Is your business prepared to generate liquidity during an economic downturn?

All companies must generate liquidity to survive, regardless of size or industry. Positioning your company in a strong cash position could provide an essential financial buffer, helping you meet challenges and survive. But doing so also positions the business for strategic opportunism.

“For many, credit is less available as creditors have become more restrictive. Companies in many industries are facing revenue pressures, which have a corresponding impact on cash flow, leverage, and the ability to raise capital,” says Arduini. “Accordingly, optimizing working capital funding in a way that is friendly from a leverage perspective is very topical right now.”

Many companies, in particular small- and medium-sized enterprises, are struggling to attract financing as their asset bases shrink due to weaker economic activity, he says, leading to less debt-raising capacity.

“The most important thing that a company should know is that there are options,” Arduini says.

What to know about today’s business liquidity options

Lines of credit:

While still a viable option, lines of credit are now being provided with a higher degree of caution and under tighter conditions. This is primarily happening based on financial institutions reacting to weaker market conditions and a softening in the financial performance of many companies.

Government-guaranteed lending space:

The Small Business Administration, for example, is stepping up to help companies with programs such as its Economic Injury Disaster Loans, available to eligible small businesses, private nonprofits, and U.S. agricultural businesses. Similarly, the Export-Import Bank of the U.S., which supports U.S. exporters primarily through credit insurance and loan guarantees.

“Having your mind open to government alternatives right now can really benefit you,” Arduini says. “Many companies that historically wouldn’t have required government support are now finding themselves in a position where they need that type of credit enhancement to get the liquidity they need."

Receivable sales:

In recent years, there has been an uptick in receivable sales activity. When an institution purchases a receivable, unlike lending, it is granted an ownership interest. It can pursue the party that owes the receivable, normally an investment-grade company, directly for non-payment. This feature, among other considerations, generally enables the institution to provide greater liquidity against a receivable than is available through a line of credit.

Many companies historically viewed this unitarily as “factoring”, which while valuable for the right companies, tends to focus more on smaller companies and distress situations and usually is more expensive than a line of credit. For medium- and larger-sized businesses, there are a variety of techniques available that can produce more liquidity than a line of credit, often at a similar or discounted price with more favorable accounting treatment.

Supply chain finance:

This enables small- and medium-sized companies to raise liquidity through programs established by their larger customers. In these programs, the large customer, commonly known as an “anchor” or “buyer,” arranges facilities with financial institutions and other concerns that enable its small- and medium-sized suppliers to sell receivables the anchor/buyer owes at a discounted price to the financial institution.

Often through these programs, small- and medium-sized companies can access more significant levels of liquidity on receivables at lower interest rates than they can obtain on their own. Over the last several years, an uptick in the availability of these programs has occurred. COVID-19 spurred this trend, leading to increased program issuance as larger companies sought to provide solutions to suppliers to add stability to their supply chains.

More than a recessionary lifeline

Arduini says many of these alternative strategies accelerated out of necessity in the wake of the Great Recession, offering companies a financial lifeline during challenging times. But since then, the products have become more mainstream.

For more information on alternative strategies for generating liquidity, contact your relationship manager.