Navigating Market Turbulence: A Q&A on Real Ways Your Bank Can Help You Stay Ahead
Amid tariff announcements, market selloffs and related economic events, there are ways for businesses to partner with your bank to address short-term needs while building long-term financial resiliency. Read on for specific recommendations on how to work with your banker for greater impact.
Q: How can a bank support automated treasury functions or integrated payments for better cash control?
A: Integrating with your bank is key to properly managing your day-to-day processes and maximizing cash flow. This can be done through automated file feeds of your account transactions, lockbox details and wire/ACH inflows/outflows. Utilizing these integrations with your ERP/accounting system can enhance operational efficiency allowing for seamless data exchange and automation of treasury functions such as payments, collections and cash forecasting.
Employing an integrated payables platform with your bank can also streamline your entire payables process — from invoice receipt to approval routing to payment. It can also transform your finance/accounting team into a revenue generator through monthly credit card rebates. Utilizing electronic payments also ensures you control the payment date and when funds are debited from your account, giving you better visibility into your future daily cash balances.
Q: What tools can help a business manage working capital more efficiently in response to tighter credit markets and potentially delayed payments?
A: Establishing access to short-term financing options like working capital loans or a line of credit provides liquidity to cover immediate working capital needs without affecting cash reserves. Working with your banker early and apprising them of your potential lending requirements is crucial.
Supplier relations is also key, and discussing potential options with your trading partners regarding revised payment terms or potentially early pay discounts can optimize your short-term working capital. Coupling this initiative with shifting as many payables as possible to a commercial credit card is an effective strategy to not only lag those purchases by 30-60 days but also earn a considerable monthly cash rebate.
Another tool that can maximize your cash flow, reduce borrowing costs and drive internal efficiency is a loan sweep — this treasury management product will automatically pay down or pull from your line of credit (depending on that day’s cash position) and eliminate the need for you to manually make online transfers and greatly reduce the risk of overdrafts.
Q: Can businesses partner with their bank on specific financing to reduce cost pressure from tariffs?
A: A business’s relationship with their bank is the most important partnership for a business in times of economic uncertainty. A strong relationship with your banker will help provide access to working capital with flexible terms to help cover the additional cash needs to pay for tariffs. Over-communicating with your banker on the business working capital needs, near- and long-term impacts of tariffs, and cash flow projections is critical to successful financing options from your banker.
Q: How can businesses improve cash flow visibility and forecasting, including stress-testing different economic scenarios?
A: Business owners can partner with their banker, CPA or financial consultants to help prepare cash flow and income statement projections. Cash flow projections are typically weekly that project over 9-12 weeks and are updated daily. The model projects the working capital needs of the company and helps minimize the risk of running out of cash. Income statement projections help manage revenue, expense management, margin analysis and net income. Executives typically prepare projection models that provide outcomes under best case, expected and worst case scenarios.
Q: How can businesses identify areas where they are overleveraged or underutilizing their credit facilities?
A: There are many ways to assess capitalization appropriateness that change based upon industry, lifecycle and many other factors. The following are good starting points to look at within your own business capitalization:
- Debt-to-EBITDA ratio
Operating leverage, excluding large CRE debt, tends to correlate with ability to handle operational volatility. In general, senior debt/EBITDA <1x is considered conservative and >3x is considered high leverage and provides less room to absorb volatility with a sliding scale. Businesses should try to be as objective as possible to their own situation and adjust for industry and other factors. - Debt-to-equity ratio
This is another way to determine how leveraged a business is compared to assets. This may be more useful for asset-heavy businesses or those that have lower margins. Similarly, <1x is conservative and >2x becomes riskier for volatile times. - Revolving line of credit usage
Businesses can assess a few factors related to their RLOC:- Compare the size of the RLOC to margined working capital (accounts receivable and inventory, generally). If there is meaningful additional availability, sizing the commitment appropriately can act as a safety net of accessing necessary liquidity, but should only be done to finance short-term assets.
- Working capital quality and age. The business can focus on conversion of assets to access more liquidity, seeking flexibility on payable due dates, collecting A/R quicker (at a minimum, not allowing them to stretch), and managing inventory as efficiently as possible.
- Evergreen balance. If the business has not been able to revolve its balances, it could be an indication of an evergreen balance and the business should consider planning to pay down. If you have not been able to revolve the loan, that may be another indication of a mismatch or a need to find a way to pay down debt levels.
In a time of uncertainty, conservatism is recommended with regards to capitalization. The bigger share of “patient” capital, the more flexible a business can be. However, debt can be useful if utilized appropriately. With rates well in excess of what many businesses were paying during the zero-interest rate policy, the same level of indebtedness has a much greater impact on operations today. Ultimately, a business should size their indebtedness using base case projections, and possibly shock, to the downside to see how much the business can fall and still make payments adequately.
Businesses should always work closely with your banker and other advisors to help make the best decisions for your unique situation and organization. A consultative banking partner will work with you through economic cycles and industry shifts to help you reach your business and financial goals.
