Uncovering Cash in a COVID World

During the pandemic, cash is king for all businesses. LSQ’s Miguel Serricchio and Mena Rizk connect with BDO’s Rob Merl to outline the current lending environment and share how LSQ helps free up capital from both the receivables and payables side of the business. Watch this on-demand BDO client-focused conversation today:

Highlights from this conversation include:

1. Working capital challenges businesses are facing during the COVID-19 outbreak.
2. Sectors that are growing, and those that appear to be shrinking during the crisis.
3. The impact of Paycheck Protection Program (PPP) loans on credit markets.
4. When and how asset-based lending (including invoice financing) and supply chain finance can help businesses increase operating capital.

Summary

The pandemic’s negative impact on the U.S. economy has left the financial future of many businesses in limbo, with a dichotomy of access to liquidity between Wall Street and Main Street. Small and medium-sized enterprises (SMEs), both thriving and struggling, find themselves lacking the capital required to meet business needs. Companies are quickly adapting and exploring new instruments to manage cash flow, including asset-based lending and supply chain finance. LSQ’s Mena Rizk and Miguel Serricchio connect with BDO’s Rob Merl to provide insight into what they’re seeing in credit markets and where SMEs can seek financial relief from COVID-19.

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Featured Speakers

Miguel Serricchio, LSQ EVP – Channel Management & Strategy
Mena Rizk, LSQ Regional Vice President
Rob Merl, BDO USA National Business Resource Network Director
Rhonda Reinen, BDO USA Alliance Client Services Specialist

Transcript

Rhonda (Host): Hello, and welcome to today’s Client-focused Conversations Webinar. Today’s topic is covering cash in a COVID world. We are excited to have Alliance members from LSQ Funding Group with us today. I’m Rhonda Reinen, and I will be your web host. I have a few housekeeping announcements, and then we’ll get started.

Please note that all attendees will be muted during the presentation to prevent any background, noise, and feedback. Please submit any questions or comments using the chat feature located on the right side of your screen. I will monitor the chat throughout the session. Please, also note that today’s session is audio-video only. There are no handouts or slides, and also note that today’s session is being recorded. The recording will be posted to the Alliance portal after one business day. Without further ado, I will now turn things over to BDO Alliance, VRN national practice director, Robert Merl to get us started, Rob?

Robert: Thanks, Rhonda. Hello everybody, and thank you for those that are joining us directly. Hopefully, those who will get a chance to listen to this later via recording. As Rhonda said, our topic today, uncovering cash in a COVID world. Our guests are from LSQ. A firm that’s been in the Alliance for going for a little while now and is in the alternative financing area and got some very interesting capabilities that we’ll hear about.

We have Miguel Serricchio who is the executive vice president at LSQ, and Mena Rizk, who is a regional vice president at LSQ, are both going to join me for a few questions and some answers and hopefully, some enlightening conversation. Gentlemen, welcome, and without further ado, Mena, let me maybe ask you first to talk about what’s going on right now. What are the opportunities, the challenges that everybody faces in the COVID world, relative to cash and working capital, because I know that’s your space relative to cash and working capital? What has COVID brought so to speak.

Mena: Absolutely. Thanks, Rob, and I appreciate the opportunity to be together this morning. I think as everyone’s world has been rocked this year in many, many ways, but in regards to the opportunities that have been presented, there are a lot of segments that have experienced tailwinds from this pandemic. Just speaking from anecdotal experience and the experience of our book. And you can see this reflected in the public markets as well, where you’ll see segments like software and tech. In our world that’s up about 130% year over year.

Food, consumer goods, distribution, healthcare, equipment, and government services, all those up over a hundred percent again in our book year over year. This creates a lot of cash flow concerns and challenges, which in some cases, we can help address it. In other cases, we’ll be the consultant that helps them find the right fit for their need.

