Working Capital and Cash-Flow Solutions for Minority-Owned Businesses

In August 2021, we sat down with the Diversity Consortium as part of their XBE Thrive webinar series to talk about working capital for minority-owned businesses. The Diversity Consortium is an organization designed to work with corporate entities, to help build and calibrate their strategies around supplier diversity, and to work with the disadvantaged business enterprises of all types. Their mission is to create a measurable difference in the supplier-diversity landscape and help organizations meet their objectives in supplier diversity, to help XBEs grow and become more profitable and successful, and to help communities develop. (XBEs are businesses owned by people of color, women, veterans, the disabled, and members of the LBGTQ+ community).

(You can watch our webinar with Danya Perry, VP of Diversity, Equity, and Inclusion at the Raleigh Chamber of Commerce).

During our time, we explored working capital and cash-flow solutions for disadvantaged suppliers with Kavy Lenon, the Supplier Diversity Manager at Meijer; and Robert Hanshaw, the Senior Director of Procurement at Coke Consolidated in North Carolina.

The first topic discussed was the struggles that minority-owned businesses (MBEs) face when trying to obtain business financing; struggles that were exacerbated by the pandemic. 

We have significant evidence of this from the Federal Reserve and other banking organizations that involved extensive polling and surveying of minority and Black-owned businesses around the United States. As a financial organization ourselves, some of the things that we’re aware of – and what these results showed – was that MBEs tend to be denied access to funding for a number of reasons. Frequently, MBE’s have a lower net worth and a lack of assets or collateral.  They are often starting from their bootstraps, without a lot of inherited wealth or financial backing to get started.

This has led to a reluctance on the part of minority-business owners to even seek bank funding. We’ve found 60 percent of Black-owned firms decided to forgo applying for credit, just because they expected to be turned down if they applied.

“Part of the reason MBEs have a disadvantage is the lack of social capital,” said Lenon. “Based on my experience, a lot of my MBEs…don’t have advisors or peers or colleagues to talk about some of the struggles that they have, especially around finance. This is usually the number one item on why businesses fail.

“When we had an opportunity last year to reach out to MBEs, just to ask, what are some of the struggles? And capital was the number one answer.” According to Lenon, in response to the pandemic, she saw companies cut employees to save capital – a solution that creates other problems in the workforce and general economy.

“Now, if you’re reading the news, you’re seeing someone you know down the street may not have the talent to keep their business going, and they have to close their doors,” she said. “So we need to really think about, how do we increase opportunities and help MBEs find the talent to ensure that they can run their business?”

So what are some answers to help MBEs?

Shortening the Cash Conversion Cycle

Understanding your cash conversion cycle is an important part of your company’s financial health. Sometimes called the net operating cycle, the cash conversion cycle measures how long it takes your business to convert cash into inventory, then into sales, and then finally back into cash again. The cash conversion cycle is calculated by figuring out how long it takes you to sell inventory, how long it takes you to collect your accounts receivable, and how soon you can pay your accounts payable. 

As a business, you should always look to have a shorter cash conversion cycle, because that will mean that your business is more liquid, which is the goal. You want to have cash on hand to be able to optimize your working capital. 

There are several ways that you can shorten your business’s cash conversion cycle: 

• Make sure your accounts receivable process is as efficient as possible, declutter your invoices of unnecessary jargon, and be clear on what you’re invoicing for, and the terms you’re asking. The quicker the customer understands the invoice, the faster you’ll get paid. 
• Ask for upfront payments or offering a discount for early payment.
• Stay on top of late payments by following up immediately when a payment comes due.

Accounts receivable and purchase order financing

Accounts receivable (AR) and purchase order financing are levers in the cash conversion cycle. Invoice financing (or factoring) allows a business to attain advance payment on invoices before the agreed upon terms. With AR financing, you invoice your customers as usual, say on net-60-day terms, then you work with a factor, which is a business that does invoice financing or accounts receivable financing. That business would then purchase your invoice, and then pay you up to 90 percent of the invoice, within 24 hours of you submitting that invoice. Once your customer ultimately pays the factor, that factor will deposit the rest of that money owed to you into your account, minus a small fee. 

Purchase order financing operates the same way, just early in the process. This is basically when you issue a purchase order to a business, you can also issue that purchase order to a financial institution, that business has the option to purchase that purchase order and give you an advance based off of the amount.

The net result of both: money is in your hands faster than the agreed-upon terms with your customer without adding additional debt to the balance sheet.

Inventory Management

The main goal of inventory is making sure that the inventory is moving. The big thing that is going to prevent cash from moving is if the inventory is sitting on the shelves and not getting sold. In order to drive that down and everything in this, you want to get inventory moving, you want to collect on your invoices, and you want to make sure that your vendors are paying you as fast as possible.

Having that lack of initial collateral can make it very difficult to obtain traditional forms of financing. And oftentimes, geography actually plays a major part: There was a survey that found that a large percentage of businesses, even if they had good credit, would be denied if their business was found to be in a zip code with low property values. Obviously, poor or little credit history can be a big factor here: minorities have often struggled in obtaining traditional lines of credit, as they may not have extensive credit history. Clearly there has historically been a degree of financial discrimination at many banks and other organizations. This is something that our country unfortunately has not completely surpassed today, and it’s very possible that a lender may look at an applicant walking in and say, “I don’t know if I want to give money to this person.”

Hanshaw sees inventory management as an important part of an MBEs financial health and views success as a shared responsibility between buyers and sellers. 

“As a consumer of the products created by minority businesses,…we try and give them the best forecast that we can, so they know what to try to keep on hand for us,” Hanshaw said. “So don’t be afraid to engage your buyers who are working with you to help (manage inventory).”

Providing the Best Solutions

“A lot of companies are looking at ways to provide access to capital for our MBE suppliers,” said Lenon. “We’re always looking at ways to develop a creative solution for the supplier development piece, but also look at our internal policies and practices.”

One such way corporate buyers can support MBEs is through the creation of a supply chain finance program. While we have covered this topic in other blogs, it is worth noting that LSQ has experience tailoring programs that provide MBEs with the same low cost of capital normally reserved for a company’s largest suppliers. These programs are more attainable for small businesses because they rely on the credit rating of the buyer, not the supplier.

“The world has changed,” Lenon said. “We need to really think about ways that we could really leverage some of the practices that are created, like your organization, to apply to AP (supply chain finance) and accounts receivables solutions.”

Hanshaw sees enterprises stepping up to help MBEs as a partnership and one that companies should invest in.

“These are our neighbors, these are our friends, these are our fellow church members,” he said. “We want to make sure that we’re building lasting relationships, and not just meeting some metrics that somebody wants to see on a scorecard. The key is having that intentionality to say, I want to engage with my community because I want to say, ‘not only am I spending dollars in a diverse way with an MBE,’ I want to do it and to say, I’m benefiting our communities as a whole.”