There are so many reasons why I love Asset Based Lending and it has been my entire adult career for the past 35 years, but the one thing that I repeat again and again when asked “Why” is that:
“I’m financing the entrepreneurial dream.”This gets me out of bed every morning!
But now we have a crisis that puts a lifetime of work in jeopardy. There are mouths to feed, responsibility to employees and family and that dream is in jeopardy. Our clients and borrowers need us now more than ever, we have work to do. This is a conversation, not a tell or lecture. Remember that “inclusive” conversations ask for thoughts, opinions and ideas from the others.
Ask Borrowers to be honest about their situation and gather data from them on a weekly basis if possible. This lets us keep in touch with evolving needs and we stay in tune with what they are facing. The “ask” is to encourage them to be honest and forthcoming to get the facts and find ways to help.
Points in the Conversation:
This is going to go better as a conversation with you taking notes because worried Borrowers need to be heard and you are having a conversation, rather than presenting a cold checklist of doom. While you might be sending them a list or lists by e-mail, the conversation shows that we’re in this to listen and help:
The Big Picture Questions:, “Talk to me about…”
- Number of Employees working
- Number of employees on payroll
- Payroll amounts per week / bi-weekly
- Backlog / Unfilled Orders
- A weekly roll-forward of backlog orders
- Beginning Order Backlog
- + New Orders
- – Orders Filled
- – Orders Canceled
- + – Adjustments
- Ending Order Backlog
- Critical Accounts Payable vendors
- Critical Amounts to pay immediately
- Vendors requesting COD or Cash in Advance and amounts
- Rents on Properties
- Operating Leases (equipment rents)
- Capital Leases – Have them add up the payment amounts (essentially P+I)
Are There Potential Curtailments or Competitors?
- Hourly wages
- Capital expenditures
- Other costs that can be reduced
- Ask them if they have contacted competitors to work together to fill orders, co-produce sub-assemblies, consolidate processing. After hurricane Katrina in the Gulf of Mexico, I spoke with a banker that setup a table (a banko) to cash $100.00 checks outside of the bank because they had no electricity. He also noted a printing company (competitor) that ran jobs for a submerged printer that was one of his borrowers. E pluribus unum
- Ask borrowers to consider temporary salary caps for top employees.
Cash Flow and Break-Even:
Can we get a weekly Cash Flow Forecast for the next 60 days?
A roll-forward style can be easiest and you can get more details as needed
(see notes about roll-forward balances below and the XLSX spreadsheet):
+ Cash From Sales Collections
– Wages for Hourly employees
– Vendor Payments
– Notes Payable Payments (P&I)
= Ending Cash
I’ve been teaching cash flow for ABL for many years. We can use the AR, Inventory and AP Stats from field exams as a guide to turnover and derive the cash flow components. However, those field exam “stats” numbers are under the “old normal” and the “new normal” is going to be slower receipts and possibly slower payments too. We need to make some assumptions, and this can help:
Beginning Accounts Receivable
= Ending Accounts Receivable
– Cost of Sales
= Ending Inventory
– Cash Payments
= Ending AP
For the urgency of this need, the Excel XLSX Model is in a Drop-Box Link here:
Break-Even Analysis – This was a model that I wrote in college in 1984 to calculate Break-even two ways.
– First if sales are the same, what margin gets a break even?
– Second, if margins are unchanged, then what sales level is break-even?
These two methods create a parameter-based Sales or Margin to break-even set.
Excel Break-Even Model:
Wrap it Up:
They have work to do to get these answers and this is an ongoing conversation to do our best.
- Ask the Borrower what they need from the Lender to keep the company going.
- Talk about honesty and how we need to know what is going on so that we can help.
- Can they report numbers electronically to us (more on that in another Blog to follow soon).
- Set a deadline to get the data back from them.
What is happening is pressing everyone to breaking points and the the worries are 24/7 for some, you are not alone in how you feel. There will be sad events and stories in all of this and businesses will close, yet others will make it and even thrive. What we do matters and financing the entrepreneurial vision by creating ways to bridge the gaps between sources and uses of funds for our customers is our thing. Rising beyond your best is the only option and what we do makes a difference, now more than ever. You make dreams come true.
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