The PPP was obviously a program that was designed to put liquidity into the marketplace. Depending on your stance on that’s it’s a can that we’re kicking down the road, but also a much-needed band-aid at the current moment. That’s been positive and a negative for us in our world because it did put a major damper on demand for alternative finance products. However, again, it did really put a big, much-needed band-aid on a major wound here in our economy. With regards to opportunities and things moving forward, I would say from what I see, there’s a lot of growth opportunity in certain segments.

The opportunities in distress as well, a lot of firms are going to be facing the inevitable insolvency and going to either need to restructure ABC assignments to the benefit of creditors or chapter sevens. In the restructure, that’s a place where lenders like us and other lenders can help, and in a full insolvency situation— it is what it is. To talk specifically with regards to the growth opportunities, depending on the industry and segment, there are a lot of programs out there to help firms unlock cash. You let me know where should we take this conversation, and how would you like to segment out where we go with that?

Robert: Well, let’s talk about credit markets, because you made the comment about PPP and how it was this, we’ll call it, temporary huge injection? Now we’re all trying to figure out what does that mean from a who owes what back to whom and all the things that you alluded to? What does this mean? I know that you thought about this in advance, what does this mean really for credit markets? Because I know you’re in the alternative financing business. Are they tighter or are they looser? Is it industry specific, as you alluded to? Help me understand, help us to understand what’s really going on in the market post this influx of government cash, basically?

Mena: Sure, absolutely. That’s a great question. With regards to what’s going on in the bank markets, I would say that they are largely frozen, unless you’re a unique one. Banks, at this point, are only lending money to companies that don’t need money. That’s, again, that’s my vantage point and from my conversations with banks, top tier and community and regional banks. Community regional banks, a little bit looser, but still, looking at it from a lending to companies that don’t necessarily need money.

That really creates a big opportunity for firms like ours in the finance segments, and not just opportunity, but also providing that much needed cash flow to companies so that they can continue to grow and operate their businesses. To that regard, you asked specifically about PPP, how that impacts credit markets in our world. Just to not make it too elongated of an answer, but it really put a major damper on the demand for our product for several months. Now that that’s wore off and today, on October 19, 2020, we sit here waiting for announcement of a second stimulus, which the threat of that second stimulus is actually slowing down credit markets as well or at least dampening demand.

Because you’ve got a lot of firms sitting on the sidelines who don’t necessarily qualify or understand and banks that don’t understand the main street lending program, as well, and borrowers that can’t really navigate it with their bank. You have this looming second stimulus package that a lot of companies are sitting on the sidelines waiting to see if that’s going to be put in place or not to figure out what their cash flow need is going to be or whether they can take advantage of really cheap liquidity in the marketplace.

Robert: Okay, so let’s follow up on that for our audience. Our audience is an advisory audience on a CPA audience, et cetera. They, undoubtedly, have customers across all the domains we’ve talked about, whether they’re the ones that are flush with cash or the ones that are really struggling and limited in cash, which maybe in this case, is the topic for this conversation. Maybe they’re sitting around waiting to see whether there’ll be another stimulus. We all know that with elections and governments and everything else, they can be waiting quite a while. How should our firms leverage a firm like yours? How can they help?

They’ve got customers out there that are cash strapped. What are the options for them, and when do those options come into play? That’s the space you’re in, so help us understand, “hey, if you’ve got customers that are dealing with this, these are some of the options I should consider,”.

Miguel: Let me add one thing. I think it’ll lead into Mena’s conversation. The other thing that we’ve been seeing is on what sometimes it’s called, and some of the banks are calling it, a covenant holiday. It hasn’t hit yet. They’ve extended breakage of covenants for a quarter or two quarters, et cetera, but reality is independent of, if there’s a second round of PPP, that, at some point, it’s going to hit. Going back to the credit market, what’s occurring is buyers are extending payment terms. It’s a reality.

