The Recessionary Cash Flow Domino Effect | Business Financing Nightmare

Cash Flow Problems In Recessions Are Typically Caused By a Domino Effect

The recession creates the obvious problem of less sales for your business, but even if you’re in a mostly recession proof business, or one experiencing only a modest down turn, beware of what I call the cash flow domino effect.

This is most relevant to businesses that are part of large supply chains, but it can happen to virtually any business, depending on the circumstances, and all these triggers can be like falling dominoes heading straight for your cash flow.

Trigger # 1.  Someone in your supply chain or even a related supply chain gets into cash flow trouble.  They can’t pay their bills, which impacts the cash flow of their suppliers.  Now the suppliers customers will have their cash flow impacted and so on and so on down the line until the problem lands on your doorstep.  The more cash flow problems originating in the supply chain, the greater the domino effect and the more likely of anyone being impacted.

Depending on where you sit in the chain relative to where the first domino falls will likely determine how this impacts you.  In some industry this can be a complete company killer as business try to find ways to cover their operating costs and protect their credit until such time as the money starts flowing again.

Trigger #2.  Your business is doing ok despite the recession and everything seems to be in hand when all of a sudden your bank calls your loans or puts you into what they call special loans.  You’ve been a good customer for years and may have never missed a payment, but here they are with a knife to your throat.

Why would the bank do this?

Could be lots of reasons.  They may feel that they are over exposed in your industry right now and want to strengthen their portfolio by calling in some loans they know they can get their money out of without losing money.  You many be “offside” on one of your debt covenants which might be only marginal, but its an excuse to again reduce their exposure.  Or based on the current conditions, they have significantly revalued your security and now believe to be under secured based on the amount you owe them.

Even if they don’t call your loans, they can trim back your limits and still wreck havoc with your cash flow.  Remember that most operating credit is on demand and can be called or reduce on demand at any time for any reason.

Its just business, nothing personal.

But you still are in pretty good shape, so you’ll just do to another bank and get business financing some where else,  right?

Trigger #3.  In the middle of the recession, hardly any main stream lenders are lending any money and few are doing more than selectively helping out their existing clients.  So even though you have a viable business, you can’t get a low cost loan.  If you have assets to leverage, this could force you into more expensive asset based solutions  until the recession blows over and hopefully you have the margins to cover the cost or you could become Trigger #1.

As you can see, the cycle can feed on itself and increase the potential negative impact on your cash flow.

As we get into the last quarter of 2009, the dominos have been starting to fall and are building momentum in some industries and geographies.  How do I know?   All I hear these days when I answer the phone is a business owner explaining which trigger he’s just been hit by.

More on what to do to protect your business cash flow  in future posts.

About the Author Brent Finlay