Local banker explains how loans can bring flexibility and stability to businesses during an uncertain time
As the world emerges from the shadow of the pandemic, many industries are finding unexpected challenges as they seek to return to a level of normalcy. A global semiconductor shortage, mounting labor shortages, and inflated commodity prices are byproducts of a rapid rise in consumer demand that global supply chains are not yet poised to meet.
“Our clients in the residential construction industry are experiencing dramatic increases in input prices and extended turnaround times on delivery of certain building components,” said Erin Schlegel, a Senior Vice President and Commercial Banking Officer with the Peoples Bank Snohomish Commercial Banking Group. “To date, limited housing inventory has driven market price appreciation to outpace the increase in input costs,” he added.
Asset-Based lines of credit for small and medium-sized businesses
In manufacturing industries, businesses are working to rebuild depleted inventory levels to meet rising demand. This increased demand for commodities has further contributed to materials shortages across many industries. Businesses in manufacturing and some retailing industries may be able to utilize an asset-based operating line of credit to support larger than typical acquisitions of materials. Examples include an opportunity to make a bulk purchase of a material that has been in short supply or strategic acquisition of inventory in advance of a scheduled vendor price increase.
“I’m working with a number of small and medium-sized businesses right now to adjust their lending strategy so they can build inventory levels and react quickly to market opportunities,” said Schlegel. “I’d advise any business that has a short-term capital need because of the current environment to talk with their banker and evaluate an existing or prospective borrowing structure. I’m hopeful that with time supply chain issues will ease, and recent price increases will largely prove to be transitory.”
Asset-based lines of credit have lending commitments that fluctuate monthly based on a borrower’s underlying inventory and accounts receivable levels. Banks offer advance rates into raw materials and some finished goods inventories ranging from 40% – 65% that are aligned with the salability and price stability of the underlying inventory. Commodity-based raw materials such as dimensional lumber and steel historically command higher advance rates due to their broad use and liquid markets. Accounts receivable advance rates typically range from 70%-75% and vary based on factors such as the quality of the borrower’s customer base, the presence of concentrations, delinquency volume and trends, and dilution.
Peoples Bank offers a full suite of products and services for small and medium-sized businesses. Please contact the Peoples Bank Edmonds Branch to learn about financial solutions that are right for your business.
— Sponsored by Peoples Bank