COVID-19 has had an unprecedented impact on the United States’ economy. According to the most recent economic data, over 1 million businesses have closed, and quarterly GDP declined by a worst-ever 32.9%. While the economy has improved significantly in the past few months, it’s safe to say that we’re not out of the woods. The economic repercussions will continue to impact businesses for the foreseeable future.
Given this reality, businesses need to focus on cash flow management to ensure that they have the working capital needed to survive without incurring significant additional debt. For most of the year, businesses have relied on PPP funding to bridge their funding gaps. But as uncertainty looms, they should begin to look for more permanent solutions, such as invoice financing, to address their cash flow needs.
Invoice financing, or factoring, is well suited for the current economic environment. By converting unpaid invoices into cash, it provides access to debt-free, on-demand working capital that businesses can use to manage their cash flow effectively. Here are four reasons to utilize invoice finance as a source of working capital during the pandemic.
One of the primary impacts of the virus has been a return to the tried and true principle that “Cash is King.” Facing the prolonged effects of COVID-19, companies are worried about staying liquid and, as a result, are building reserves by hoarding cash. Many are cutting services, laying off workers, eliminating dividends, and delaying capital investments. We’ve also seen companies draw down their credit lines and, according to Refinitiv, borrow almost a year’s cash in the first five months of 2020.
The Federal Reserve of Economic Data reports C&I usage across all U.S. commercial banks in late-February to mid-April jumped from $2.3 trillion to $2.95 trillion. This was mostly a result of SMEs employing PPP funds to position for an extended period of downtime. Of course, now liquidity is much harder to find. The takeaway— previously leveraged companies are now further leveraged and need to find new sources of liquidity, such as invoice financing, that don’t add additional debt.
There is considerable uncertainty about the future of government relief for small and medium-sized businesses between recent congressional inaction and the expiration of the Payroll Protection Program (PPP) on August 8th. Given concerns about government spending, it seems safe to assume that any new aid package will not be as robust as the original offering. This may have dire consequences, as many businesses have relied on PPP funds due to lack of revenue and the specter of decreased activity in the 2nd half of the year.
Timing is also an issue; the lapsing of the $600 unemployment benefit and an end to the moratorium on evictions could soon make the economy worse. Any new relief bill passed will take time to implement. Even ambitious estimates place late September as the earliest that businesses and consumers could feel the benefits. Given the delays and uncertainty of an aid package, invoice finance becomes an appealing proposition for companies to stabilize their cash flow.
Another reason businesses are considering invoice finance is that banks have increased their lending standards, making it extremely difficult to get loans not related to PPP. According to the Fed’s latest Senior Loan Officer Opinion Survey on Bank Lending Practices, some 70% of lenders had increased their lending standards for C&I loans. It makes sense for banks to be restrictive. Credit scores are declining, balance sheets are a mess, and the outlook for future orders on many goods and services is grim.
For those lucky enough to have existing loans, several banks granted 1–2 quarter “Covenant Holidays” to segments of their portfolios when the pandemic started mid-March with the expectation that the economy would have significantly recovered by the summer. Banks will have to address this miscalculation in some form, be it extensions or exits. If there is a tidal wave of workouts, businesses, along with their current lenders, will likely look to solutions, like invoice financing, to meet their needs.
One of the most evident reasons to consider invoice financing is that procurement and payment cycles have slowed. Businesses looking to preserve cash are extending their payment terms with suppliers or making more frequent late payments.
In addition, according to the Wall Street Journal, global factory production has decreased by almost 50%, partially due to new orders declining by 30%. This has led to a reduction in global shipping capacity and an increase in shipping costs, which has slowed down the entire supply chain. To offset these delays and costs, many businesses are now choosing to adopt a “Just-in-Case” strategy of inventory management.
As a result, businesses are now placing larger orders that take longer to arrive and, therefore, longer to sell. This has real impacts on their cash flow and supply chains. By utilizing invoice finance, businesses are able to offset some of that pain by converting their sales into cash immediately, instead of waiting for the invoice maturation date.
Consider LSQ’s Invoice Finance Solution
If you or a business you know needs a stable and professional working capital solution, consider LSQ. For over 20 years, LSQ has helped countless companies across the United States access the funding they need to thrive. Cash flow shouldn’t be an issue that holds your business back. Learn how LSQ’s invoice financing solution and technology platform can help your business succeed.