Financing and Loan Options to Weather Covid-19 Crisis
As we approach mid-May 2020, the mergers and acquisitions market for companies in the $5 - $25 million revenue range is in flux. The impact from the virus and shut-down has varied significantly by industry, geography, distribution channel, supply chain and many other factors, and the pandemic will also impact M&A on a deal by deal basis. However, here are some general themes we are seeing and hearing:
Unlike 2008, banks currently have strong balance sheets. Therefore they are potentially well positioned to help businesses with liquidity issues.
- First step, call your existing banks and lenders. Your existing banker may be the best option for access to additional credit, to extend or reinstate a line of credit. If you have not already done so, call your banker.
- If you have any existing debt, and your business has been impacted by COVID-19, you may be able to defer payments. Most major banks are offering deferrals on debt for 90 days. On March 21, Governor Cuomo issued an Executive Order stating that banks (those subject to the jurisdiction of the NYS Department of Financial Services) must grant a forbearance to any person or business facing financial hardship as a result of the COVID-19 pandemic for 90 days. If they do not, it would be deemed “an unsafe and unsound business practice.”
- The bank is going to want a story as to how you plan to come out of this. Put together a plan now.
- Here are sites for various banks on the Coronavirus response, numbers to call, etc.:
2. State, local and community loan programs.
3. Small Business Administration (SBA).
- As a response to COVID-19, there are now two federally funded programs available via the SBA:
An SBA Disaster Loan (also called Emergency Economic Injury Disaster Loan Assistance or EIDL) is issued directly by the SBA, and is available in counties that are declared disaster zones, which now includes all of the U.S.
- Here is the site for the SBA disaster loan application. https://disasterloan.sba.gov/ela/
- Annual interest rates on SBA disaster loans are 3.75%.
- Disaster loans are capped at $2 million.
- Proceeds can be used for operating expenses, including accounts payable. Proceeds cannot be used to acquire fixed assets or to pay back shareholder loans.
- TBD how long your disaster loan will take to get approved. As of March 30, the SBA rolled out a new simplified application, that does not require documentation. You may be contacted later for additional information and documentation. The application also provides the option to receive a $10,000 emergency advance, that should be delivered within days of applying, and may not need to be paid back, even if you are not approved for the full loan.
- The SBA is also providing daily webinars on how to apply. Check here.
Paycheck Protection Program. The $2 trillion relief package, the CARES Act, includes the Paycheck Protection Program (PPP), designed to help small businesses to keep employees on payroll, and pay rent, utilities and mortgage payments.
Unlike the SBA Disaster Loans, this program will be administered by participating lender banks, but guaranteed by the government. You will need to apply through a bank. Banks will accept applications starting on April 3.
- Call your bank to find out if they will be a participating lender, and when and how you should apply. All SBA lenders and many other banks will participate.
- The maximum loan available under this program is the lesser of a) 2.5x times the average monthly totals of payroll for last year (capped at annual salary of $100,000 per employee); or b) $10 million.
- Payroll costs can include: 1) Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee) 2) Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit 3) State and local taxes assessed on compensation; and 4) For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
- Businesses must have less than 500 employees to be eligible.
- Proceeds from this program can only be used for payroll obligations, rent, mortgage interest, and utility payments. The portion of the loan that is used for payroll, rent, mortgage interest or utility payments for a period of eight weeks after the loan is approved will be forgiven. There may be reductions in the amount of forgiveness if headcount is reduced compared to last year, or if salaries are reduced by more than 25%. As of April 1, the Treasury Department is indicating that 75% of the proceeds may need to be used for payroll.
- Interest rates on these loans are 0.5%. Fees to apply are all waived. No interest or payments for first six months. Similar deferment provisions will also apply to businesses with existing 7(a) loans.
- More details and a sample application are available here.
- Also see our blog post on Differences Between an SBA Disaster Loan and the Paycheck Protection Program
4. Facebook Small Business Grants Program: Facebook is offering $100 million in cash grants and ad credits to businesses experiencing disruptions as a result of COVID-19. The application is not yet live, but you can sign up to receive information here.
5. Factoring. Several factor companies are currently providing accounts receivable and purchase order financing. Although fees will vary, the cost associated with factoring is likely to be significantly higher than most other type of financing. However, you may be able to get financing in 5-7 days, with less paperwork. Find out if you can pick and choose which accounts to sell and which invoices to finance, and if there are minimum size requirements.
Please contact us at firstname.lastname@example.org for any help, updates and introductions to lenders we know and have worked with. Please bear in mind that this information is evolving. Please check with us, your banker or CPA for any recent updates and changes to this information.