As the novel coronavirus reached U.S. shores earlier this year, public health efforts to limit transmission closed businesses, canceled large gatherings and people were told to stay in their homes. The economy dipped into a recession at a historic pace, while policymakers rushed into the fray to provide some relief.
In Greenwood, Indiana, Steve, Scott and Mike Hawks were helping to guide a generations-old family business, Rubber Products Distributors (RPD), through the economic tumult that had fanned across the country. RPD imports and distributes thousands of grommets, washers and other components that you likely never notice but encounter every day in your car and home. RPD wasn’t immune to the global impact of a pandemic.
RPD’s suppliers in China had been reeling from the virus since January, and that followed what was already a turbulent year of tariffs and new trade policies in 2019. It deeply affected RPD’s core business, and sales were falling.
“Our supply chain from China basically dried up in January because of the COVID-19 outbreak over there,” says Scott Hawks, RPD’s CFO.
A WELCOME PHONE CALL
But then, on March 20, the company got a call from a personal protective equipment (PPE) supplier in China that had masks ready to ship to the U.S. Was RPD interested? PPE was an entirely new product for them. So RPD’s sales team sent an email to their customers, largely manufacturers, to get some feelers out.
“It’s not an understatement to say the phones never stopped ringing. It was unbelievable the response that we got,” says Hawks. “Our customers were going to be reopening and they would need this stuff.”
Their largest order, in fact, came from the state of Indiana. Immediately, Hawks saw a chance to play a crucial role supplying his home state with essential gear to help businesses reopen — and safely. And, it could help RPD weather an unprecedented economic storm.
But there was one obstacle, common for any business, standing in their path: cash. However, the work they have been doing with Northwestern Mutual for more than three decades would be just the lifeline they needed.
“It truly was a godsend,” says Hawks.
GETTING CASH QUICKLY
Cash flow is the lifeblood of any business. When it’s in short supply, opportunities can glimmer and fade before a business can seize them. Managing cash flow is always a balancing act, and one of the more difficult factors to control in a business. That’s exactly the position RPD found itself in when the PPE manufacturer supplier in China called.
“We went through a week of placing orders, but it quickly became evident that we would be stretching ourselves in terms of our capacity,” Hawks said. “So, I called the bank to ask for an extension on our line of credit and discuss some options.”
By “stretching ourselves” Hawks meant there was some concern they may not have enough cash on hand to make payroll. PPE was far more expensive than any of the products RPD typically shipped, but demand for these critical supplies was incredibly high. Hawks opted to place the orders, because they had customers lined up. The problem was cash from the sales would trickle in unevenly, given the various sales terms they’d agreed to with customers.
Unfortunately, their local bank was inundated with loan requests, driven by the government’s small-business lending program passed as part of the CARES Act. It would, perhaps, take weeks to get the cash – lifeblood – RPD sorely needed. So, Hawks called Brian Wilkinson, the company’s financial advisor from Northwestern Mutual. Wilkinson and Hawks also happen to be friends who trace their connection back to the dorm rooms of Purdue University in 1986.
“When Scott called, I was a little concerned. We’re friends, but Scott doesn’t typically call on a Friday night at that time,” says Wilkinson. “Scott had explored a few options, but he needed a solution that would be quick.”
Wilkinson knew exactly how Hawks could get a quick solution to his bind.
To get cash quickly, Wilkinson recommended Hawks tap the cash value of key-man life insurance policies on the other co-owners of RPD, Steve and Mike. Key-man life insurance is simply a life insurance policy on a principal owner of a business or other critical employee. If the insured employee passes away, or perhaps wants out of the business, the insurance policy helps cover disruptions (lost sales, clients, expertise) that would result. The RPD co-owners set up these key-man policies roughly 30 years ago, and continually paid into them and expanded them as the business grew. All that time, those policies accrued cash value, which can be utilized at any time for any purpose.
In this case, they used most of the accumulated cash value in those policies to infuse RPD with the cash it desperately needed. And it came fast.
“We submitted all the paperwork quickly, and I noted the request should be expedited, but I didn’t in my wildest imaginations know it would be this quick. The money hit RPD’s account in less than 48 hours. And that was huge.”
That cash infusion helped RPD order all the PPE it needed to fill all customers’ orders and cover payroll. RPD helped the state of Indiana, and helped countless other businesses restart their operations while keeping workers safe. Within weeks, the company repaid the cash value loan in full as payments rolled in.
“It was a lifeline for us. It really was,” says Hawks.
It was, without a doubt, a few stressful weeks at RPD. However, during a global crisis that presented businesses with unprecedented challenges, Hawks is proud RPD could step up and help its customers and home state. The trials and tribulations the business overcame also showed that they can indeed stretch into new markets. But without that cash infusion, the story may have played out differently.
“It really gave us a shot in the arm realizing we aren’t pigeon-holed into the existing business markets we serve,” says Hawks.
Now, rather than a business on its heels, the financial security the life insurance policies provided allowed RPD to find its footing and adapt its business quickly.
“It remains to be seen if this all adds to a good year or simply sustains us in what has been a bad year,” says Hawks. “But what we do know is we don’t need to wait for the core business to come back, we can seize other opportunities.”
Utilizing the accumulated value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event. Assumes a non-Modified Endowment Contract (MEC). The testimonials presented may not be representative of the experience of other clients and are not a guarantee of future performance or success.