Business In The Boardroom
Business In The Boardroom

Keeping businesses running when liquidity is scarce

The downturn caused by the sudden drop in economic activity related to the coronavirus has seen companies of all sizes facing severe liquidity shortages. Despite the challenges, companies are encouraged to talk to their banks before making any decisions, focus on supplier relationships and explore other tools to tie up less working capital.

The sudden freeze in consumer spending, restricted business activity and disrupted supply chains has placed heavy demands on working capital. Whilst large numbers of companies are faced with the prospect of poor liquidity, those businesses that have been able to  continue to operate have encountered challenges with finding suppliers and delays in receiving payments from their customers.

Johan B Eriksson, Senior Credit Manager at Nordea, says. “The economic impact of the crisis has really placed the spotlight on available cash and created a new set of needs for working capital. Most managers are looking at various options to make sure their companies can survive until something like normal business presumes.”

How soon is now?

For financial advisors and banks currently discussing ways of assisting their customers, one major difficultly is related to the uncertainty of how long the immediate downturn will continue. Decisions usually based upon short and long term perspectives become problematic when it is impossible to define how long the short term actually is. Help packages related to keeping a company alive until the economy begins to pick up are difficult to calculate in times of heightened uncertainty.

The economic impact of the crisis has really placed the spotlight on available cash and created a new set of needs for working capital. Most managers are looking at various options to make sure their companies can survive until something like normal business presumes.

Johan B Eriksson, Senior Credit Manager at Nordea

Johan continues: “Of course discussions with businesses take place in the light of questions around the time perspective. How long will this go on and what do we need to look at in terms of long term help? Many of the government initiatives across the Nordics are proving a big help for certain companies but for others, taking on more loans and debt may not be the best solution in the long term. They may not be the right solutions for everyone because someday the loans have to be repaid. For that reason, it’s really interesting to try to find other solutions.”

Keep the bank informed before taking action

One approach that banks are using to try to offer more nuanced solutions to their customers is to become more proactive in really trying to understand their customers businesses. With a deeper understanding of each business, other alternatives can be considered beyond providing extra credit. At the same time, a closer relationship involves a customer informing the bank before they make any other business and operational decisions.

Johan says: “A very important idea is to take an educational approach on the bank’s side to learn more about the particular needs of each business, getting our customers to rely on us and being very early in their communication. To inform us and ask us our point of view before they begin a different course of action. Sometimes when a company acts on their own and contacts us afterwards, it can subsequently be difficult to help them. The most challenging job facing a bank advisor is trying to establish which companies we really believe can come out intact on the other side of this downturn. Of course, a better understanding and closer dialogue will help this.”

A very important idea is to take an educational approach on the bank’s side to learn more about the particular needs of each business, getting our customers to rely on us and being very early in their communication. To inform us and ask us our point of view before they begin a different course of action.

Johan B Eriksson, Senior Credit Manager at Nordea

Urban Ljungblom, Trade & Working Capital Development at Nordea, say: “For many companies, it’s definitely a good idea to contact their bank before entering into any new agreements. Once they have employed their working capital in some way, it can potentially become too late to deal with any mitigating actions related to risk, trust and liquidity. Our advice is to contact your bank before doing anything. Discuss the consequences and navigate in order to make sure any actions taken are standing on solid ground.”

For many companies, it’s definitely a good idea to contact their bank before entering into any new agreements. Once they have employed their working capital in some way, it can potentially become too late to deal with any mitigating actions related to risk, trust and liquidity.

Urban Ljungblom, Trade & Working Capital Development at Nordea

For banks trying to help meet liquidity needs, assessing a company’s current operational decision making and planned use of available cash flows is critical.

Urban adds: “A company should definitely contact their bank before they enter into any liquidity heavy agreements. For example, they should not make any down payments unless they know for sure when the delivery is going to take place. They should try to avoid exposing themselves to that risk because afterwards it might be difficult for a bank to help.”

Stronger partners take the strain

In challenging times, it is natural for companies to request longer payment terms in relation to their suppliers and shorter payment terms in relation to their customers. One approach that is proving extremely important for smaller companies is letting the larger companies take the strain in the supply chain.

Johan says: “Some larger companies in the Nordics have responded by reducing the time they take to pay smaller companies in their supply chains. This can be a bit tricky because of course they are looking at their own liquidity but it can also become a really challenging environment if the largest companies are too hard on the smaller companies that are delivering to them. This is related to trust and lengthy supply chain relationships and we have seen some very good examples of large companies paying suppliers almost immediately. It’s important during this time that that those large companies who have the possibility to help or contribute to other companies in their supply chain try to do so.”

Urban adds: “If a company has a very strong supplier it could be a good idea for them to ask for support, especially if they still believe in the cooperation beyond the downturn. If there are two parties from an efficiency point of view, it’s better that the financing is managed by the stronger party because they are better equipped to accomplish that.”

If a company has a very strong supplier it could be a good idea for them to ask for support, especially if they still believe in the cooperation beyond the downturn. If there are two parties from an efficiency point of view, it's better that the financing is managed by the stronger party because they are better equipped to accomplish that.

Urban Ljungblom, Trade & Working Capital Development at Nordea

Look for packages and innovative ways of trading

Other options available to help businesses hang onto their liquidity include government sponsored tax breaks and employee support schemes across the Nordics. For trade purposes, Export Credit Agencies (ECA) offer to guarantee a large percentage of trade receivables. New tools such as the we.trade platform enable companies to use payment guarantees instead of increasing overdraft facilities when purchasing goods from suppliers.

Urban says: “In trade finance we have seen a big uptake in ECAs, especially with larger companies. The applicability of using the ECAs has been increasing to include more transactions. If banks are able to receive a guarantee from the relevant national ECA, the financing risk changes and this becomes more desirable than extending an overdraft facility. The advantage of ECAs are that they are related to the real economy and transactions that have actually happened.”

“There has never been a more appropriate time to look at the other services and tools available to companies looking to trade. We.trade is definitely something that can help as every company trading on the platform is pre-approved by one of the 16 member banks behind the solution. Creating a safe environment to trade ensures that deliveries are paid for and payments in case of non-delivery are prevented. This is of course extremely helpful in preserving scarce working capital,“ Urban adds.

There has never been a more appropriate time to look at the other services and tools available to companies looking to trade. We.trade is definitely something that can help as every company trading on the platform is pre-approved by one of the 16 member banks behind the solution.

Urban Ljungblom, Trade & Working Capital Development at Nordea

Trust is always key             

In challenging times, businesses can suffer from a lack of trust as well as poor liquidity. Developing closer relationships with banks and supply chain partners and increasing the knowledge of available tools can all help to increase trust.

Urban concludes: “It’s important that companies remember to contact their banks beforehand. They should not move to action unless they have secured a way of financing their upcoming commitments. Securing their specific trade transactions and financing them individually will increase their opportunities to access proper financing. When two parties are trading, both sides should be open for letting the strongest party support early settlement. Banks are obviously more happy to finance liquidity needs rather than financing losses. The key word that pops up is trust. In trade, we talk about the trust between the trade parties but trust is just as relevant in relation between banks and companies as well.”

Johan concludes: “In general, trust in a company is of course very important when assessing how we can support them. If  we feel that a company has really tried to do everything and to take actions on their own then we can pursue a combined solution to find more liquidity. We really need to feel the engagement and belief in the company and that they are doing more than solely relying on the banks to fix things for them.”

Contact your Nordea Trade Finance advisor for further assistance or find out more about we.trade here.

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