How to raise working capital now in anticipation of an economic downturn due to Coronavirus?

Posted on Monday, March 23, 2020 - 11:33

The news about the Coronavirus disease (COVID-19) pandemic has come with a raft of protection measures which has affected small businesses in Australia.

Many have had to cut back operations, change their hours, or shut completely. This has a devastating effect on cash flow. Cash flow is the lifeblood of business and raising working capital ahead of an economic downturn can help keep businesses open and operating.

What is an economic downturn?

Economic downturns and recessions are part of business life. Modern economies are cyclical, which means we can have many years of “boom” times and periods of slower economic activity which eventually recovers.

Sometimes economies are “shocked” from external factors such as war, natural disaster, or pandemics.

Amid the coronavirus disease (COVID-19) pandemic, businesses have felt and will feel the pinch of economic instability as people self-isolate and avoid large groups. Tourism, entertainment, and hospitality all found themselves without any customers to entertain or serve.

The shock is felt throughout the economy as wages stagnate, unemployment rises, and spending goes down.

However, businesses can get ahead of an economic downturn by raising working capital to ride out the storm.

Though many of these protection measures will be temporary as the virus will run its course, many businesses may not survive without cash coming in.

How to get working capital during the COVID-19 outbreak

Increasing working capital can help businesses maintain their cash flow; this means they can keep paying workers, stock up on inventory, manage fixed costs such as rent or utilities, and spend money on long-term assets. These assets may be new computers, vehicles, tables, coffee machines, and so on.

One way is to get finance from external investors. This may be difficult, as investors are not guaranteed a return in a recession. Banks will have the same attitude, fearing similar results.

The easiest way to secure funding in insecure times is to consider unsecured business finance.

What is unsecured business finance?

Unsecured business loans are a type of business loan that does require any collateral. That is, you don’t need to purchase something (like a car) in order to be approved for the loan. As it’s unsecured and the lender takes on more risk, interest rates may be slightly higher than secured loans.

Unsecured business loans are often used for maintaining cash flow, purchasing long-term assets or replacements (such as IT equipment), and fuelling growth. Some new businesses use these loans as start-up capital or funding.

According to an Australian Banking Association report commissioned in 2019, approval for business loans among banks is 94%.

Is my business eligible?

As a minimum, lenders will require your business to be registered and have been operating for a minimum of 12 months. You will have to show that your business is profitable and can pay back the loan without too much hardship.

To prove you are profitable, your lender may ask for bank statements or profit and loss statements. The more information you can provide a lender or broker bolsters your chances of approval.

Lenders approve loans based on risk. It would be too risky to lend a business with $50,000 monthly turnover of $500,000. All loans are based on what’s manageable and the lowest risk to lender and borrower.

If your business does experience growth during your loan term, you can apply for further finance.

Other alternatives

Another alternative is to seek invoice finance. Invoice financiers pay your business a fraction (usually between 75-85%) of your invoices now and seeks the rest from your debtor when it’s due. Once the debtor has paid, the financier takes its cut from fees and interest charges.

If you become overly reliant on invoice finance, you could also run into trouble as you aren’t getting the full amount of what is owed. This may also be subject to stricter eligibility criteria.

Remember to consult a financial professional before making any major business finance decision.

Coronavirus information and support for business

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