Working Capital Financing from Alternative Lenders - What CPAs Need to Know

James Poston

Last Modified : Jan 23, 2024

Fact-checked by: Bruce Sayer

CPAs often have a front-row seat to spot the signs when their clients are facing financial challenges or heading toward a cash flow crisis. This is especially true at the beginning of a calendar year as businesses compile year-end financial statements and prepare tax returns.

In today’s economic environment, businesses focused on their struggle against declining revenues and rising costs may fail to recognize the business financing cliff they’re possibly rushing towards. Fortunately, CPAs provide a critical role in advising on financial matters, enabling them to throw up red flags if necessary and offer intelligent solutions to credit restrictions or loss of working capital financing as banks continue to tighten credit.

Suppose a company is struggling to maintain sufficient cash flow or hold on to its existing business financing. In that case, CPAs can help transition working capital management to alternative lenders, who can often deliver faster-working capital financing solutions with more straightforward qualification requirements.

In this article, we’ll explain how the best alternative lenders approach working capital financing and the products they use to solve cash flow challenges quickly and efficiently. Learn what actions CPAs can take to ensure that the businesses they represent have the working capital they need when they need it.

How do alternative lenders provide flexible working capital financing?

Alternative lenders have altered the lending landscape with advanced working capital financing features and benefits that traditional lenders typically can’t match. High advance rates, competitive costing, flexible structures, and advanced technology can be combined to deliver easily accessible working capital financing businesses can depend on. More importantly, they feature easy qualification requirements, faster onboarding, and expedited funding to revolutionize the speed of funding. Today, many businesses previously deemed as unbankable are eligible to receive business financing faster, with more control and convenience than traditional lenders.

Here’s how leading alternative lenders deliver what few traditional lenders can provide – fast, flexible working capital financing to businesses in distress:

• Employing advanced fintech capabilities, alternative lenders access vast databases and analyze hundreds of credit related data points to better understand an applicant’s borrowing potential. Assessing untapped credit strengths and underutilized assets, these tech-enabled lenders can evaluate, approve, onboard, and start first funding to new accounts in a matter of a few days. Now, businesses in financial distress can pivot quickly with restructured financing to support turnaround efforts.
• Monetizing quality assets, such as accounts receivable, inventory, or equipment, alternative lenders can tailor easy to manage facilities with fewer rules. These flexible lending agreements provide large influxes of cash to meet financial burdens, fill funding gaps, or take advantage of business development opportunities.
• Utilizing debtors’ credit strength, alternative lenders can approve financing and set credit limits based on the creditworthiness of the borrowers’ business customers. Expandable credit limits can increase as accounts receivable volumes grow. With an invoice factoring facility in place, businesses can rely on having the cash flow they need when they need it.

Understanding alternative working capital financing options

Following are the two most effective alternative working capital financing options to deliver fast, flexible access to working capital:

Asset-based lending (ABL) are business lines of credit that are secured based on the value of your client’s business assets. Physical assets provide maximum liquidity and fewer rules – less red tape may mean more cash for your clients.

Invoice factoring is the selling of invoice receivables at a discount in exchange for immediate cash. This easy-to-manage funding option does not incur debt, but simply accelerates days sales outstanding (DSO) from weeks and months to just a few hours. Invoice factoring is ideal for companies that regularly issue invoice receivables to creditworthy businesses.

Actionable steps to pivot to reliable working capital financing

Often, complex problems are best resolved by learning new information, asking a qualified person for help, and following a series of clearly defined actions designed to change a condition. The following are five steps CPAs can take to identify troubled accounts and change their financial condition from a cash flow shortage to reliable access to working capital.

Step 1: Review loan covenants

Review loan covenants to become familiar with client’s restrictions, obligations, and ratios that each of must be adhered to. Use this perspective as you work through reports and calculations. Be on the lookout for balances and performances trending in the wrong direction and agreements that are on the cusp of being broken.

Step 2:  Analyze financial ratios

Analyze financial ratios focusing specifically on those used as covenants when formulating year-end reports and preparing tax returns. If metrics, such as interest coverage ratios or debt to equity ratios indicate negative performance levels, it could indicate a potentially troubled account that will require the flexible advantages of alternative working capital financing.

Step 3:  Create a cash flow forecast

Create a cash flow forecast to look ahead and plan for financial continuity. Determine clients’ short and long-term goals, then project how much cash a client will need to achieve objectives. These answers will help determine what type of working capital financing will best meet their needs.

Step 4:  Explore alternative financing relationships.

Reach out to find alternative lenders well suited to support your CPA business. Conduct research, perform interviews, and learn lender capabilities. Select a reputable financial provider you trust to service your client companies and reinforce your reputation as an effective resource center for managing financial stability through all economic conditions. Review troubled accounts with the lender and discuss viable working capital financing solutions.

Step 5:  Schedule client phone calls

Schedule client phone calls to discuss their business financial status. Prioritize these calls to address looming cash flow emergency’s first. Propose restructuring details, explain lender benefits, and outline plans for a quick transition to sustainable funding.

Conclusion

CPAs can become credit heroes by taking initiatives to identify problem accounts and see them through to reliable funding. CPAs that understand the advantages of flexible working capital financing and have established a relationship with a trusted alternative lender can deliver exceptional value to struggling clients. Imagine the reputational lift CPAs will gain by guiding distressed companies to financial stability during challenging economic conditions.

Before conducting year-end reviews, establish a working relationship with a reputable and trusted alternative lender. Alternative lenders experienced in the industries they serve provide much more than flexible working capital financing solutions to complex situations – they provide tools, access to information and expertise to help guide borrowers towards increased stability and profitability.

James Poston

James is an experienced product expert in receivables financing, trade finance including purchase order financing, and asset-based lending. In his role, he oversees eCapital’s sales strategy by driving business development and creating unified revenue generation processes across our organization. Utilizing his experience in developing strategic relationships and nurturing strong networks, James is positioned to expand our company’s market footprint and industry associations.

Prior to joining the eCapital organization, James served as Executive Vice President and Sales Director for Bibby Financial Services Canada. During that time, he participated in all aspects of the organization including operations, credit and finally business development where he was named a 40 under 40 Award recipient by Secured Finance Network.

James is a Chartered Professional Accountant and Certified Management Accountant and holds a Bachelor of Economics degree with concentrations in international relations and political economy from McGill University.