As businesses close their doors and many of their workers settle into new routines—working from home, or unable to work—experts are considering the longer term implications of the partial economic shutdown that COVID-19 has forced on much of the world. In the coming weeks, businesses are expected to stand down record numbers of workers. At the same time, months of economic difficulties have left businesses weakened and unprepared for a crisis of this magnitude. With little remaining in the way of emergency funds, many are expected to go into administration in the coming months.

assets balancing debt - Businesses need new financing tools to cope with falling home prices

Because of the expected increase in unemployment, experts predict that housing prices in Australia could fall by as much as 20 per cent. This means that businesses owners who rely on their homes for equity could be faced with another financial challenge during an already difficult time. To deal with that, many of these typically smaller businesses will need alternative financing tools such as invoice finance and supply chain finance to keep their operations running. These provide them with a way to finance their operations without relying on home equity, and without risking their debt to equity ratio in the future.

Rising unemployment can crash the housing market

After months of uncertainty due to bushfires and floods, Australian consumer confidence is already relatively low. Now, with more stringent emergency measures impacting and restricting the lives of consumers, few will be looking to buy real estate. Worse, many homeowners who are suffering a loss of income due to cutbacks or unemployment will find themselves unable to make mortgage payments, potentially leading to a rash of bank foreclosures.

As a result, the real estate market may be flooded with homes at a time when few people are looking to buy. This will, in turn, drive down prices. Low prices often aren’t enough to attract buyers, though, when potential homebuyers are faced with income insecurity on an unprecedented scale. That means low and declining home prices for the foreseeable future. For businesses owners, it translates to an unacceptable loss of equity.

Businesses need new financing tools

Many businesses, particularly small businesses, rely on the owner’s home equity as security for day to day financing. When home equities are rising, this works well. When prices are falling, though, it can throw the business’ debt to equity ratio out of balance, making it virtually impossible to access further credit. Worse, if home values drop too far, the business might not only lose access to further credit, but also be forced to pay off some of their existing debt.

In order to deal with a situation like this, and to get their future cash flow management under control, businesses need better financing tools. Invoice financing and supply chain finance are ideal for this, as they allow businesses to get the cash they need without taking on any new debts. That’s because, instead of borrowing funds, these tools allow businesses to defer outgoing payments, or to accelerate the arrival of incoming revenues as a way to consolidate funds when they need them.

Invoice finance

To finance an outstanding invoice, the business trades it to a financier like Fifo Capital for an up-front cash payment. That payment makes up the majority of the value of the invoice, providing a significant cash injection right away. When the invoice is due, the financier collects payment from the customer, and issues the remaining funds, less their fee.

Supply chain finance

Where invoice finance provides businesses with extra funds, supply chain finance helps to delay outgoing payments. Instead of making a supplier payment the moment it is due, the business works with a financier to pay the supplier on their behalf. Then, up to 90 days after the supplier invoice date, the business makes its payment to the financier. This allows the business to redirect existing funds to deal with other issues, or simply buys the time they need to make payment.

Together, these can also be used to finance a business’ operations. Supplies bought using supply chain finance don’t need to be paid off by the business until 90 days after the invoice date. Provided that the resulting products can be sold before that deadline, the business can then use invoice finance to collect most of the revenues immediately after the point of sale, before using those funds to pay the supplier.

This gives business owners a way to avoid borrowing against their home, not just to manage cash flow interruptions, but to finance their operations, even if they don’t have any of their own working capital to invest.

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