How a Proactive Working Capital Strategy Can Provide Stability and Opportunity on the Uncertain Road Ahead

Someone once said it pays to be proactive.

When it comes to devising an agile working capital strategy that aphorism has never been more relevant than today. For small and medium sized businesses looking to stay competitive and take advantage of new growth opportunities working capital is key.

As the U.S. and global markets move further into recovery, accessing a proper working capital structure will be vital for all companies. This fact is especially pertinent for manufacturers and exporters with contract production models, long-tail supply chains, international accounts receivable, and the need for on-demand inventory.

Working capital loans, like all asset-based lending, “look backwards”—meaning they are supported and collateralized by assets that are already on a company’s books, including accounts receivable and existing finished good inventory. Devising a proper working capital strategy, on the other hand, “looks forward” ensuring that growing companies have the liquidity available to support specific upcoming projects, negotiate better terms with customers, and compete in new markets.

Yet many companies wait until it’s too late. This inaction results in companies failing to put themselves in a position where they have both the sufficient working capital to meet their existing cashflow requirements as well as sufficient liquidity to take advantage of fast-moving, unexpected opportunities.

Opportunity cost is the biggest downside for a company that is not proactive with its working capital needs. Working capital is the lifeblood of every company—especially now. Following COVID-19 and the economic uncertainty it has caused, there will be opportunities available to businesses and working capital will allow those businesses to take advantage of them.

The primary benefit of a proactive working capital posture is to ensure that companies have a forward-looking financing structure in place. For fast-growing businesses, this means understanding what financing options are available ahead of time to be in the best possible position to improve margins, secure better terms, reduce risk, and close a transaction.

Since the COVID-19 outbreak, financing terms have quickly become one of the most significant factors in negotiating new business. When it comes to payment terms, 90 days is the new 60, which is why it’s never been more important to take a proactive view of working capital. Companies that are reactive to their working capital needs go to their bank when they have already been awarded a contract and then work to craft a loan to meet the upcoming cash needs. But, how can you bid a project before you know what you can afford? Being proactive with working capital needs allows you to ensure you have the proper loan structure before you need it.

This is particularly true for manufacturers and exporting companies, and specifically those producing custom products and machines or whose business models are based on complicated, multi-vendor supply chains. These companies typically require a more sophisticated, custom-tailored working capital structure designed to support the financing needs of a project through various stages of production over a longer timeframe.

Our last piece of advice is that working capital should be viewed as an ongoing conversation with your lender on the types of opportunities you see coming and the required capital needs you’re going have looking forward. By involving your lender ahead of the need, you can craft the terms of your project or opportunity around the financing options available to you, not the other way around. At First American Bank, we advise our clients to take this proactive, get-ahead-of-the-deal approach, which means we can frequently underwrite their projects even before they get awarded. This puts our clients in a position to negotiate the best project-specific terms while also staying focused on their long-term growth objectives.

To speak with a First American Banker or Trade Finance expert, and learn more about how you can design a better working capital strategy, contact us here.
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