In a tweet earlier this week, we asked for your questions on operating in this highly uncertain environment, reacting to COVID-19. Below are questions we received related to Liquidity and Banking.

Do you have additional questions? DM us on Twitter or reach out using the contact info in the footer below.

Q. How are you thinking about shoring up liquidity (specifically retail)? What working capital practices are you employing?

A. Liquidity is critical when there are significant unknowns. The less you know about tomorrow, the more margin of safety you need to build in on your balance sheet. But liquidity can also be expensive. Most small businesses won’t benefit from plunging interest rates because many will have floors set for their borrowing rates (i.e. the rate on a line of credit won’t drop below 4% or so no matter what the bank can borrow at). Therefore it’s important to be adequately liquid given the information you have, but being overcapitalized can also turn out to be a mistake.

For retail specifically, working capital is likely to be the issue. With customer activity declining, money is going to get stuck in inventory, suppliers are going to demand payment, which will drain cash, while receivables are less likely to be paid on time (and you may have to work hard to try and collect them), which all adds up to a cash crunch. This is a time to work with any potential liquidity provider (banks, customers, vendors) to see if you can agree to a mutually beneficial arrangement, starting with the least expensive liquidity and working upwards until you have what you need.

The least expensive is likely to be an interest-only line of credit with your bank. Hopefully you set one up before you needed it because underwriting can take time. Reach out to suppliers and see if you can set up an installment plan. They need to cover their bills too, but have no interest in driving you out of business. With customers you can offer promotions to bring in more cash, give discounts for early buys, accelerate payments, and the like to get more cash in the door now. Lastly, you could look at more expensive mezzanine debt or additional equity financing. Given the recent volatility in the capital markets, this is likely to be expensive.

Q. How are you navigating banking relationships? While you use little-to-no debt, for the bank relationships you do have, how are banks responding to Corona Virus? Are they offering any support or interest waivers to your PortCos?

A. We are navigating our banking relationships the same way we try to navigate all of our relationships -- transparently and with high amounts of mutual trust. We are also trying to overcommunicate what we see happening in our businesses, where our balance sheets stand, and what we might need from our financial partners and why.

Banks, like all of us, are trying to operate on rapidly changing terrain and neither want to abandon their customers nor risk up their own businesses. If you haven’t talked to your banker, call her now and see if you can put some contingency plans in place with agreements and approvals ahead of a time when you might need them. Again, it’s not in a bank’s interest to drive you out of business, but they are a business too.

Q. Do you do any kind of scenario planning? Eg. On revenue slow down, expenses, cash flow. Any best practices?

A. Yes, we try to imagine good and bad scenarios and plan for them, keeping a running list of ranked priorities if we need to play offense or defense. For each of these priorities, we did our best to quantify both the near-term benefit and the long-term cost. We then decided on actions we wanted to take now versus later if we were to experience a protracted downturn.  

This is also business specific. We have executed differently in businesses where revenue backlog has given us more time compared to businesses where the near-term demand environment has abruptly lost visibility. For best practices on cutting costs, you can read our article here.

Q. Where liquidity is a concern (as it is in many small businesses) what role do you see Permanent Equity playing to support businesses with requirements for capital, and how do you approach that situation?

A. We think that there are many potential roles for us to play. A primary concern for us is ensuring that we are not setting ourselves up to profit from others’ misfortune, but rather offering a compelling solution to a capital crunch that sets us up for a mutually beneficial long-term partnership. If you know a business that needs capital, please reach out and let’s talk about it. There are lots of creative ways where we might be able to quickly step in and be helpful.

Q. Freeze AP? Is that selfish or good practice in a time like this?

A. If you stop paying your suppliers without communicating with them, you are likely to do more long-term harm than good as the loss of trust that occurs is irreparable. Having said that, desperate times may call for desperate measures. Your suppliers likely have no interest in driving you out of business, but they also have to watch out for their own suppliers, employees, and shareholders. Before you do anything, we’d recommend reaching out to your suppliers and explaining your situation and what you are seeing. You may be able to work out a longer payment schedule or different payment terms to your mutual benefit.

Q. How much of a financial buffer do businesses have to weather low demand and potentially severe disruptions? How long can they go with short term measures to get by before instituting cost cutting strategies that may have longer term implications? Which cost cutting and loss mitigation strategies are businesses prioritizing? Are they resorting to layoffs, hours cutbacks, or non-labor savings? Do they have insurance arrangements that can soften the blow at all

A. We handle much of this in our essay on How To Cut Expenses.