In the midst of the COVID-19 crisis, most businesses are looking closely at cash flows, revised financial models and where to find additional capital. By now, you’ve probably read about the various government funding options that have been made available. Some of these arrangements, notably the Paycheck Protection Program, come in the form of government-secured loans that will be issued through your bank. These funds are available on a first-come, first-served basis, so there’s some urgency in approaching your financial institution to discuss the program and apply.
Beyond these new government-backed programs, however, we’re seeing banks reluctant to issue new debt that wasn’t already in play somewhere within the credit process before this all started. Financial institutions appear to be focused on serving existing customers and ensuring companies have the resources they need to make it through the crisis before looking to issue new loans.
But what about talking to your bank about existing debt? Most businesses are in the midst of modeling out the financial impact of COVID-19 and looking for ways to conserve cash, which includes taking a hard look at all normally incurring cash outflows and making decisions about what to do with those expenses during this time of uncertainty. Financial institutions understand this and may be an outlet of support in your efforts. Principal and interest payments are often significant costs that many businesses have; a number of banks are offering relief to customers in the form of restructuring principal payments, providing flexibility on interest, or a combination of the two.
Beyond the need for principal and interest relief, companies may also have issues meeting certain compliance requirements outlined within existing debt agreements. Some businesses may be challenged to complete their audit or review on time. Most bank agreements require audited or reviewed financial statements to be submitted within 90 days, 120 days or within some other agreed-upon timeline. That means that audited or reviewed 2019 financial statements are generally due by April 30. Other businesses may be at risk of failing certain other financial covenants due to the economic impact of COVID-19.
We’re seeing that proactive, honest and open conversation with your lender on any of these issues as the best way to go. Banks understand the challenges created by COVID-19 and want to be good business partners. At this point, we’re not aware of any financial institutions that are issuing blanket waivers for convenant violations, nor are we aware of many banks issuing any automatic principal and/or interest relief. Rather, banks seem to be addressing each issue on a case-by-case basis. Based on a number of informal conversations with certain lenders, banks will want to talk with you to understand the impact COVID-19 is having on your business. You should also be prepared to provide and discuss updated cash forecasts, financial models and best-guess assumptions based on what we know today.
Although all banks want to further understand your needs and issues, we’re seeing many adopt very customer-friendly policies with respect to these conversations. Relief is often being provided to customers who need it, and many banks are being lenient on issuing waivers for covenant violations. Most lenders we’ve talked with recently are more interested in looking to the future rather than the past. They want to understand how COVID-19 will continue to impact your business.
The Paycheck Protection Program has accelerated many of these conversations, but if you haven’t talked to your bank yet, you should do that very soon. Please don’t hesitate to reach out and start these conversations now.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.