Two Details Your Lender Is Asking About, and You Should Too

There are a lot of words to describe the current economic environment, uncertain is one of them. And while many companies may not be seeking new financing in the near term, there are a number of reasons a business owner and its lender will be having conversations soon if not already – 1) a renewal of an existing loan 2) terms were modified as a result of COVID-19 impact 3) quarterly or annual covenant or other performance requirements.

There are consistent themes emerging with lenders, so it is best to be prepared for the questions being asked, but it is just as critical in managing the business itself. While an overall assessment of the business is always key, there are two key lines of questioning where visibility is essential – monthly trending and liquidity.

Monthly Trends
The Lender
The value of timely, reliable monthly data is never more critical than in times of significant disruption. Lenders are diving in deep and scrutinizing monthly trends to understand what the impact of COVID-19 had on their customers. Results from one month to the next can provide key data that could lessen cause for concern from a lending perspective. They are not assuming just because numbers were great prior, that this will revert automatically. They are looking to see an upward trend after the economy has begun to re-open, and that the short-term trends can be explained by what is going on in the business.

Isolating the noise is essential as well. Lenders are partnering with their customers in a very active way, but they are still very mindful of risk. You may be in an industry with a gloomy near-term outlook, yet your business could be an outlier in a positive way. Disruption could create an opportunity to gain market share or purchase failing competitors for pennies. Being able to present a picture to the lender that demonstrates this strength could not only make the lender feel more comfortable, it could even result in additional financing if needed, being easier to obtain.

Lenders are asking questions around this to manage their risk and assess how much debt the company can support.

The Business Owner
For business owners, this detailed look at trends is crucial to make decisions. So first and foremost, every reasonable effort needs to be made to ensure that timely, accurate monthly data is available.

Do the trends make sense? Did payroll come back and not revenue as expected or was there any expected lag and revenue came back a month later. Are margins doing what they should be? The worst thing that can happen is to not have explanations for movement in numbers. With the world changing so quickly, having information to make quick, informed decisions is paramount. And this means your financials need to be accurate enough to form reasonable conclusions.

What is your business telling you versus the headlines? While lenders want to peer through the noise from a risk perspective, you want the same clarity to identify signs of an opportunity or challenges. Do the trends show that customers are buying where it may make sense to add more payroll? Or are results not yet there sustainably and cash needs to be conserved for another month or two. And just because the industry overall or even competitors are moving one way, your business may be telling you something different through its performance.

The Lender
The other key area lenders are seeking clarity on is liquidity. What is the company’s cash position now and in the future? For a lender, this is simple – can my borrower repay the loan they have? And one step further – can they do so today, tomorrow and 6 to 12 months from now. Of course the further out a projection goes, by nature, it will be less accurate. However, lenders are absolutely expecting some sort of cash flow forecast out 90 to 180 days and even a full year. Even a solid attempt at this will go a long way in providing confidence to your lender that you are monitoring cash and being proactive.

You are likely to be asked about some of the details behind expected cash flow as well. Are customers paying on time? How much of your payables are deferred save cash in the near term? How does cash change as the market improves?

The Business Owner
Cash is the lifeblood of your business. What does your runway look like? How do you know? What impact does it have for you if a key customer pays late? Do you have enough cash to add staff in 60 days? PPP money is likely spent, what is happening to your cash balances in the future as a result? How much cushion do you have? Businesses that cannot answer these questions are at risk of running out of cash without even knowing it.

Understand your options. Having a cash flow forecast on paper allows a management team to evaluate what happens if a key assumption does move around. If a key customer pays late and creates a $100,000 cash shortfall, what options could you move around to make that up? And remember, cash flow is about timing, so it could be accelerating other receivables, deferring payments to vendors, or waiting to hire until that customer pays its invoice. It is much easier to avoid a car accident when you can see out your car window up ahead and react. Looking forward into your cash flow is no different. And evaluating possible scenarios on paper adds confidence to decision making, even during chaotic times.

The bottom line is that businesses will be asked by a lender to provide this information at some point. By being proactive, you will be prepared, but more importantly, a deep look in these two areas on a regular basis could guide essential decisions that could avoid potential pitfalls, increase profits, and protect the business long term.

The Most Important Three Feet Businesses Face

One of my favorite quotes is from Royal Robbins, a pioneer of American rock climbing, who said, “When it’s been a long day of climbing, and I feel like I can’t go any farther, I concentrate on the next three feet. And then the next three feet; and then the next three feet. Pretty soon, I’m at the top.”

