This article appeared in the November 2020 issue of MiMfg Magazine. Read the full issue and find past issues online.

The Paycheck Protection Program (PPP) helped many businesses stay afloat during the start of the COVID-19 pandemic. Many would have closed with little working capital to meet their cash needs.

The PPP funds were only a bandage to cover payroll and some overhead expenses for a short period. For many, they just weren’t enough. Lack of liquidity remains a significant problem, impacting normal business operations and causing lower staffing levels, disruption in the supply chain, stretched receivables and payables and decreasing inventory.

This leads to an uncomfortable position and potential to default with lenders.

So, what are your business’ options?

• Alternative Financing: To buy additional time, a business may need to enter into a short-term forbearance agreement which may include additional terms, reporting and higher pricing. Some businesses may be forced to sell or close their operations.
• Merger: Merging with another company is a consideration but it takes time to find the right partner, conduct due diligence and negotiate an acceptable agreement.
• Bankruptcy or reorganization: This option can be expensive and few survive over the long term.

Your business should rely on trusted advisors to explain your best options based on your situation. Accurate and timely financial and collateral information must be available to prepare a plan and help negotiate a deal with the bank or another lender.

If the bank is unwilling to continue working with a business, there are alternative sources of financing for businesses requiring working capital.

• Purchase Order Lender: If the business has purchase orders, a PO lender can provide financing for inventory purchases. This option is usually done with a factor or asset-based lender who finances the invoices to pay off the PO lender and provides additional working capital going forward.
• Asset-based Lender: An asset-based lender leverages the receivables, inventory, machinery, equipment and real estate of a business on a formula basis to pay off its existing lender and provide additional working capital. These lenders provide financing to companies with high leverage, weak balance sheets or those that have experienced losses but are still viable. These businesses should show their operating performance and plan to return to profitability. While pricing is oftentimes more, asset-based lenders provide critical and essential access to working capital.

Of course, it’s best to think about financing options early before cash needs arise because lenders need time to conduct diligence, get approval and document the agreement. Waiting too long to obtain financing can result in further disruption and missed opportunities to operate and grow the business.

It’s smart to have a plan B to finance working capital needs when PPP isn’t enough.

About the Author

Jeff Wright works in Alternative Financing Solutions for Hitachi Business Finance. He may be reached at 248-259-3749 or jwright@hitachibusinessfinance.com.