As COVID-19 Relief Funds Phase Out, U.S. Businesses Explore New Options

 In Accounts Receivable Factoring

Across the U.S., the pandemic has caused massive economic disruption, affecting businesses of all sizes and types. Some businesses won’t survive the impact: as many as 2.1 million small businesses in the U.S. are predicted to close permanently due to COVID-19 according to McKinsey research. For others, the rapid socio-economic changes triggered by the pandemic have stimulated greater demand for products and services as well as new business opportunities.

Whether a business faces a market contraction or expansion due to COVID-19, the unpredictability of today’s economic landscape has made access to cash flow more important than ever. While government loans and debt relief have helped businesses stabilize their cash flow, these programs are gradually being phased out. The Paycheck Protection Program closed in early August, and the remaining supports may not be available for much longer. As a result, many business owners have begun exploring alternative funding sources.

We talked to some of our clients to find out how the pandemic has impacted their business and how they plan to manage their cash flow during this next phase of the recovery.

Manufacturing Company Prepares for Rapid Growth

One of our clients, a furniture manufacturing company based in Alabama and serving some of North America’s biggest retailers, decided to factor their invoices when the pandemic struck. While government support helped, it wasn’t enough to cover the devastating impact of cancelled orders, stranded merchandise, and a vast production backlog to pay for. As a small company with a variable balance sheet, obtaining a loan against company assets was not an option, so the owner began looking at invoice factoring to access the working capital he needed.  

“My business wasn’t just down by 20 or 30 percent. It was 100 percent: we were completely shut down,” said the owner. “At the same time, we owed our manufacturing partners in Mexico a lot of money, and if they don’t get paid, their employees don’t eat. It was a stressful situation.”

Factoring invoices helped the owner avoid being squeezed between a lengthy retail payment cycle at one end and the need to pay his manufacturers promptly at the other.

“This has been toughest on my factory partners. It’s hard for them to ramp up and rehire. But with invoice factoring, we were able to start providing some more liquidity to our partners so that they could help us meet the demand.”

While the early days of the pandemic had a devastating effect on his business, the owner reports that over the longer term, it has actually created new opportunities. Retailers who are concerned about the impact of COVID-19 on the overseas supply chain are attracted by the company’s near-shore manufacturing model. In a few short months, the owner has gone from seeing factoring as a short-term solution to reduced cash flow to using it as a long-term financing option to fund rapid expansion and continued growth.

“I’m feeling very positive about the future,” the owner said. “The pandemic hit us hard, but business today is just stellar. It’s through the roof.”

IT Staffing Company Builds Up Capital Reserves

Long before COVID-19 struck, the owner of a small, minority-owned information technology staffing company based in Maryland struggled with cash flow. The government and corporate organizations the company worked with tended to respond slowly to the placement of IT professionals, and payment was often significantly delayed. More than a year prior to the start of the pandemic, the owner had begun factoring his invoices as a way to minimize the delay and access the cash sooner.

At the start of the pandemic, placements became hard to predict, with demand drying up completely in some areas and increasing in others. The owner and his team needed to pivot quickly and pursue the new opportunities as they came up, and that required additional funding.

“We qualified for PPP, but we needed working capital to develop new business and business ideas,” the owner explained.

 By increasing the percentage of invoices they factor, the company was able to build more flexibility into their cash flow and pursue new opportunities more quickly.

While the pandemic has presented challenges, the owner is very optimistic about his company’s growth potential in the coming months and plans to use factoring over the long term to fund that growth.

“The pandemic has helped myself and my team to be more creative,” the owner explained. “It motivated us to open up different avenues and develop new business, and that means we need that extra capital.”

IT Services Firm Focuses on Stabilizing Cash Flow

For a Virginia IT company working with government and commercial customers, business remained fairly stable during the pandemic. They had begun factoring their invoices three years earlier to replace a line of credit. 

“The line of credit that we have with the bank was becoming way too much of an administrative burden,” the company’s COO explained. 

With access to pandemic relief grants and programs, the company actually reduced the percentage of invoices they factored for a few months. However, as the availability of those funds comes to an end, the COO plans to gradually increase the reliance on factoring again to stabilize the company’s cash flow.

“Because we work primarily with the government, we are keeping an eye on the impact of the pandemic and the elections,” the COO said. “For us, factoring is a way to mitigate the impact when the business environment is less predictable.

Reliable Cash Flow Is Essential

With the economy in flux, businesses are facing more challenges–and more opportunities–than ever before. As the funding landscape continues to evolve over the next few months, it’s critically important for companies to be aware of the funding sources available to them, whether it’s collateral loans, lines of credit, or invoice factoring. Planning ahead and evaluating all the options will help businesses survive and thrive during this volatile period.

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