COVID-19 Everything is Broken

Broken cutters, broken saws,
Broken buckles, broken laws,
Broken bodies, broken bones,
Broken voices on broken phones
Take a deep breath, feel like you're chokin',
Everything is broken 
~Nobel Laureate Bob Dylan 1989

When I looked at my notes for this piece last night at about 2:00am, it seemed that I could have just spewed-out a list of all of the things that are collapsing and how people will not have money for consumerism and big-kid toys and vacations and it went on and on. So we’ve identified the problem? Not exactly, but we need to start somewhere and there are a few things that Asset Based Lenders can do to start the process and solutions.

All comments here are in my opinion and readers are encouraged to seek legal advise, lobby politicians and take the risks that they feel are appropriate for their institutions based on the comments herein.

Talk to your Borrower:

I covered this in the prior BLOG, but I repeat, we need to know what they need and we need for them to be honest about that. This is a team sport now.

Supply Chain – NEEDS:

Inventories are going to be depleted and supply-chain cooperation is critical.

WE MUST SHORTEN THE OPERATING CYCLES!

This is a cash flow critical moment for us all. Suppliers are desperate for cash and we can shorten the operating cycles (think AR, Inventory, AP turnover days) with smart advances, confirmation of Purchase Orders and Shipments, documentation and some hard work.

We want our Borrowers to get the cash to the suppliers immediately and this could take the form of P.O. Financing, Inventory in-Transit advances, Payment on Delivery guarantees or similar measures. By speeding up the cash flows for payments it will decrease the loan balance requirements and speed the turnover of cash in the economy.

Supply Chain Advances-HOW?

As noted above, this is more or less a P.O. financing or Inventory in Transit change of thinking. A few ideas and comments here:

Confirmations – To do this right you need to ask a lot of questions and not just “Are you supplying the goods.”
- Establish a threshold to confirm such as payments over 1-2% of total AP or estimated monthly disbursements.
- Get a copy of the P.O.
- Lookup the phone number of the supplier business to gain more comfort
- Lookup the Vendor URL on https://www.whois.net/ and pay attention to the Creation Date so that yo know the URL has been around (not created last week).
- Make the call, send the emails, etc. and Ask about:
  - The availability of the supplies.
  - Can 100% be shipped or is it less than that?
  - The expected ship date.
  - The name of the person you are talking to.
  - Payment information, including the address, wire information for ACH or SWIFT, etc.
Written and Signed Agreements – This could be put in the P.O. to make it a three-party Agreement or in a separate Agreement (talk to your legal council about who has assignment, title, who is consignee, etc.).
- Lenders are setting up guaranteed payments here (Think of being the bank that pays the LC as an example). To the extent possible, setup an Agreement that payment will be made:
  - In advance of the shipment to let them fill the order and pay people at the vendor location.
  - When the shipping documents are completed and verified.
  - Verify the shipping documents with the carrier before payment is made.
Co-Op – Maybe you’re not a rocket scientist with this paperwork stuff. Seek out a P.O. financing company and work with them in cooperation to make this go. Cooperative engagement to speed up the supply chain cash flow is for the greater good.

BBC Rates and Limits

Advance Rates:
So many of us have done hundreds or maybe thousands of deals with 25%-50% advances on Inventory and 70%-90% advances on Accounts Receivable on the Borrowing Base Certificate (BBC). Those rules need to be broken for a while. With depleted inventories, no cash and limited buying power, we need to go higher, maybe to 100% of eligible collateral (no I STILL don’t want to lend on the inventory from 1972).

I would like to see the Federal Government of the United States guarantee any shortages on collections and asset conversions up to 20% on Receivables and up to 50% on inventory for the amounts advanced. Lenders could go to 100% with confidence, and the guarantee would cost the government almost nothing at all.
I would also like to see the government provide an amortizing 30% guarantee to commercial real estate and other commercial term loans over the next 5 years. Again, no cash outlay, just an impairment guarantee that amortizes to zero over time.

Eligible Days:
We are looking at a real need to remove caps and advance at 100%, but we need more days on receivables too. We have a shut-down, we have no cash flow, we have no payments coming in. For every day that people are shut-down we need to add at least 2 days to the Eligible Borrowing Base Certificate. That means 120. 150. 180 days for eligible collateral on existing deals. Higher Over 90s will also reduce the Cross-Age (Taint-Rule) impact.

Forbearance:
The government has already met with the largest lenders to encourage forbearance on loans due. The banking system is cooperating with this request to delay mortgage, auto, student loan and other debt payments. Of course, we have more to come in the days ahead for those needs. But we ABL folks need to forebear and modify our agreements for a period of time, to be stated in said agreement. We will likely need to modify these over time based on expiration and emerging conditions and it would be wise to have the right to modify these Agreements as needed. Taking off your “Shields Up” mentality (sorry, had to get a Trek comment in here), we need to do the opposite of what we normally do. We are not cranking collateral down, we are pumping up the available base, boldly!

Getting Information

We say words like “Asset Based Lending,” but I often call this “Monitored Lending” and I punctuate that with “If you can’t monitor it, then don’t lend on it!” I still feel the same way now and we need to get information.

The comments above about P.O. financing for the supply chain and going higher on advance rates, eliminating caps, etc. do not negate the need to get reports that back this up. We still need AR Agings, Inventory Reports, confirmations of receivables and Purchase Orders, etc. I have more BLOGS to come on these topics, but for now:

Daily, Weekly, Monthly:

Same old stuff as usual, but we can set-it-up and go weekly or per borrowing if needed. If we’re giving more, we can ask for more reporting. Sales journals to support the increases to the Borrowing Base. Inventory reports per borrowing, etc. Most of this stuff is push-button-now from modern accounting systems. Electronic Ineligibles and report analysis are very automated and doable (that is a good part of what we do at FinSoft, LLC).

Lending on in-transit and P.O. financing means getting those documents, but also it means a need to see the inventory enter the inventory report and relieve the financing position of the P.O. or In-Transit. DON’T DOUBLE UP YOUR COLLATERAL HERE!.

Field Exams:

Travel is not allowed in many places and the risk of COVID-19 infection is high at this time. Desktop exams are possible with downloaded reports, cell phone images and modified reporting. I’ll be BLOGGING on this soon.

Appraisals:

Like the above, any human on-site visits are not likely to happen for a while. But live streaming cell phones with the appraisal companies and even your own staff observing that the appraisal list is still there (tie the list to what you see on the phone) can help to ease concerns abut asset existence. Our world relies on markets to buy goods and assets. A ready auction market will evolve on-line, but that is all evolving in the shadows and fears to come.

Other:

Real-time monitoring is possible for things like bank accounts, credit card volume and more. I’ll be BLOGGING about that soon.

You can Do It!

Now is a time to do this differently and to set our determination to the greater good. With faster operating cycles and perhaps some form of government guarantees, we can move this along faster. We’re going to do some of this anyway, because everything is broken.