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Potential Sources of Liquidity



If you’ve run out of cash and can’t borrow anymore, it’s up to the executive management team to identify sources of capital to work through the troubled times. Fortunately, potential capital sources are available, described in this post, which can assist your business in times of need. Read on…



Asset Liquidations

  • Liquidating assets is often targeted by management as a quick and easy method to raise capital. This philosophy would appear to make sense as if a company has unneeded or underutilized assets; selling them may help ease a cash crunch.
  • Although liquidating assets does represent a viable alternative, be careful of the following pitfalls with this strategy:
  • Values received: If you plan on moving older, slow-moving inventory in bulk or selling old, unused equipment, be prepared to sell the assets well below cost. While the cash received is great, remember that you’ll have to explain the losses to investors, lending sources, and the like.
  • Collateral support: Certain assets represent collateral for loans extended to the company. If you liquidate the assets, not only may you be violating your loan agreement, but you may also be reducing your ability to borrow [as the asset base is reduced, so will your borrowing capacity].
  • Future growth: Liquidating assets that are unnecessary in the short term but that you’ll eventually need can be very expensive.
  • Management time: Liquidating assets often takes much more time and effort than anticipated, which means that the parties responsible for this function are distracted from their regular duties.



Lending Sources

Your company’s primary lending sources, such as banks, asset-based lenders, leasing companies, and the like, represent a potential source of quick capital if needed.

The key in approaching lending sources is to have solid information available for review and a clear action plan on how the capital will be repaid in a reasonable time frame.


There is no question that these groups want to see your business survive, so being able to leverage the relationship can provide some added liquidity.

The following two examples demonstrate how you can squeeze capital from these sources:

  • Loan advance rates: Lenders provide borrowing capacity based on the value of the asset they’re secured by. For example, a bank may advance 80 percent on eligible trade account receivables. During a particular tight period, such as during increased seasonal demand, you may be able to get the lender to advance 85 to 90 percent of the eligible receivables so that you can free up capital. If your bank doesn’t want to work with you, then an asset-based lender may be a better financial partner. Asset-based lenders offer more aggressive loan facilities in exchange for higher rates and tighter reporting to compensate for the higher risk present. Asset-based lenders understand the importance of having access to capital in relation to businesses operating in challenging times.
  • Asset sale lease-back: Although asset sales may represent a source of quick capital to your business [see the section earlier in this chapter], it comes with a number of potential problems. You may want to consider executing an asset sale lease-back where you sell the asset to a leasing company who in turn immediately leases it back to you. You achieve your goal of freeing up short-term liquidity, and the leasing company doesn’t have to worry about finding a new lessee for the asset. Similar to working with an asset-based lender, leasing companies that support these types of transactions will be more expensive.
  • Restructure notes payable: You may want to consider restructuring any long-term notes payable with the lender to lengthen the repayment period [thus reducing the current monthly payment] or move it to an interest only note for a short period [for example, six months]. The goal is to reduce the capital outflow with the note agreement to better match it with the ability for your company to generate internal cash flows to service the debt.

If you find your company has to work with financing sources that are more expensive than traditional banks and low-risk leasing companies, you can expect to be charged higher interest rates and more fees. While there are no set rules, on average you can expect to pay at least 3 percent more in overall interest costs [which can quickly reach 5 percent]. If the bank is charging you Prime Rate plus 1 percent [which today would be approximately 9.25 percent], you can expect to pay at least Prime Rate Plus 4 percent [pushing your rate to 12.25 percent].

If the difference between your business making money and losing money is 3 percent points, then you probably have bigger problems than just a short-term liquidity squeeze. Access to the capital is the key, so paying 3 percent more on the capital should be far cheaper than the alternatives, which include lost business growth opportunities or, worse yet, a failed business.


Unsecured Creditors

You can tap your vendors, suppliers, and yes, even your customers, from time to time to help manage potential liquidity issues. These parties are already in bed with you and stand to lose the most if your company fails. In addition, they stand to gain quite a bit if your business continues to grow and prosper [which means more business for everyone].

Having customers step up with an advance payment, deposit on a large project, and so on can help ease a liquidity squeeze. Also, you can provide customers with incentives, such as a 1 percent discount if paid within 10 days, to pay quicker]. If a customer has ample cash resources available and it’s earning a measly 4 percent, why not offer an incentive that provides a chance to save three times this much? Of course, this strategy has some pitfalls, but in certain situations, customers can be leveraged to accelerate payment delivery. An example of a pitfall is that certain large customers may still take the discount offered but not pay within the shorter time period.

Although you could pursue the larger customer for the discount, you would then risk alienating the customer. Large companies tend to dictate payment terms based on their criteria and not yours.


In addition, vendors and suppliers offer a relatively cheap and easily accessible source of capital to your company. Various strategies are available and range from requesting extended payment terms during a high sales period to terming out a portion of the balance due the vendors to be repaid over a longer period — in other words, instead of paying the entire balance in 60 days, see whether you can pay it over 12 months in equal installments with a nominal interest rate attached.

When needed, you can also evaluate your internal employees to determine whether you can secure added liquidity. In tight times, you may ask your senior management team to defer a portion of their compensation, which will then be paid when the company hits certain milestones. If they’re resistant to this suggestion, at least you know where they stand in terms of their commitment to the company. Also, if you have paid commissions on sales when they’re booked, you may want to restructure this program to pay commissions when payment for sales are actually received [in cash] to better match cash outflows with cash inflows.

You must remember to be careful when using customers, vendors, and suppliers to provide additional capital resources. It’s one thing to push these sources within the normal course of business, but you don’t want to appear desperate. You may actually find that payment terms tighten up and customers get nervous [thus delaying orders], which then produces the exact opposite of what you were trying to achieve.



Equity and Off-Balance Sheet Sources [if you are a small business]

A number of external capital sources are also available to provide additional liquidity during a bind:

  • Owner personal financial strength: Business owners and key executives have been asked [on more than one occasion] to step up and provide additional capital to support their business. If your lenders, vendors, suppliers, customers, and employees are all on board, why not the owners of the business? Business owners with ample personal wealth are often asked to pledge some of it for the benefit of the company.
  • Family, friends, and close business associates: This group is a natural source to secure capital for a business, as well as during a liquidity squeeze when they may be able to provide a bridge loan to get the company through a tight period. While nobody likes to ask family members for money, when your business life depends on it, you may have no other choice.
  • Off-balance sheet assets: You may have various assets that relate to the business, but aren’t included in the balance sheet or are restricted in nature. For example: the building your company leases may actually be owned by a group of investors [including the owners of the company] with close ties to the company. Over a period of time, the building may have appreciated in value and may be refinanced with the proceeds then loaned to your company from the legal entity that owns the building. Conversely, if the legal entity that owns the building has the resources, the lease payments from your company may be reduced or deferred for a period of time to free up cash.


Business owners and key executive management team members have the most to gain if a business succeeds and the most to lose if it fails. Stepping up on the capital front provides for much more than simply helping with a liquidity squeeze. Rather, it displays creditability to other parties that the management team and business owners believe in the business and are willing to stand behind it [in good times and in bad].

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