We’ve seen that in our portfolio. We’ve been tracking it pre and post, I don’t want to call it post-COVID. It’s when the economy shut down. We’re starting to see extension of payment terms 30, 45, 60 days. When you go back to your bank or your lender, a couple of factors that you have to take into consideration. One is, is that account receivable now acceptable for the borrowing base. Borrowing basis typically have what will take an AR, that’s up to 60 days and if not, it’s got to be insured. There are two factors that are impacting/has interrupted the supply chain. Let’s say from a buyer and the supplier is— payment extensions, are they breaking covenants because of that extension and then the credit insurance market, if anybody follows the credit insurance market, most credit insurance are not insuring they’re actually decreasing their portfolios, getting out of policies and not willing to extend any new policies. I wanted to clarify that because that is just the reality of the market today.

Robert: Yes, that’s excellent. Thank you, Miguel. Where I’m leading with the question for both of you is pragmatically, we’ve got people listening that have clients that have these issues, and they’ve probably investigated some of the normal channels that they’ve gone to their bank. They’re dealing with issues that you guys have both been talking about. Under what scenario should they be engaging a firm like yours? When does that come into play? Can they leverage you for liquidity, or cash, or whatever the right words are here?

Mena: Yes, and thanks, Miguel. Thanks, Rob. Just to put this in some higher-level categories and buckets of alternative finance, you’ve got asset-based lending, which LSQ falls into which we can leverage against the receivables, the inventory, and then more traditional asset-based lending would include equipment as well. Two of those we handle in house, the AR and inventory and then we have partners where we already have our inter-creditor agreements and bring in the equipment piece as well. You also have purchase order finance, that would help with growth funding as well when you have a credit-worthy purchaser of your goods. Triple-A credits, logos, or even qualified middle-market firms that’s where we can bring in a purchase order financier who would advance against the materials that possibly that work in progress or contract manufactured goods. Then we would be able to take them out once that purchase order and delivery is completed.

You’ve got those two working hand in hand. On the other end of the spectrum, you have mezzanine finance, Junior lien lenders, as well and then and then further down the capital stack, you have what I’ll just call cash advance lenders, which is they’re a necessary evil in the market depending on what segment you’re in/if you’re a retail-based. Let’s just take a restaurant, for instance. I don’t know anyone, particularly lending in that space, but it was very popular to take cash advances against your future receivables, and that is not our space, but that’s the major buckets, I would say of alternative finance and what’s available to unlock cash in a COVID world.

Robert: Those different choices, do they line up by type of business at all, or do they apply to all businesses? You use the restaurant example in the latter one. I get your point, which is there are some businesses that are much more equipment-heavy, and there are some that are not right. I assume there are some industries specific a value by a different category, how does that work or how do we think about it?

Mena: Yes, absolutely. To your point, a lot of businesses being equipment heavy. Being a part of the Alliance, I want everyone on the call or everyone who listens in later to please feel free to use LSQ as a resource because we are plugged into this world day and night 24/7, this is what we do is alternative finance. Whether it’s equipment inventory AR that you’re looking for liquidity and leverage against, we can be that contact, but to answer your question directly, take LSQ for instance— in 99% of cases, we won’t work with construction firms. 90% of cases, we won’t work with third-party medical insurance receivables. However, because we see a lot of that deal flow, we have partners that are in that space and can help direct you to vetted firms. I would say most of these programs, there’s a lender for everything. With the boom of e-commerce, there’s a handful of firms that have ballooned to lend specifically against the inventory of e-commerce firms. That’s blossomed in a big way since March. That’s something that’s it’s not going away, it’s not getting smaller. E-commerce, I believe, is up 71% year over year. That’s just an example, to your question of, there’s a lender for everything.

When it comes to LSQ, so long as it’s B2B or B2G based receivables, that’s an arena that we can play in. Again, we can always help point the Alliance firms in the right direction when it doesn’t fit.

Robert: That’s really good. Let me restate what you said. You guys can not only help with the solution in many cases, but you can advise on the choices, even if it’s not in your exact domain.

Mena: Absolutely.

