The events of the last couple of years have been disruptive, to say the least. And while the impact has been extreme and far-reaching it isn’t necessarily completely devastating. Nor will it be the last disruption your business faces.
What many businesses don’t realize is that disruptions come in all shapes and sizes and with varying degrees of impact and longevity. Some of these disruptions are predictable, as they take time to develop (there will always be economic downturns somewhere in the future). Some come without warning and, seemingly, when you are least prepared (COVID-19). But there are ways you can prepare financially. And a little preparation can go a long way.
Preparing for Business Disruption
We’re all familiar with the phrase “save for a rainy day,” which basically cautions us to reserve capital for some future, as-yet-unknown, need. While many businesses do have some cash reserves, they don’t always have the amount they need, or access to that cash as quickly as they might need it.
But being financially prepared doesn’t necessarily mean having a bunch of cash just sitting in the bank. Fabrication and metalworking shops rely on revenue generating assets (machines and equipment) to perform work and create products. These assets, even if financed, can have equity which can be refinanced to access working capital in the event the business needs cash.
In addition to having access to cash or equity that can quickly be converted to cash, having a relationship with a financial institution that understands your business, your equipment and the situation in front of you is critical to long-term business success. Small businesses often struggle to get equipment financing or a working capital loan because some banks or financial institutions don’t get to know you and your business. They only see the financial information, credit score and other numbers, but don’t really understand your business motivation, the type of work you do or the equipment you own.
You should have at least one financial partner that understands the ins and outs of the metalworking and fabricating industry, its cycles, the equipment you use and the customers you serve. This is the type of finance provider that is most likely to have your back when you get in a bind or find a great opportunity — because disruptions don’t have to be negative in nature.
Whether a disruption is positive or negative, it helps to have a financial partner in your corner that will listen to your situation and swiftly work with you to mitigate it or take advantage of it. Disruptive times are not when you want to be searching for a new lending partner.
Causes of business disruption include:
- Business opportunities
- Weather and seasonality
- Legal and/or legislative regulations
- Personnel and customer issues
Disruptive Technology, Innovation and Business Opportunities
Disruption isn’t always negative. There are times when a good opportunity presents itself, and a company just doesn’t have the financial stability or resources to take advantage of it. Think about a competitor acquisition, for example. A local competitive business decides to sell, and almost overnight you could double your revenue. But if you don’t have the funds or can’t get a loan to make the purchase, another business could make the acquisition, thus limiting your opportunity for growth.
Technology can also be a positive disruption. With FABTECH 2022 just around the corner, you’ll have the opportunity to see new technology in action and you may want to acquire some of it. New equipment innovations, business systems and other forms of technology and equipment can positively impact business operations. If you don’t have the funds to take advantage of these new technologies, you could put yourself at a competitive disadvantage.
Seasonality and Economic Disruptions
Economic disruptions are often unforeseen, uncontrollable, and difficult to plan for. The financial crisis of 2008 and 2009, while some would argue should have been evident, caught most people off guard. Businesses collapsed, the labor market was in tatters and seemingly overnight, the credit markets dried up. This severely hampered many companies’ ability to access cash and credit to run their businesses. Most recently the COVID-19 crisis at least temporarily shuttered some businesses and those without cash cushions and strong balance sheets simply weren’t in a position to ride out even the short-term effects.
And now many economists and financial pundits are predicting an economic downturn headed in 2023.
Similarly, weather-related disasters can occur overnight, affecting your ability to complete projects in a timely manner and force you to incur expenses for labor and maintenance which you could not anticipate. Equipment can also be severely affected by adverse weather, such as hurricanes, floods and tornadoes.
Legal Regulations and Compliance Issues
Legal and/or legislative changes can bring a multitude of disruptions, but because legislative changes take time, many businesses have opportunity to prepare for them. Some of these changes require investment in equipment and technology to maintain compliance (for those of you with welding operations you may remember the OSHA standard changes on hexavalent chromium in 2006 that required installation of fume mitigation equipment).
Legal disruptions can also include fines and lawsuits — either levied against your company or brought by your company against another entity. Failure to comply with regulations can result in legal action against your company and many businesses don’t have the funds necessary to address such problems.
Personnel and Customer Issues – Internal Chaos and Challenges
Personnel changes can be extremely disruptive to the day-to-day operations of a business. Loss of key employees can have dramatic effect on customer and vendor relationships and the ability to conduct business in a “normal” fashion. Most companies can weather a personnel storm, but it helps to have crisis planning in place should key people exit the company.
Similarly, the loss of a key customer could cause significant disruptions. Loss of revenue is a concern, but what if you are stuck with inventory or work-in-process that you can no longer sell? Diversification of your customer base helps mitigate the loss of one or a few customers, but crisis planning can help you be prepared.
Find the Right Financial Partner
Throughout the life of any business, there will be challenges and opportunities. Planning and preparation can help you withstand the challenges and leverage the opportunities. Diversify your work and client base, have a cash cushion, build equity in your equipment, and have the right financial partner. A good partner can quickly assess your situation and help you prepare for what lies ahead.
Aerospace Parts Manufacturer Refinances Equipment to Get Working Capital for Acquisition
An aerospace parts manufacturer in the Southeast United States had an outsourced plating operation that was going out of business, leaving them without a source for the finishing service. They had the opportunity to acquire the company’s equipment but didn’t have the $600,000 required for the acquisition. Manufacturers Capital, which specializes in metal-cutting and fabrication equipment finance, was quickly able to review the company’s equipment list and determine that there was enough equity in their existing machines to allow for a working capital loan large enough to pay for the purchase.
The purchase of the finishing business allowed the company to expand their service offering, improve lead times, and reduce the cost of the finishing process.
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