenders on loans advanced to small businesses.
  • PPP loans – The CARES Act provides forgivable loans to small businesses under the Paycheck Protection Program (PPP) to be used to maintain up to 24 weeks of payroll costs, rehire employees, and cover overhead during the COVID-19 pandemic. Small businesses can apply for loan forgiveness if at least 60% of the borrowed amount was spent on payroll costs and if the number of employees and their compensation level was maintained during the 8 to 24 weeks covered period.

Financing options

Small- or medium-sized businesses operating in domestic or international trade may opt for trade financing to address their cash flow issues. Trade finance helps free up working capital held by the supply chain processes. Here are the several financing instruments available under trade finance:

Cash in advance

Under trade financing, you can request your buyer to pay for the goods or services in advance before you deliver. Cash in advance is a risky approach to the buyer as the goods may not be delivered or, if delivered, may be substandard.

Most buyers may not accept such an approach, but you may use it for infrequent orders or if the buyer trusts you will deliver. This way, you will have the cash to work on orders and avoid cash flow constraints.

Receivable financing

Receivable financing, usually referred to as factoring, is post-shipment finance from a third-party financing institution. Once the exporter has shipped the goods to the buyer, he may use the invoice or accounts receivable to acquire funding to free up working capital. The financing company usually pays approximately 80% of the invoice upfront.

The buyer now owes the financing institution and is supposed to pay the invoice amount when due. The exporter will receive the outstanding balance minus the charges once the buyer pays the financing company.

Unlock working capital from accounts receivable with Lockstep’s export financing.

Invoice discounting

Invoice discounting enables small- and medium-sized businesses to access funds by transferring ownership of invoices to a financing company and immediately be paid a discounted value of the invoice amount.

Apart from improving cash flow, invoice discounting transfers several risks from the exporter to the financing company, such as non-payment risk. This is because the buyer owes the financing company and not the exporter.

Contact us today and get paid immediately when you close your container doors!

Purchase order financing

Purchase order financing (PO) is a pre-shipment financial solution to facilitate export production.

An exporter, after entering an agreement with an international buyer and the buyer placing a PO, the exporter can involve a financial institution. The financial institution will advance between 30% and 70% of the PO value to purchase raw materials, overhead, production costs, and working capital.

Supply chain financing

Supply chain finance offers cash flow solutions while improving the efficiency of international trade.

An exporter supplies the goods to the buyer and submits an invoice, which is approved but is paid under the 30-day term set.

But because the exporter has cash flow problems, he needs an early payment but cannot inconvenience the buyer. So he approaches a financing company that pays the exporter and extends payment terms for the buyer for an extra 30 days.

The financing company improves the importer's liquidity and enables the buyer to fully utilize payment terms, improving the relationship between the two parties.

Lockstep’s sustainable supply chain financing comes with shipment tracking and analytics tools that help exporters reduce financing overhead. We also reward you for using eco-friendly shipping methods! Check out our Green Score used to rate and reward your green supply chain.

Letter of credit

A letter of credit (LC) is a written confirmation issued by a bank on behalf of a buyer to assure an exporter of payment towards the supply.

The letter of credit also assures the buyer that the goods will be delivered as per agreed terms because the exporter will only be paid if the goods meet the required standards. A third party bank, known as confirming bank in the exporter's country, has to ensure the goods' standards against the LC terms and pay the exporter.

By accepting to confirm the compliance documents and the LC, the confirming bank assumes all the risks within the international trade. The exporter will therefore pay a fee to the bank according to the assessed risks.

Equity capital

The last option to raise funds for small- and medium-sized businesses is to sell part of their ownership stake to investors who will become company stockholders.

One significant benefit of equity capital business owners is not worrying about making interest payments or financing fees like loans or financing options. This type of liquidity management method can be used even when the business does not earn any money and has no securities to acquire loans.

However, there are critical considerations that make equity capital the most expensive form of funding. First, the future profits will be divided among shareholders in the form of dividends. Second, shareholders will be among the company's decision-makers through voting rights, meaning the business owner's control is diluted.

Final thoughts

Your business will face uncertain times, such as the current COVID-19 pandemic, but there is help out there to boost your business liquidity.

Do your research and think outside the box on the liquidity option that best suits your business. Remember that you can always negotiate for what is best for your company. Consult an expert to help you find the best solution for your cash flow problem.

Contact us today and let our team guide you through our sustainable supply chain financing. We are also committed to greening our continent and will reward you for making environmentally friendly shipping choices.

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