Robert: We have so many of these scenarios, so many different clients across the “family”, if you will, that being able to, as you said, access the right lender is probably the right thing. You guys can fill that niche as well. Thank you. There you go. So good.

Miguel: Literally, Rob, a five-minute conversation, and we can figure out directionally where the best fit would be. If we can do it if someone else can or even in some cases like Mena has done a million times, is just advise them on what the right approach should be.

Robert: Excellent. Let me ask a question. It’s an offshoot to this. I recognize that this is a dangerous question to ask. If it’s not easy to answer, just say so, but I’m sure if you’re like me, you’re also thinking okay, there are different levels of financing and funding. What’s the relative cost differences between the two? There’s the mezz debt, as you talked about, there’s the advanced lending, there’s the asset-based receivable. How much difference is there, or is there any way to even generalize that? Is it all just situation-specific?

Mena: No, I think that’s a really good question. Yes, you can actually generalize it. I would say, among the capital stack that we talked about, asset-based lending, would lean towards the lesser expensive side, lower cost of capital, somewhere in the high single digits to low double digits in general. I would bucket PO finance and mezz or junior debt in a similar bucket where they’re going to be very high teens, or in the 20s total yield total cost of capital, and then the cash advance solution would be above that.

Robert: By category, we’re talking about a significant difference. Each step of the ladder, if you will, is a big step. It’s not trivial at all.

Miguel: Mena mentioned it early on— bank financing is the best today. The issue is that if it was available, “perfect”. The thing is that it’s not available, or mostly not available today.

Robert: It’s going to as you guys have said depend on the firm too. For some firms maybe they may not need it as much.

Mena: In 99.9% of the cases, by the time an advisor is having this conversation with their client or with us, bank finance is off the table. That’s why you just start the conversation with what else is available.

Robert: Excellent. Let’s take a little bit of a turn, because I know Miguel, you’ve got some additional expertise and perspective on the supply chain financing spot. Why don’t you explain what that is to everybody and how you guys work that into we’ve been talking about at more asset-based lending here recently. Talk about supply chain and how it all fits into the puzzle if you could.

Miguel: My son asked me that last week, and he’s still trying to think of what I actually told him and try to explain what I do. If you look at what’s happened in the markets this year is a total disruption in the supply chain, both buyer and suppliers from what we’ve spoken to . We’ve got some really interesting case studies. We just actually launched a new program for US Steel. In simple terms, supply chain up until now has always been limited to investment-grade companies. These, again, Fortune 100, Fortune 500, which like Mena said, those are actually the ones that probably don’t need it. One of the things where we’ve been for the last 12 to 18 months, is really focusing on that middle market and above. Right before, right up to that investment-grade type of company.

Looking at supply chain finance programs, basically, what this provides to the buyer is increasing working capital by potentially extending payment terms. Which everyone is doing today. The thing is that how do you extend payment terms at the same time not trade additional debt which is, again, is something to consider and at the same time offer the suppliers an early payment program that economically is beneficial to them. It’s really looking at it from the other side. If Mena spoke about AR financing my thing would be “let me see who those buyers are” and look at it from that perspective. Look at it from a debtor perspective.

Typically, what happens is a buyer extends payment terms, we see it… every single day of this year we’ve seen it, an additional 30, 45, 60 days offer that early pay program to the suppliers. Typically the suppliers would have access to the funds one or two days after the approval of that invoice. They can actually even bring the early payment up to— If the approval time of the invoice within the buyer is five, six days, they can get funds availability within six, seven days of that approval of the invoice. Again, economically, it’s a little bit probably more expensive than bank financing.

Again, what we said what we’re seeing today under the covenants, most of these payment extensions are not meeting the borrowing base or they’re being requested to get insurance which is more expensive than if they would come to us. There are benefits to the buyer. It doesn’t create debt to either the buyer or the supplier. Again, it gives the suppliers ability to obtain cash within one or two days if they so choose.

Robert: Because this is complicated, can you give us an example, not names but types of firms— so the supplier, the buyer, the customer, can you think of an example right now you can create for us?

