- Look closely at your working capital and cash flow for opportunities to manage expenses. Consider what will happen if receivables do not get paid promptly. Even if things are okay now, you should proactively contact your lender to talk about your situation and what you are doing to manage this period of uncertainty. Many lenders are already actively discussing actual or potential issues with borrowers and often accommodating deferment requests (the SBA has just made it easier to apply for a deferment without need to provide financials). Also, prepare cash flow projections looking forward 90 days and update it weekly against actual cash receipts and expenses.
- Consider how the COVID-19 outbreak and responses will impact revenue, whether or not your business relies on foot traffic such as “bricks and mortar” retail, entertainment and sports venues. Also be thinking about the potential need for lender forbearance, financial restructuring or bankruptcy protection. These are words not spoken in a while but are now front and center for many businesses. Consider whether you can reduce your fixed expenses for a period of time (such as by asking for a rent reduction or deferral from your landlord). Asking sooner rather than later makes sense; nobody really knows how bad and for how long the current uncertainties will last.
- Review your existing banking relationships and documents to understand your obligations including reporting and financial covenants. If you have a line of credit, use it to manage short term cash flow needs. Know what your borrowing base will accept for taking draws (typically receivables over 90 days are ineligible for the borrowing base). If you do not have a line of credit, consider other funding sources. Given the extensive stresses in the economy right now, lenders may be more forgiving than you realize.
- Anticipate the increased potential for defaults by affected individual and corporate borrowers which could lead to a rise in bankruptcy filings, including among your customers and suppliers. We suggest you (1) increase internal reporting on all elements of your working capital (particularly payables and receivables), and (2) contact critical customers and vendors to talk about how they are doing and what they expect. Having closer connections can help to get critical information from them early to let you get ahead of the impact should something bad happen with them.
- Review your corporate governance documents to confirm which of your stakeholders need to agree to various actions (such as seeking a new loan, institutional or other).
- Government loans and other supports are still evolving. The SBA’s Economic Injury Disaster Loan Program can potentially provide small businesses financially impacted by COVID-19 loans of up to $2 million at interest rates of 3.75% per annum (2.75% for non-profit companies). Extended terms for repayment may apply - up to 30 years. These loans can be used for a host of purposes and there are no fees for applying. You can access the SBA’s loan program here: https://disasterloan.sba.gov/ela
- Lenders and investors should prepare for depreciating valuations across asset classes and corresponding collateral coverage erosion. While these may raise defaults (technical or otherwise), consider whether a greater engagement in finding a solution is better than a reflexive rush to action. Market climate could lead to large swings in debt trading prices, with control positions changing hands to opportunistic investors who dangle cash for buying valuable assets. Determine what actions you will be comfortable with your companies taking and how long you are prepared to wait for them to rebound.
In this challenging period there is no one-size-fits-all approach. We believe that smart planning is critical for moving forward. We will continue to watch for developments and will provide updates accordingly. In the meantime, please reach out to your Tarlow Breed Hart & Rodgers attorney if you have any questions or want additional information.
This update was prepared by Michael Radin, Esq. for general circulation. This website presents general information and is not intended to provide legal advice and it should not be considered or relied upon as such. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as lawyer advertising.