As a provider of working capital during a period of economic and financial uncertainty, we at LSQ feel a deep responsibility to (1) maintain our discipline and strength so that we’re here when you need us, and (2) pass along perspectives that may be less readily available elsewhere.
On the first point, we, of course, did not anticipate COVID-19, but we have been concerned by the easy credit environment of the past decade and its impact on corporate creditworthiness. The demand shock caused by COVID-19 will likely create significant disruption in the credit markets. It is critical to maintain discipline during times like this. Our shared goal is to be in a position to weather periods of volatility, and we want to offer you insights to that end.
On the second point, our suggestion is to assume that business won’t be as usual for some time to come. Nobody knows the severity or duration. It’s hard to forecast when there are no precedents, but it is possible — indeed, necessary — to plan, to prepare, to anticipate and to adjust as we learn more.
With that in mind, we would like to share some thoughts on managing risk and building resiliency into your business:
Customer credit: Monitoring the financial health of your customers is critical during periods of disruption . If you are working to bring on a new customer or want to evaluate the health of your existing customers, we recommend analyzing their financial statements, leveraging credit bureau information, and keeping an eye out for signs of irregular payment behaviors. LSQ has published a free and useful Guide to Navigating Customer Credit to help you avoid financial distress with your customers.
If you’re a current or prospective LSQ client, remember that our platform does more than just accelerate your cash flow. We have a team focused on the credit strength of thousands of our clients’ customers, with a proactive rather than a reactive mindset. Our Dashboard provides real-time credit decisions that help you determine the creditworthiness of your customers. Whenever we believe we see customer weakness, our priority is to reach out so that we can decide together how to manage it while there are still multiple options on the table. If you are working to bring on a new customer, don’t hesitate to ask us about their credit profile.
Cash conversion cycle: Pay even more attention to managing your working capital. Working capital is what you have tied up in receivables and/or inventory, less the capital of your suppliers that you are tying up in your payables. Let your customers know that their on-time payments are even more important to you than usual. Keep an open dialogue with critical suppliers to gauge whether they are able to accept longer payment terms. Ask yourself what level of inventory is appropriate in this environment. The more visibility you share into the details of your cash conversion cycle, the better-informed working capital providers can be in helping you find ways to boost liquidity.
Fixed costs: As we have already seen, people and companies are behaving differently, consuming less, much less in particular businesses like travel, entertainment, and retail. Ask yourself what your cash flow would look like if business (revenues) were to decline by 25% or worse for some period of time. How long could you cover your fixed costs under that condition? What can you do now to improve the resiliency of your business? This is a healthy exercise — regardless of market conditions — that improves staying power.
Predatory lenders: A new class of lenders has emerged over the past 10 years. They don’t ask about your financial statements or your assets. They offer quick approvals and funding, and ask only to park a hand in your pocket (bank account) for a daily extraction. They have a way of presenting the cost as if it’s not the 40%, 60%, or even 100% annually that they actually charge. This short-term cash boost can quickly become a drain on your business. If you find yourself contemplating this “solution,” be wary, you may want to consider other options such as invoice financing, PO financing, inventory financing or equipment financing that leverage existing assets instead of incurring high fees or interest rates with predatory lenders. And as more details about the SBA’s expanded support of virus-impacted businesses become available, consider that as another potential working capital option.
Responsible growth: Several of the points above are tied together by a theme: saying no. Sometimes even when you really want to onboard that new customer, the terms aren’t right or there is a real chance they won’t be able to pay the bill when it comes due in 60 days. Sometimes it’s OK to say no, and this is likely to be both more necessary and more acceptable in coming weeks and months than most of us have become accustomed to in recent years.
Our objectives here go beyond helping you. When your business is stronger, ours is too…and vice versa. LSQ has weathered several cycles in our 25 years, but the challenge we face is unprecedented. Let’s be vigilant and keep each other strong.
Our business development team can help evaluate the needs of your business. Our underwriting and data teams remain vigilant in identifying and mitigating risks. Our client management team is here to support and give advice to our clients. And on behalf of our leadership team, you have my commitment that we will communicate with you actively and help you build resiliency through and beyond these challenging times.