Global events and a turbulent economy have clouded the business landscape. Ongoing supply chain challenges, record inflation, rising interest rates and increased transportation and labor costs mean businesses could be facing significant impacts to their cash flow and working capital cycles.
A consultative bank that understands your operations can structure solutions to weather the storm.
Many commercial loans are closely tied to borrower performance. However, companies have options to access capital and shore up liquidity, even if earnings take a hit in a volatile environment.
Asset-Based Lending (ABL) provides a flexible solution for businesses with borrowing needs beyond what they would qualify for in a cash flow deal. Instead of focusing solely on metrics such as EBITDA, or earnings before interest, taxes, depreciation and amortization, ABL looks more closely at a company’s assets, including receivables, inventory and fixed assets, to determine how much it can borrow.
In the current environment, many businesses stocked up on inventory to mitigate supply chain delays and now have cash tied up with larger initial investments and longer lead times for sales. ABL enables that extra inventory to work in their favor to increase borrowing capacity and fund ongoing working capital needs or growth.
An asset-based lender often can offer favorable advance rates, with financing based on up to 85 or 90 percent of a borrower’s receivables and up to 60 percent of its inventory. Additionally, ABL facilities generally offer competitive pricing and have less stringent covenants than traditional commercial loans, so borrowers enjoy enhanced liquidity and flexibility to absorb ups and downs in their operations.
Mezzanine Finance is another option to increase borrowing in a downturn. A blend of junior debt and equity financing, mezzanine finance typically is used for event-driven capital needs, such as acquisitions or buyouts — but it also can bridge the gap when a business needs more financing than it could expect with a traditional senior loan. Because mezzanine loans are interest-only and feature lower monthly payments than traditional payments based on principal amortization plus interest, they can be effective for a business that needs to preserve cash flow, even though they are a more expensive form of debt overall.
Both ABL and mezzanine structures can be converted to traditional cash flow financing when circumstances improve, maximizing benefits over time.
Equipment Finance or leasing also can be viable solutions for companies that need to purchase equipment while preserving their cash balances. Leases offer up to 100 percent financing, fixed rates and customized terms, ensuring capital is available for other issues that could arise.
Interest rates spiked in the first half of the year and, with tightening economic conditions, it is unclear where they will go moving forward. Hedging strategies can lock in rates and better manage risk.
The forward starting swap is especially effective in a shifting rate environment. In this solution, a borrower sets a future date to fix their interest rate while employing a variable rate in the interim. When the fixed rate kicks in, the floating rate likely will have stepped up to meet it, enabling the business to benefit from current lower rates and protect itself from future uncertainty.
Businesses also are facing volatility in the foreign exchange (FX) market. Constant fluctuations in FX rates combined with a strong U.S. dollar have created challenges and opportunities. Currency hedging can help a business address scenarios, depending on whether it is buying or selling in a cross-border transaction. Now is a good time to review your international currency flows with FNB’s international banking team, as they have the expertise to help you manage currency risk during these uncertain times. Explore FX hedging techniques at fnb-online.com/business/knowledge-center. Select “Do Business Internationally.”
In challenging times, your business needs more than a lender — you need a partner. The bankers at FNB have the experience to design solutions to keep your business on the right track.
