FEDA Associate Member Multifunding Explains the Financial Strategies Distributors May Consider as they Prepare for the Economic Rebound

By Ami Kassar
CEO, Multifunding

With 2020 thankfully in the past, it’s a time for optimism. No, the pandemic isn’t over and the next few months are likely to be rough, but the future seems promising.

Thanks to ongoing vaccination efforts, the hope is that the public will be able to increasingly get back to its accustomed lifestyle. A big part of that for most people is eating out in restaurants and at events. In turn, that means major increases in the need for foodservice equipment. Given the pent-up demand, there’s quite likely to be a deluge of need.

That’s why you need to be prepared well in advance.

Debt Consolidation, New Loans
While you’re waiting for your customers to return, it’s a good time to look for ways to consolidate your debt and debt service. The fact that interest rates are low now means it’s possible for you to save, perhaps significantly, in that area.

Meanwhile, because of delays – often considerable ones – when it comes to product sourcing, you need to maximize your leverage for increased liquidity. This is yet another reason to consider debt consolidation.

A couple of options come to mind:

If you’re sitting on a large inventory of equipment, you might consider swapping your traditional line of credit for an asset-based line. You may well end up with more funds available since such a line isn’t based entirely on future cash-flow expectations. Plus, there often are fewer covenants, which also helps flexibility.

When it comes to new loans, your first stop should almost always be the loan programs backed by the U.S. Small Business Administration (SBA). Many businesses incorrectly believe they are ineligible for SBA-backed loans – that they’re only for true mom-and-pop businesses. That is most definitely not the case.

The best-known SBA program is called 7(a) and provides working capital. It’s effective because it offers loans of up to $5 million, with 10-year repayment periods and interest rates in the 7-8 percent range.

And the benefits are even greater now because of the new COVID Relief Act. At present, borrowers will receive a waiver of all guarantee fees – typically 3.5 percent of the loan’s value – and you can get up to $9,000 a month of principal and interest reduction for the loan’s first six months. Even better: The benefit is not taxable. Note that these benefits end on September 30 – or earlier, if funds run out.

One non-financial note: Consider revamping your product mix for the time being to include non-core products. One food service supply client bolstered its revenue streams by focusing on janitorial supplies. This also ties in nicely with the asset-based line of credit approach.

What to Avoid
It’s also important to consider what not to do financially.

Unless you’re truly desperate, avoid short-term financing options, such as those involving internet-based lenders. Yes, you’ll get your money quickly, but the interest rates will be so high and the payback period so quick that you risk getting caught in an endless cycle of short-term debt.

Avoiding high-cost debt in any structure is always crucial: Cash remains king and allows you to retain optimal liquidity.

While low-interest rates are always desirable, don’t obsess over relatively small differences in rates. For example, the asset-based line of credit mentioned earlier might cost a percentage point or two more than the regular line of credit, but that shouldn’t be a deal-breaker because of the added flexibility and liquidity you gain.

And if, despite the pandemic, your company is seemingly sound financially and has good prospects for the latter half of 2021, be cautious when it comes to taking on equity partners. Beware of what I call the Shark Tank myth – that a company must take on investors if it wants to grow.

Entrepreneurs often worry needlessly about debt, but with a proper loan you’ll be repaying it in bite-sized pieces (just think about how your car and home payments are manageable). Say you take out an SBA-backed 10-year $350,000 loan at 8 percent interest; the monthly payments are $4,200. For most businesses, that’s doable.

Remember that if you take on partners, you’re losing control of a chunk of your company. If the newcomers’ views are different than yours, that can become a huge problem. Consider that venture capitalists will want to justify their investment (and quickly) and push for returns of 10 to 20 times their contribution. That just may not be feasible.

And it’s not unheard of for company owners to get pushed out of the company they founded. It’s better to instead hold onto your equity in case an exit strategy is needed.

Reasons for Optimism
Finally, remember to remain optimistic looking ahead.

If you’ve weathered the storm, you can expect business to rebound (people have to eat!) and even increase over previous levels as new restaurants and food providers emerge. Market share increases are possible, too, since acquisition opportunities should abound.