Companies and self-employed people are under pressure. Our advice is therefore to ensure sufficient short-term financing. Specifically, we recommend providing sufficient financing for one year, rather than a series of shorter-term financing arrangements for their short-term debts. After all, every renewal of financing involves a risk. As a company, you now need to keep a close eye on your liquidity, which smaller companies may not always be able to do, given that they have many other things on their minds at the moment.
Obtaining the necessary financing, in the right form, is something that companies often struggle with. And the situation today, particularly the outlook for the coming months, is very uncertain and therefore worrying.
ERA's financial experts Marc Beyens and Danny Decupere: "In 2008, the recession was triggered by the mortgage crisis. This coronavirus crisis could well trigger another recession. Companies sometimes have to look for other suppliers for their raw materials and components, which increases the risk. Trade fairs are being canceled and sales are falling. As a result, cash flow is also declining. Credit problems at a limited number of companies, and the associated cash flow problems, have a domino effect and can thus trigger a recession."
Marc Beyens and Danny Decupere recommend providing sufficient financing for one year to cover short-term debts.
ERA helps companies to work more efficiently. This includes support in organizing debt financing and helping to save on bank charges. Two financial experts from ERA, Danny Decupere and Marc Beyens, come from the banking world and therefore know exactly how banks work. With this knowledge, they assist companies in finding additional cash flow in general, and in optimising their credit applications in particular. The internal employee who has to draw up the credit application often does not know how the bank works internally and therefore how to make the most of its possibilities. ERA can therefore provide useful advice on this point.
As a company, you have short-term and long-term financing needs for your short-term versus long-term debts. In concrete terms, many companies take out renewable loans on a month-to-month basis to finance their short-term debts. With each renewal, there is a financing risk. Given that the economy is currently experiencing negative growth and a recession is looming, it is impossible to predict how strictly credit institutions will evaluate credit applications. After all, the risk for banks is increasing, no matter how you look at it. When renewing short-term credit on a monthly basis, the bank will in any case ask to what extent your company is sensitive to the coronavirus crisis.
Since a number of credit renewals will be refused anyway, a number of companies will run into problems. Those companies that do obtain credit will have to pay an additional risk premium. Factoring, which companies use to cover themselves in terms of suppliers, may also become more expensive. Credit insurers who insure invoices to customers may become stricter. Cash loans are already very expensive. There is therefore an increased risk in times of coronavirus.
That is why Marc Beyens recommends financing your short-term debts with a one-year loan, with a generous margin for additional liquidity needs. This way, you avoid the risk of no longer being able to obtain financing on the one hand, and having to pay a risk premium on the other. After all, the future is uncertain, and lenders in general, and banks in particular, do not like that. By providing a generous margin on top of your known needs, you avoid cash flow problems, even if your business experiences more difficult times than expected, or when other forms of financing, such as factoring or credit insurance, become more expensive. If there is too much cash, it can always be invested, so it is better to have too much liquidity than too little.
Our financial experts do not expect interest rates to fall further
Some companies assume that interest rates will fall further and therefore prefer to apply for (renewable) very short-term loans, such as one month. However, the financial experts at ERA are not counting on this. "How much lower can interest rates go? For us, it is now particularly important to hedge the risk of cash flow problems. We do not see interest rates rising immediately in the short term, but we do not expect them to fall any further either," say Beyens and Decupere.
The majority of ERA's projects in the financial departments of companies involve finding the best financing solutions, creating or renegotiating credit facilities, investigating whether the guarantees provided are still necessary and reducing their costs, and scrutinising the commissions and costs of certain financial services. In this way, ERA creates additional cash flow for the companies it assists. Marc Beyens and Danny Decupere come from the banking world, so they know exactly how banks make their profits.
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