Surviving Illiquidity

In last month’s column, I wrote about the current credit crisis and why banks are lending only to the most creditworthy businesses. The logical follow-up question is: “If I can’t get credit from my bank, what can I do to generate internal liquidity to survive?”

Illiquidity is the number-one issue facing businesses right now—especially small and midsize companies. Even large global companies are holding onto cash and postponing spending, because all signs point to a long, deep recession that will challenge even the most financially fit companies.

The restricted lending environment is making credit tighter, more costly, and more difficult to negotiate. Business leaders need to employ creative ways to finance their operations through internally generated cash flow.

Leverage Your Assets

In today’s credit market, banks are reluctant to consider traditional cash-flow loans, but I’m observing a renewed interest in asset-based lending. This type of financing, formerly reserved for asset-intensive or less creditworthy companies, is attractive right now because it allows companies to obtain loans that are secured by various assets, including inventories, receivables, intellectual property, royalties, and in some cases, real estate. In other words, the capital locked up in your assets may be unleashed to gain liquidity, without having to pony up a bunch of new equity.

Unlike traditional cash-flow loans, asset-based loans are not dependent on existing profitability. Even companies that are experiencing distress may be able to get one of these loans because banks have the reassurance of basically owning the assets that are backing the loan. This increases the banks’ opportunities to recover their losses in the event of a default. Banks are seeing more defaults now, and that’s one more reason that leveraging the value represented by your assets through an asset-based loan may be a smart idea—or the only option.

Squeeze Out Cash

I can’t tell you how many people say they are shocked that their business is out of cash and failing even though their profit and loss statement shows they are in the black. I am amazed at the ignorance that exists about how cash flows through a business.

To pump life into your cash-anemic business, you must get a grip on the ins and outs of cash flow and make managing it your number-one priority. Start by creating daily cash flow projections for the next two weeks, weekly projections for the next two months, and monthly projections for the next 12 months. Break your cash flow problem into little pieces, figure out where the deficits are, and find ways to improve it.