DATE: March 30, 2020
AUTHOR: Anna Masker
The COVID-19 virus has left many businesses struggling to survive. Demand has dried up, customers are taking longer to pay, vendors demanding payment and tightening credit. The overhead you were carrying to grow your business just doesn’t make sense for the new norm.
If your business was on uneven footing before the crisis, it will be difficult to recover. If you were managing your business on the borderline of profitability, lax in your collection efforts, or were leaning heavily on borrowing to make ends meet, you are probably in a tough spot.
Even those that were on stronger financial footing and not in the industries directly impacted with government mandates to shut down are still going to struggle. The recovery may take months, and in some cases a year or more to get back to “normal.” Few companies we know have a cash runway to last them through this ordeal.
Even if you had good cash flow before the crisis, banks are being very cautious about additional lending. Call your banker and see what he/she may be able to do to either increase your line or work out more favorable terms. After all, they want you to stay in business so that you can repay the loan. We strongly recommend you take advantage of the government programs available through the CARES Act– the terms are excellent. As of this writing, however the turnaround times from the time you apply until the time the money is received is yet to be determined, and you may still need cash to bridge you until time of funding.
There are other online lending options like Kabbage or OnDeck Capital that come with high interest rates. Cash advances from credit cards are another option. While these may have short turnaround times and may provide an alternative if your bank is unwilling to lend you additional funds they are very costly with typical interest rates above 20%.
Assuming you have exhausted all those options, or don’t want to go with high-interest rate options and you still need cash, there are a few defensive strategies you can use for an emergency cash infusion. Think of these strategies in the same category as an emergency brake on a train or a pulling the fire alarm in a building. They have both personal and financial implications that will not go away, even if your business shuts down. You should never employ these strategies without a well thought through plan on how you will repay the money.
Draw down your line of credit. If you have funds available to you on your line of credit and you fear it may be retracted, it may make sense to draw down your line and put the money in a separate bank for safekeeping until you need it. The downside of this is that you will begin to pay interest on this amount and most lines of credit have personal guarantees. If you not extremely diligent with this money, and you are unable to repay the loan if your business closes, you may find that your home or other collateral maybe at risk.
Tap your retirement accounts. Under the CARES Act there is a provision allowing you to take money from your retirement accounts with limitations but without the normal penalties. While this may be a good short-term strategy, you need to consider how close you are to retirement and the implications on your long-term financial plan.
Friends and family loans: You may have used this strategy in your startup phase, now you may need to go back to friends and family again. If you do this, you should create a written loan document including term of repayment and signed by both parties. This will make sure that you are compliant with the tax laws. The downside of this option is the long-term impact this could have on your personal relationships if you are unable to pay back the loan.
These options are, as we said, a defensive strategy to keep your business alive, but come with high risks on a personal level. Before employing any of these options it is imperative that you have a plan for repayment. Acting out of desperation, scrambling to find cash to make payroll, or dealing with vendors and keep their business alive, can cloud your judgement and downplay the risks. Think through your plan before you engage in any one of these.
If you need help working through your cash plan and options for finding financing, please contact us.