As small businesses reel from the business disruption caused by the COVID-19 pandemic, it’s important to know the cash needs of your business over the coming months and the financing options available to you.
One compelling option is a hallmark of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748) signed into law by President Donald Trump on March 27, 2020—the Small Business Administration’s (SBA) 7(a) loan expansion, also known as the Paycheck Protection Program. It’s recommended that all small businesses with under 500 employees—or the applicable industry size standard, as provided by the SBA—consider applying for the loan if you’ve experienced business disruption as a result of COVID-19.
Below, we’ll explore:
Your organization should begin by assessing its cash needs under various scenarios likely to impact operations.
Variables to consider:
This type of model helps your management team run what-if scenarios and fully assess the company’s ability to fund its obligations through the immediate three-month period and intermediate 12-month period.
Once you know how much capital you need over the next three and 12 months, understanding where to get that capital is essential.
Companies that were unprofitable and illiquid at the beginning of the year will likely find it difficult to obtain new capital over the next several months, while companies that were profitable and generating cash flow have numerous options to protect the viability of their business. Many companies may soon find themselves vulnerable to violating loan covenants, perhaps for the first time.
There are four main options available to you.
This includes two options from the SBA: its 7(a) loan program expansion and the Economic Injury Disaster Loan (EIDL).
As part of the CARES Act, Congress enacted a significant expansion of the SBA’s 7(a) loan program, allowing for forgivable loans of up to $10 million to small businesses with less than 500 employees. See below for more details about the program and how to apply.
The EIDL can provide up to $2 million of financial assistance to small businesses or private, not-for-profit organizations. It provides relief from economic injury caused directly by a disaster—in this case COVID-19—but isn’t intended to replace lost sales or revenue. Learn more in this article.
Senior bank loans are exactly as they sound. They’re asset-backed loans provided by many of the major banks you know and work with every day and can be the most immediately available financing sources for your business, even in times of distress.
Thoughtfully prepared projections and negotiations with senior lenders could result in a successful extension of borrowing capacity.
Junior and equity capital represents largely unsecured investments in the form of loans or equity investments from investors and institutions.
There are thousands of junior and equity capital investors in the country, but they have higher return requirements and deploy capital in more specific situations. Also, when there are material decreases in profitability or prospects for business, these investors tend to shy away from riskier investments.
Capital can be available in some situations and should be discussed as part of a broader financing plan.
As a last resort, it may become necessary to generate cash by restructuring the business’s operations, which includes reducing staff or cutting R&D. For more details on restructuring options, including business recovery plans, see this article.
The significant expansion to the SBA 7(a) loan program comes with some interesting benefits to businesses.
As an example, if a business has $1 million in qualifying monthly payroll costs, the maximum loan amount would be $2.5 million, of which $2.5 million would be forgivable if spent on allowable uses in the eight-week period following the funding date of the loan, assuming reduction in employees doesn’t occur.
Applications are expected to be available for submission in early April.
To apply for the loan, contact an SBA 7(a) lender. The SBA’s 7(a) loan program will be serviced through existing and new SBA 7(a) lenders.
Utilizing an existing banking relationship with an SBA 7(a) lender may help expedite the process. A bank that has a high volume of activity with SBA 7(a) loans may be best prepared to answer technical questions that come up during the application process. The country’s top SBA 7(a) lenders are listed on the SBA website.
Importantly, it’s anticipated that SBA lending programs within commercial banks and the SBA program itself, will be resource constrained for the foreseeable future as a result of the SBA 7(a) loan expansion. Get your application in early, and seek advice so your application can be submitted timely and accurately.
Securing financing resources can be a complex process. Concurrently with applying for the SBA 7(a) loan program, consider modeling your cash needs over the next three and 12 months and evaluating your financing options. To learn more, contact your Moss Adams professional.