Insight & Analysis

Lessons from the pandemic: America’s SMEs learn the importance of working capital

Published: Oct 2020

As America’s SMEs continue to battle the impact of the pandemic, access to working capital and liquidity is the difference between life and death.

Life or death, one bright lightbulb

Limited working capital has been the single biggest challenge for many of America’s small and mid-sized companies (SMEs) coping with the financial chaos of COVID-19. An estimated 50% of America’s SMEs traditionally hold less than one month’s liquidity, says Bill Fink, Chief Lending Officer and Head of Credit Management at TD Bank’s Commercial Banking Group.

It has meant those companies that acted quickly to sure up liquidity and access to cash in the face of dramatically reduced revenues and severe disruption to their supply chains have done much better than those who adopted a wait-and-see or casual approach, hoping the crisis would go away. With insight gleaned from oversight of the bank’s US$60bn small corporate loan portfolio across the US and spanning family-owned hotels to restaurants, healthcare businesses and beauty salons, Fink knows first-hand how access to working capital has created COVID’s winners and losers. “Not getting additional liquidity locked down to weather the COVID-19 pandemic has proved a significant issue in many cases,” he says.

“Companies that moved quickly and proactively are now much better off than those who didn’t react to the crisis,” he says. “Those who took a more relaxed approach and decided to weather the storm have suffered as a result of the lack of additional liquidity. Going forward it is an absolute necessity for treasury to look at how they can ensure liquidity and increase their working capital facilities. Access to liquidity is paramount to working through this crisis.”

Much of his work in recent months has involved answering corporates calls for liquidity as a backstop against the uncertainty. But supporting cash-strapped corporate clients involves a deep dive analysis of their credit worthiness, including assessing a companies’ historic businesses patterns, customer base and ability to recover. Elsewhere companies have had to work out what proportion of their expense base can be scaled back. “These are key elements we have to assess when we work with smaller businesses with less cash flow,” says Fink, who notes how federal programmes allowing companies to tap liquidity have been a vital pillar of support – and more stimulus is needed.

As US politicians continue to wrangle on a fresh round of stimulus, Fink says corporate America needs more support because of the enduring duration and impact of the pandemic. Much of his work involves helping corporates tap the Paycheck Protection Programme, the US government’s forgivable loan program for cash-strapped small businesses that was established under the CARES Act this spring. More than five million PPP loans were approved between April and August accounting for US$525bn, according to data from the Small Business Administration in an application process that Fink says has amounted to companies’ treasury management functions “becoming front and centre overnight.”

Wish we’d known six months ago

In fact, of all the lessons learnt in the crisis, Fink believes the primacy of adequate cash flow and access to working capital is the thing treasury teams wish they’d known six months ago. Although most corporates have contingency plans for natural disasters, few had factored in the impact of a pandemic into those plans. “Companies had contingency plans, but this didn’t include a pandemic,” he says. “The GFC didn’t shut down industries but this crisis has shut whole States down.”

In another lesson learnt, Fink says the pandemic has also taught treasury teams to prepare for unknown timelines. “I don’t believe there were many people in March who expected we’d still have business restrictions today. And there is no end in sight without a vaccine. There is no definitive date when they can get back to business as normal. But I have confidence that corporate America will find its way through.”

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