Brandon Spear, president of MSTS, sent in the following commentary on how businesses can properly vet partners when seeking working capital.
"Businesses seeking working capital may turn to a variety of sources and partners for help," Spear wrote. "But when it comes to extending credit to B2B buyers, there's always been a degree of risk that is now exasperated by the global health crisis and the resulting economic uncertainty. And when finances are strained and working capital is tight, it may be difficult to fully support customer requests for trade credit.
"However, with a strategic approach to underwriting and credit line management, B2B sellers can preserve their business's financial health and maximize working capital. Like most industries, customer underwriting is also impacted firsthand by the challenges brought about by the COVID-19 pandemic.
Spear noted that a strategic approach involves using current and forward-looking data from a buyer's industry and customer base to determine the financial outlook over the next few months. "Another way to protect a business' financial health while minimizing risk is right-sizing the credit lines of current customers," he added. "It's worth it to take the time to accurately determine how much credit customers require to support their purchasing needs. Oftentimes, a customer may qualify for a credit line that's much higher than their actual purchasing activity, and right-sizing reduces the risk of bad debt without inhibiting customers.
"For businesses unable to extend credit to customers with these additional considerations, it's best to turn to a partner that takes on the credit extensions — as well as the risk. They must also consider the wide array of alternative funding options, such as asset based lending. Before signing any deals, it's imperative to fully understand the terms of the agreement and look historically at the partner's work with similar industries and clients to ensure the partnership will help the business conquer its short-term challenges and provide long-term support and efficiency."
We wish to thank Brandon Spear for sharing his insights on this topic. For additional commentary, visit www.msts.com/resource-center/blog. If you'd like to sound off on this or another relevant topic, please email firstname.lastname@example.org.
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