Commentary: Financing for uncertainty


Everything is changing rapidly. Retailers need financing that allows them to evolve with the circumstances.

In less than two months, everything changed. It is easy to forget how quickly this has happened. What we needed to do and what we thought the future held on March 1 changed again on March 15 and again on April 1. It has continued to change every day since.

To adapt to the rapid change, companies needed to triage. The first mission was to implement safety protocols to protect employees and comply with new government mandates. Companies were racing to keep up with the day-to-day changes and manage operating costs.  After employee safety and operating costs are addressed, it is time to take a closer look at financing. Retailers should work with their financial partner to re-evaluate their financing to help meet new working capital needs.

Prepare for Change
Day-by-day change has been the name of the game for the past few months, but now it's time to build a longer-term plan. Companies should look 50% further ahead than they think they need to. This includes allowing more time than usual for functions to happen: build in plans for delayed store openings, slower shipping speeds, and a gradual return of consumer confidence. As stores are allowed to open, keep in mind that new safety protocols may limit foot traffic levels. Also, take into account regional differences in re-opening schedules and brace for a possible second wave of closures.

Create both a best-case and a worst-case scenario, keeping in mind that reality will likely be somewhere in between the two. Continue re-evaluating this plan as circumstances change. 

Companies should create a weekly cash forecast that looks 13 weeks out and rolling it forward each week with new learnings and revised assumptions. Once this plan is in place, companies will be better able to evaluate their financing needs. 

Improving Working Capital
Money in hand is the most liquid capital there is. Companies should take a hard look at capital expenditures and see where they might be able to save. If possible, retailers should defer non-essential capex as a great way to preserve working capital and provide more flexibility in the months ahead. Investing in new stores, renovation or equipment might be best put on hold for the time being. 

Next, retailers should consult their cash forecast to see where they might be able to reduce or eliminate any drain on cash. Many retailers are seeing slow inventory turnover due to brick-and-mortar store closures. E-commerce may allow for sales that can't take place in-store, and companies can fulfill orders from the in-store inventory.  Across the brick & mortar retail sector, we generally see e-commerce represent mid-teens percentage of total sales (13-16%), but within this group there are e-commerce sales ranges from a low of almost zero while other retailers achieve 30%+. If there is the option to ramp-up e-commerce selling, this is a great time to do it. Doing so will help to sell in-season inventory and strengthen retail revenue streams.  Demonstrating a strong revenue stream outside of brick-and-mortar sales will position retailers better than competitors who are more reliant on in-person sales.

Looking at balance sheet management includes addressing size of existing credit facilities, type of financing utilized and preparing plans around any upcoming maturities over the next 6-18 months. All these are key topics in discussions with lenders.

Look for Additional Liquidity
Liquidity is key to having flexibility during the pandemic period and maintaining business viability until commerce returns to more normal patterns and levels. 

One approach to unlock liquidity is by leveraging existing assets. Asset-based revolvers are a reliable option to access working capital, offering flexibility and competitive pricing. Employing inventory, accounts receivable or other assets can help bridge companies through the pandemic period.

If companies own real estate or equipment, they may be able to sell these to a real estate investor or equipment company in a sale-lease back transaction converting assets to cash while in exchange for a manageable monthly payment. This may help boost cash reserves while helping both increase and extend their liquidity. 

The key here is to access options to endure the pandemic disruption. Working with financial partners to find liquidity will help, as will re-evaluating any capital expenditures that were planned. Refinancing existing loans and talking with commercial landlords about flexibility with lease payments can also help manage through this.

The past few months have been extremely challenging, and companies have had to adjust rapidly to a set of almost unimaginable business conditions. While the future is uncertain, the one constant is change. This will not last forever.

Jeffery Wacker is senior managing director, head of US ABL Originations, TD Bank.

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