We have seen firsthand how the cash infusion from the Paycheck Protection Program, or PPP, has kept companies afloat since the pandemic struck. However, as just about every business has experienced, the goalposts on the program have been constantly moving, and as we sit today, there are far more questions than answers, particularly around forgiveness. So, what should a business with a PPP loan be doing right now?
A Little Context
Actions You Can Take
As we sit, there is still a good bit of uncertainty, however, there are steps to take until the dust settles.
Just like with the original PPP loans, it is in the best interest of the bank for their clients to achieve forgiveness. The process is still very fluid. Both banks and the SBA itself do not have the resources to manage through an extensive forgiveness process. As such, it would seem more changes to simplify the process are coming. What we do not know is what and when. While not easy, an educated waiting game is likely the smartest, least disruptive course of action.
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.
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 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.
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:
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?
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?
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.
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.
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.
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 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?
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.