Connections for Success

 

03.31.20

How to Establish a Rainy Day Fund in the Middle of a Crisis
Chris Arndt

Unprecedented ideas in unprecedented times

We have entered an unprecedented time in market disruption across industries. Now, more than ever, is the perfect time to enact the rainy day fund. Either start building it or call on it. 

As a business owner or executive, it likely feels imperative to get in front of this disruption to your normal operations. Despite these uncertain times, there is a unique opportunity that exists right now: Interest rates are at all-time lows.

Do you own a company that has a strong track record of solid financials? Do you have a P&L that is looking good and a strong balance sheet (i.e., you are not running with too much inventory, your accounts receivable is current and you do not have too much existing debt)? 

You may want to reconsider your line of credit

Consider taking out a fixed-term loan from the bank. Given the current financial climate, interest rates are so low that it is a perfect time to get a big chunk of money upfront. Yes, you will pay some interest every month and some principal. 

Hear me out.

Typically, most businesses get a line of credit and only get charged interest when they are pulling on that credit. The idea is to use it to bridge a gap when it is really needed. The problem with a line of credit, however, is banks can come in at any time and remove your excess credit. This type of situation happened in the Great Recession, “you are not using that additional $200K? We are changing your terms and removing it from your line of credit.”

If you have a business that is in good standing and a banker that can get it for you, take out a loan. Get the cash, put it aside in a separate account as your rainy day fund. Then, if things get bad, you have cash to help you survive.

The best defense is a good offense

Alternatively, you could do what I am asking my team to do: Double-down. History repeats itself. After the Great Recession, we saw the biggest market rally over the following ten years with historic lows in unemployment. Those companies that doubled-down had a better chance to emerge stronger than ever.  

Go on the offense. Use the rainy day fund to scoop up a rock star that has been laid off somewhere else. Or perhaps you can acquire a competitor for cheap. Don’t feel guilty — these can be mutually beneficial arrangements. Maybe your rainy day loan can be used to plan and adjust for new customer behaviors as a fallout of this crisis (i.e., disruption).

Yes, the downside of a loan is you have to pay interest on the cash from day one. But rates are so low, it would be a nominal amount that in the end can help your business stay afloat or, better yet, innovate in an otherwise unfriendly growth climate.

For more information, contact Chris Arndt at carndt@orba.com or at 312.494.7014. Visit ORBA.com to learn more about our Cloud CFO Services. 

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