Conditions in the marketplace are extremely challenging.  For many companies and their leadership teams, it feels like they are out on a ledge, on a mountain too tall to climb, with visibility so bad, one has no idea which route to take. 

Things are changing so rapidly in the business landscape, yet it  seems every day brings more questions than answers.  Right now, we are all asking, “What will re-opening look like?  What will customers do?  How and when do we re-hire?  When will the economy rebound?”  We just do not know the answers yet.                

In the face of that uncertainty, management teams can move their businesses forward by focusing on a  few key things:

1. Focus on what you can control.

This is first and foremost.  There are a lot of things out of our control, but we can control movement, momentum, and action forward just like Royal Robbins.  What do the next three feet look like for your organization?

2. Create and monitor a “picture” of your customer.

They have almost certainly changed.  Assess their current state and carefully watch for changes over time.  How healthy are they?  Can they buy?  Will they buy – just because you have a great deal to offer perhaps, will the customer take it at any price?  How do you best reach them with what you have to offer?

3. Map out the desired journey, with detours.

There is no better time to have a clear plan, even though obstacles seem to constantly appear.  No different than scaling that mountain when bad weather arises, you might have to take another route up, you might have to take an intentional pause, or possibly even go back down a bit.  The key is planning ahead of time on the available options – have contingency plans throughout.  It is highly unlikely the route will go exactly according to Plan A, but thinking ahead of time of possible options will make it much easier to nimbly shift when the storm comes, and also much easier for the team to follow.

4. Have a cash flow plan.

An essential piece of that plan is cash flow.  It needs to be on paper and go out at least the next 2 to 3 months.  The goal is not to get it perfect; it is more of a compass to help with direction in making decisions.  It will change frequently, and it needs to be reviewed as much as multiple times per week.  When is cash likely to come in? (Be very conservative).  Lay out the key buckets of expenses in the business.  And make sure there is an understanding of any deferred expenses such as rent, loan payments, etc., that may have accumulated during the last few months.  A great best practice is to compare forecast to actual – this can really help fine tune the process.

5. Seek guidance from key strategic partners.

Having the right banker, CPA, lawyer and other strategic resources has arguably never been so important.  They can provide you with key insight and resources, can help you strengthen your planning, and provide context on the broader market.  You should not be alone in these uncertain times, and these partners are there to help you navigate.  If they are not of help right now, find ones that will be.  You will need them to reach the summit.

The journey is not going to be easy, but the opportunities will be abundant as the market rebounds.  Even in this time of uncertainty, companies can take proactive steps to not only survive, but to thrive as well, even if just three feet at a time.

Practical Tips for Managing the PPP

The Payroll Protection Program (PPP) has provided a lifeline to assist businesses through the economic confines caused by the COVID-19 pandemic.  For many small businesses, confusion has been constant with respect to loan status, forgiveness and how to manage the loans once they are funded.  There is a good bit of blanket guidance that has been put out by the SBA, accounting firms and law firms, but final details surrounding the program are still a moving target.  Thus, the average business owner may well find themselves wondering what to do to manage the PPP funds for their individual business. 

First, some quick background

  • The program was rolled out quickly – speed to market meant a sacrifice of perfection in rollout – lenders were not equipped to handle the rush of applications.
  • The process has been managed bank by bank – it operates a little differently across the spectrum.  We have seen many sets of information requests, calculation forms, submittal processes and loan documents.  We expect forgiveness to operate the same way.
  • Rules and guidelines have changed depending on when submissions were made – in other words, the very first to submit applications may have been operating under slightly different guidelines.

The takeaway from this is that what has happened to a neighbor’s company may be very different from what happens to yours.

What to do?

  • Talk to your banker – They will be the best source of information on how each individual bank is handling forgiveness of the loans.
  • Don’t assume anything – Forgiveness guidelines are fluid, some bank docs don’t even reference forgiveness in their loan docs, some are more specific.  While there are general guidelines such as the 75% payroll, 25% other uses limit, there is gray area on how certain expenses will be defined for forgiveness.
  • Keep good records – We certainly recommend setting up a separate bank account for PPP funds for ease.  Regardless, track the uses of the money.  Just like the rush to apply for funds, there will be a rush of forgiveness requests.  You will be well served to make it easy on your bank to understand what happened.  Be prepared with payroll reports, check copies, etc.
  • Be conservative initially – Don’t spend all the money early.  If the money is gone and then you find out a portion is not forgivable, that could be a problem.  Better to be cautious initially until guidelines are clearer.
  • Avoid non-conforming uses – There are companies that will use this money for other purposes, even if temporary.  That is a big risk.  Even if everything can be trued up within the 8 weeks, it could cause forgiveness issues or worse as many of these loans will be audited.  Fines are able to be levied as well.   
  • Don’t place forgiveness above a business decision – The goal of the program is to help restart businesses and keep workers employed, however, there is still a business decision element here.  Especially given the uncertainties around what “re-opening” will look like, be thoughtful about how to spend the money.  Paying a portion of the workforce to sit idle for weeks may not make sense.   Thus, having a portion of the loan not be forgivable may make broader business sense.

