Originally published on LinkedIn
Small to mid-sized businesses have had an incredible roller coaster ride in terms of earnings the past 6-8 weeks. COVID-19 has robbed many businesses of their livelihood and left a wave of desctruciton. While many household names such as Boeing, GE and Lyft have announced deep layoffs, many just couldn’t weather the economic storm — Sweet Tomatoes to name one such victim.
For those businesses that have survived, what now? We are expected to have a very slow recovery and that means earning will continue to be depressed and this recession will touch every industry in the US. All the while businesses are trying to forecast cash flow for the next 6-8 weeks without a clue what tomorrow will hold. Lenders are scrambling to work with their borrowers, large and small, and unfortunately lenders are also affected by this uncertain time. Banks are increasing loan loss provisions and are carefully looking at their existing portfolio of commercial loans and deciding who to keep and who they have to start pushing out. No business gets a free pass no matter how long they have been a client of a bank or lender.
This means many businesses are seeing credit line increases denied and banks and lenders unable to make credit exceptions which would have been so easy to do pre-pandemic. For many businesses, this means they must find a new lender which in this economy can become one of the single most important decisions they will ever make. Choosing a lender is like choosing a spouse — do it right and there is bliss, do it wrong and it is a life of agony.
Like a marriage, a good lending relationship starts with understanding. Does the new lender understand the businesses’ industry? Specialty industries such as transportation, health care and construction need specialty lenders who understand the nuances of these industries especially in times of turmoil such as our current environment. In a good economy finding the right “match” is not as important because every industry is doing well and a few mistakes here and there will make no lasting impact. In the current economy and uncertainly, if your lender doesn’t understand how your business will change, how your customer profile may perform, then the lender will not support your decisions and you will be at odds. This is disastrous and will lead to a lender tightening credit and changing ineligible definitions. All of this leads to less cash flow to a business when they need it most.
Now is not the time to look for the cheapest bank or lender. More than likely cheap rates equate to a much tighter credit structure with little room for exceptions if the borrower hits a rough patch (i.e., a large customer files bankruptcy or there is some other credit disruption). When looking for a new lending relationship consider the experience the lender has in your industry. How many other clients does the lender have in your industry? Can the lender give you client references to call?
Asset based lenders are a great choice when the economy is in a down turn because the asset based lender is underwriting the assets of a business, not the cash flow. This gives a business the time to get revenue back on track and to grow the company without concern of financial covenants. In lieu of financials covenants which work for cash flow loans, an asset based lender will manage risk by defining ineligible accounts receivable and inventory.
If you are considering an asset based lender, make sure you understand how the ineligibles are defined and the borrowing base is calculate. It is a good idea to have a prospective lender do an initial borrowing base calculation with details of the ineligibles before you sign a proposal and pay a large due diligence fee. This exercise can help you weed through the “wrong” lenders so you can focus on working with the right lender.
Robyn Barrett is the Managing Member of FSW Funding, an asset based lender founded in 2001. FSW Funding offers working capital lines of credit to businesses in many different industries across the United States.