COVID-19 financial challenges (and how to overcome them)

COVID-19 is affecting us all. A recession is looming, if it’s not already here. Preparing your business during uncertain times is essential - least not during a global pandemic. 

Working with SMEs, we know (and hear) that change can be hard. Therefore, we want to help you adapt to this changing environment.

The good news is that there are a lot of things you can do to stay ready and adapt as you learn new information.

Remote working is a problem many SMEs are facing. Supply chain issues, too. But nothing is more frightening than the looming financial issues faced by almost every business on the planet today. And finance, the engine room of any business, is needed to keep the business running. Financial issues in a time like this can cause the most well-tuned business to break down.

So what can we do about it?

1- How to deal with a lack of cash flow?

Ah, cash flow. Oh, how much you frustrate us all. According to Quickbooks, 32% of businesses cite cash flow as their biggest problem.

Global virus pandemic, or not - cash flow is always a challenge.

And without cash, you have no business. So what are the options available to you if cash flow is a major issue right now?

Of course, you could apply for a line of credit. It’s safer than a standard business loan because you pay for what you use, instead of paying interest on the whole lump sum, a line of credit could be a good option right now. 

With a line of credit the cash flow is revolving - meaning that as you pay back what you’ve borrowed the amount replenishes again for you to continue borrowing.

The flexibility makes it popular among small businesses - but during the COVID-19 crisis, is a line of credit the best choice, or even viable right now?

A credit stretch is an alternative. Especially for SMEs still providing goods and services to their customers. If you’ve provided a product or service to a creditworthy customer you will get access to a credit stretch.

If your clients often pay late - and who could blame for that now, a credit stretch is something you can offer them to pay faster and with less hassle. This will guarantee late paying customers on-time payments - because the credit stretch company (like CreditStretcher) will deal with collection.

If you’re buying goods or services, you’ll want the longest possible payment terms available. A credit stretch will give you 60 days of interest free credit.


2- What about your marketing?

Spend money on marketing during this crisis? Are you mad?

Maybe. But not on this subject.

If you have the cash, spending more money on marketing could put you in a super strong position when the market recovers. This is about thinking long term. While every competitor cuts their budgets, be brave and stick to your guns.

But don’t throw money at anything. Get smart. Bill Bernbach said that “creativity is the last legal unfair advantage any company has over its competitors” - now is an opportunity to get creative. Maybe cut your advertising budget and spend half of it on ramping up SEO efforts. 

If you create helpful videos and articles that address related topics in your industry,” you can improve your search ranking and attract potential customers looking for similar products or services.


3- Sticking to a budget

A realistic and thorough budget is your friend right now. Treat it with respect for the best chance of riding out the storm safely.

Create a budget by gathering up all sources of income. Include sales numbers, investment earnings and accounts receivable. Now add up your expenses - rent, equipment, leases and loans.

Now create a list of variable expenses - contractor wages, marketing, travel and office supplies.

Finally, include enough money to cover emergencies and expensive one-off purchases like equipment or software.

During this global crisis, it might be wise to schedule monthly (or perhaps weekly) budget reviews to make sure you’re on track. Spotting issues, like a lack of orders, will give you the chance to kick your sales team into action to get those sales in before the end of the month - taking this proactive approach will reduce the number of costs you need to cut - especially painful ones, like staffing.

Doing this leads to greater accountability. And greater accountability leads to a better (more robust) business.


4- Keep cash in the bank

Cash is (literally) king right now.

Cash isn’t often the best way to store your wealth - apart from the early stages of a recession. So your cash reserves are your lifeline right now. Keep hold of as much of it as possible.

Because acquiring funding can be so difficult for many SMEs, a lack of capital can be the cause of great stress - in fact, the same number of businesses struggling with cash flow are that are struggling with capital issues.

Cash matters!

And for a long time your credit rating mattered in getting more capital. Banks were (and mostly still are) reluctant to lend money to companies without a crystal clear and stellar credit history. According to Biz2Credit’s May 2018 Small Business Lending Index, big banks only grant about one in four small business loan applications. Though the approval rating has gone up slowly since the last recession, it still is below 30 percent.

Expect that figure to reduce massively during this recession.

But there is a saving grace.

As I mentioned earlier, a credit stretch doesn’t take your (the seller/supplier) creditworthiness into consideration. It’s only concerned with the credit rating of the company you do business with. So if they’re creditworthy, then you will still get access to capital.

If you’re having capital and cash flow issues, it’s likely that a credit stretch will get you out of the sticky hot mess.


5- Unexpected expenses

Recurring business expenses (that are easy to see) sometimes lead you to forget the likelihood of unpredictable costs.

Nassim Taleb, author of Black Swan, says that humans are bad at predicting the likelihood of negative events happening. This is amplified in business. When things are good, all we can think about are the good times. I think this is mainly an issue with short, quarterly budgets stopping companies from thinking long term.

But damaged equipment, sick staff and other unforeseen expenses can happen at any time.

How much you save for Black Swan moments depends on your risk tolerance. During a time like this though, make sure there’s plenty in there.

Legendary management consultant, Peter Drucker, coined the terms profit center and cost center. A cost center is an expense that doesn’t increase the profits of the company. During a crisis companies will look to remove as many cost centers as possible.

A profit center is an expense (or investment) that increases profits over time - think sales and marketing. If you’re fortunate enough to be liquid during COVID-19, now is a good time to analyse your cost centers for savings and invest heavily in your profit centers.

Overcoming common business challenges comes down to education and execution. Taking the time to determine your small business’ pain points and lay out a plan of attack can help set you up for success.

If you need any help about remote work or financial issues, we are available to chat. You can contact us here at any time you need.

Joseph Pack

CMO at CreditStretcher. Nice to meet you!

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