Miguel: We’re about to do a press release right now, and it’s public information, so I’m perfectly okay with it. What we just launched last week and went completely live, is a supply chain finance program for US Steel Corporation, a company that’s been around 100 plus years, if I’m not mistaken. There’s a subset of 60 of their suppliers here in the US, the program will run on an accounts payable somewhere around $800 million. We approved the $200 million facility for that. Basically, the payment terms are 90 days.

The benefit to US Steel, just think about it, $800 million dollar in spend and let’s say that they extend the payment terms 30 days, that’s the amount of days that they don’t need to borrow. 30 days on 800 million that they don’t need the borrow. Anybody depending on cost of funds, do the math and that’s the benefit. The suppliers at the same time, what they have found is because of the terms, either there’s no credit insurance that’s available, or it’s not meeting the facility, the borrowing base, so they’re able to get early pay on those invoices.

We actually enhance the program with the EXIM bank guarantee, which just provides even an additional lift to the program. We worked with the government to get this approved, and that’s a press release, so this is all public information that I feel comfortable sharing.

Robert: Thanks.

Miguel: I think it’s a very clear example of a benefit to the buyer, US Steel, a benefit to their almost 60 suppliers here in the US. Ultimately, it’s a benefit to the economy, right? Because this is supporting about 3,000 jobs in the US.

Robert: Yes. Obviously, you used as an example that everybody can understand. It’s a big firm, but you’re doing this into the mid-market as well. This is not just a large firm issue, right?

Miguel: We’re looking at companies, I would say at the lower end, maybe 350 million, we’ll do some exceptions. They do need somewhat of a sophisticated finance group because this is not something to take lightly. The other benefit, I think that LSQ, as an alternative lender, I consider ourselves more than a lender. In the case of US Steel, yes, we are also the platform. We manage the program for both US Steel, the suppliers, and in this case, Huntington National Bank, which we partnered with. We manage the whole program, the technology both for the buyer for the supplier, we brought in Huntington bank into this, we did all the negotiations with EXIM.

We’ve got the ability to find the funding sources as an alternative lender, but also manage the program for both buyer and suppliers, and then the ongoing maintenance of the program.

Rob: Great. Well, we’re getting close to our 30-minute mark. If anybody has a question, please quickly chat it to us. I know Brenda Sleeper of our team is also on the phone with us. Brenda, any questions or something that you’ve seen or any questions that you yourself might have?

Brenda: I don’t see any here, Rob. This has been really great information. As I mentioned before, we are looking with these conversations to connect the dots between our Alliance firms and help that they may need for their clients and with the Business Resource Network firms like LSQ funding. I think I saw a stat the other day that supply chain, for example, might have been it was an issue with CFOs. They rated it like 20%, 25%. Now they say in terms of number one issue that CFOs are having its supply chain, and that’s gone up to like 95%. I think it’s important to get the word out that you’re here and what you provide so that we can all help our clients better.

Robert: Yes, thank you, Brenda, great summary. Mena and Miguel, thank you. Just to reiterate to everybody, they can find LSQ on the Alliance portal. They can certainly contact any of the Alliance team members, and they can find Miguel and Mena’s contact information as well under LSQ on the portal. I think Brenda, you said it really well. We know businesses are out there in this very unusual time struggling. LSQ is a strong provider of alternative finance with firms that are in need of the cash— here’s a great way to uncover it and access it right now.

Please contact any and all of us as needed and pass this message along to others at your firm that you think might have an interest. Feel free to come back with questions or more information to any of us. Mena and Miguel, again, thank you so much for your time today. Rhonda, thank you for hosting us. Anything else we need to do, Rhonda, or are we ready to say goodbye?

Miguel: Well, thank you.

Brenda: Thank you, everyone.

Rob: Thanks.

Rhonda: That concludes today’s session. Thank you for joining.

Rob: Thank you, Rhonda. Bye-bye

 

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