Secured Finance Executives Discuss Coronavirus

March 11, 2020

By: Eileen Wubbe

Secured finance executives from Gerber Finance, North Mill Capital and FTC Commercial Corp. discusses the impact of Coronavirus.

Jennifer Palmer, CEO, Gerber Finance

We began reaching out to our clients in early February to discuss the potential impact of coronavirus on our client’s businesses. Since then, so much has changed but still one thing hasn’t, that the true impact is still an unknown and difficult to forecast.

Already in January, our clients were feeling the effects of the disruption in global supply chain.  Fortunately, many of our clients, like many other American companies, began moving production out of China last year due to the trade war and the imposition of tariffs.  Unfortunately, the companies who didn’t diversify their supply sources prior to January 2020 are also the ones who haven’t moved quickly enough in the last few weeks.  We are seeing certain companies struggling to find new sources and when they are successful in doing so they are not getting the terms they had with their previous suppliers.  We are asking these companies to revise their cash-flow projections to take these changes into account.

And, even the companies who were proactive are still affected. For example, one of our U.S. clients moved production from China to Vietnam last year due to the tariffs and felt confident about the decision until January.  They didn’t realize just how reliant they are on China, for componentry, hang tags etc.  While they are not experiencing immediate issues due to brining in extra inventory prior to the Chinese New Year, they do believe this will greatly impact their business in Q3 & Q4.  While it is difficult to calculate the true impact and nobody knows just how long this situation will continue, we again are asking this client to work with the information on hand and look at their projections and revise their budget with the assumptions they may need to reforecast delivery dates and therefore marketing spend. They may need to air freight goods, they may need to pay their supplier and transport companies ahead of schedule to get to the front of the line to get goods released.

Paul Schuldiner, executive vice president and purchase order finance division manager, Rosenthal & Rosenthal

The virus has definitely impacted clients importing from China and it is premature to determine how long this will last. If this becomes a pandemic, we may all be facing longer-term issues.

The immediate impact is that locking down space on vessels for imports from China to the U.S. will be a challenge, as product shipping will be compressed, and freight rates will increase. So, while tariffs are being reduced, higher freight costs will reduce our clients' gross margins. 

Also, clients have to be forthcoming with their customers (retailers, distributors, even direct-to-consumer) that products may likely be delayed and/or examined by U.S. Customs or other governmental authorities to ensure there are no issues with products being potentially affected by the virus. We're encouraging our clients to discuss obtaining extensions on orders with their end customers. Engaging in ongoing discussions with logistics providers is also paramount for companies to ensure real-time shipping and delivery updates.

While factoring and asset-based lending clients may not use third-party inspection services, the potential quarantine issue may inhibit a client's own quality-control personnel from conducting their own QC procedures in a timely way -- or even at all -- at least until this situation sorts itself out. The lack of adequate quality control or inspection could potentially result in higher dilution should there be material deficiencies in product quality that are not caught before shipment to end retail customers. Clients should step up their own inspections of goods when they arrive at their third-party logistics or leased warehouse space before they ship to end customers. 

The virus scenario does signify the need to potentially diversify the geography of a company’s supply chain. Having a financial partner that can provide guidance and funding solutions that assist in supporting diversified sourcing, product inspection, logistics analysis and funding for direct as well as ancillary product costs (like freight and duty) is critical. Purchase order financing companies are specialists in navigating these turbulent waters!

Ken Wengrod, co-founder/president, FTC Commercial Corp.

The world’s central global supply chain is presently being affected by the Covid-19 virus impacting the flow of goods.  According to Reuters, “around 500 million people in China are affected by policies restricting their movement to help contain the virus”.   This should be a wakeup call to the U.S. importers and lenders since many are factory workers who cannot get to work.

It’s critical for banks and financial institutions to pay attention and monitor their borrowers’ loans closely to determine if an interruption in the flow of goods exists.

It seems some Chinese suppliers are declaring Force Majeure to suspend their agreements given they are unable to fulfill their contracts/purchase orders.

In order to prevent paying for goods and services clients may never receive, financial institutions need to analyze any suspended contracts that have been previously financed, which will negatively impact their borrower’s trade cycle.

Materials and components made in China have a trickle-down effect on production in other Asian countries, which invariably impacts numerous industries across the board - auto, energy, technology, pharma and consumer related industries to name a few.  In order to safeguard financial institutions, lenders need to review borrowers’ insurance policies to see if they have any protection for these events, if the lender is named as loss payee, and analyze concentration in the supply chain as well their borrowers’ A/R.

U.S. importers should be developing a long-term goal of geographically distributing their network of suppliers.  Their supply chain needs to be more responsive when any adverse market conditions occur.  Importers who truly understand their costs are already maximizing their model by actually manufacturing in the U.S. or in a closer market instead of having any dependence on goods from China. 

Editor’s Note: If you would like to offer your insights into this topic, please contact Eileen Wubbe at ewubbe@sfnet.com.

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