The bottom line is to be intentional with decisions.  Plan as though there will not be another lifeline on the horizon.  Used properly, these PPP loans can be a great bridge to help companies navigate toward a rebound in the economy.  Just beware the missteps that could make a tough situation even worse. 

Navigating through a Crisis – Immediate Steps to Take

None of us could have expected the disruption to daily life that a sudden pandemic can cause. News changes by the minute, and countless businesses are faced with significant and, in many industries, severe pain.
There is no easy solution to a crisis, especially one with such a global macroeconomic impact. Standing still can be fatal, while taking action too extreme can cause more harm than good. While each business is unique, there are some best practices and positive steps businesses can take to hunker down, weather the storm, and make the best of a terrible situation.

Manage Cash Carefully and Proactively

  • Know exactly what you have on hand, today and tomorrow. Put in on paper as best as possible
  • What cash is committed already that has to go out the door? What accounts receivable are potentially in jeopardy – either in timing or payment altogether? What access to capital do you have from a bank line of credit? Investors may be willing to provide short term capital as well. You almost certainly want to obtain all capital you can get your hands on.
  • Cut controllable, non-essential expenses wherever possible.
  • Exhaust these options to identify how much cash you will have to work with to manage through, as this is likely an overriding guide to other decisions that need to be made.

Communicate with Stakeholders

  • It is never pleasant to deliver bad news, but time and time again, through multiple crises including this one, we have seen firsthand how proactive communication can make all the difference. This means lenders, vendors, landlords, investors, insurance brokers, etc.
  • Be open, and honest, and not afraid to ask for help from them and craft a solution together. They are partners in your business too.
  • Reach out to customers as well. They might be looking for payment plans from you. Far better to know their situation as soon as possible, and it will also improve retention and market share, as this will be ignored by some of the competition.

Prioritize Needed Changes

  • Crises like we are in now create some of the toughest decision points businesses have to make. The conversation around what cuts and changes may need to occur to ensure the doors stay open, while necessary, is very painful.
  • The key is to keep as many options open as possible. Take a look through all the uses of cash in the business and where possible, prioritize and group into categories. There will be immediate cuts, but likely 2 or 3 different categories – 1) non-negotiable, 2) need to have but the business would exist without, and then other areas that the business could trim back on where needed for survival. This A, B, C list, for example, can apply to vendors, departments, positions or other expenses.
  • Prioritizing like this forms the basis for a game plan that also allows for different actions down the road if needed, instead of taking one swift action, thereby firing all the bullets in the gun at the same time.
  • Maybe instead of cutting staff, hours could be cut back. Perhaps vendors could be negotiated with on current payment terms, even if purchasing down the road has to eventually change if the business situation does not improve. To be clear, this does not mean to dip a toe in the water around tough decisions – it means exploring “what ifs” going forward.

Manage the Short Term and Long Term

This chaos will end at some point. However, we lack the crystal ball to know when and how. While survival in the short term is a must, it should be done in the context of future impact as well.

  • A business with cash tied up in inventory right now should have a plan in place so that once consumption increases again, that inventory can be sold and turned into cash.
  • Plenty of companies in history have missed the “rebound” and failed in the long term. Don’t put all the eggs into survival today to run into trouble tomorrow. The sustainability conversations will be different near term and long, but the overall plan should contemplate both.

Pause on Non-Essential Decisions

  • This is a time for critical decision making. Plans prior to the crisis that are not mission critical to the business at this moment, for example a planned investment, hire, or product change, likely should be paused at least until there is better clarity on the real picture of the business.
  • Crises create a lot of noise, not all of which may be permanent. Often best to let the dust settle.

The American entrepreneur is incredibly resilient and has long been the lifeblood of the economy. There is no stopping that role into the future. This too shall pass, but it no doubt will require extremely hard decisions, tenacity, and teamwork. Great opportunity awaits on the other side of a crisis. We will rise from this challenge as well. Stay safe and stay strong.

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