Save Your Business during the Coronavirus CrisisChia-Li Chien
Chia-Li Chien, PhD, CFP®, PMP®, March 23, 2020
Small businesses in business sectors not deemed critical during the Coronavirus health and economic crisis are suffering heavily from mandated closures. Many states, including California, identified a list of critical sectors to remain operational during the Coronavirus (COVID-19), while the rest of us need to work from home or close the business until further notice. The stock market reacted volatilely to the uncertainty in this public health crisis. The ripple effect caused the federal government to assist those who need to stay afloat until we as a country stabilize with some potential solutions. The bipartisan relief packages are changing as new estimated damages arise.
Having standby working capital, such as a line of credit or an emergency fund, is a best practice for many businesses. However, no one knows the extent of the closure, and the possibility of exhausting the line of credit or emergency fund worries many business owners. The ups and downs of the economic cycle are expected; we don’t know the length of time or the resulting damages.
According to the 2019 Pepperdine Private Capital Markets Report, in a normal economic environment, capital providers refuse about one-third of the businesses who applied for a loan due to poor quality of the earnings or cash flow. About 95% of loans require personal guarantees and collateral. There is a wide range of capital providers, such as banks, private equity firms, or the Small Business Administration (SBA). The capital providers’ expected return ranges from 3.6% to 49.5% if the prime rate is at 3.5%, according to Slee’s book, Private Capital Markets. Yes, even the SBA has predetermined interest borrowers need to pay back.
As Congress and the White House consider bailout measures, in states that have declared a disaster, disaster loan assistance is already available through the Small Business Administration. The disaster loan assistance is available for small businesses, private nonprofits, homeowners, and renters in those states which declared a state of emergency including for Coronavirus (COVID-19) indecent. Businesses are encouraged to search for available disaster loans.
Loans will require repayment with interest and in some cases collateral. For the most part, the disaster loan amount is up to $2 million, with fixed interest rates of 3.75% (or 2.75% for nonprofit). The term could be up to 30 years. Yes, there is a collateral requirement if you borrow more than $25,000. You cannot use the disaster loan to refinancing or pay off your existing loans. You need to maintain proper insurance per SBA’s requirement.
For Coronavirus indecent, our Congress and Senate are still working through the possibility of forgiving and deferring these loans if they are used for payroll purposes at the time of this writing.
As I counsel clients about these potential options to keep their businesses open and ride through the economic downturn, I encourage you to consider applying for the Economic Injury Disaster Loan (EIDL) as soon as possible if your business has been impacted. There is limited available funding from the Federal government.
SBA developed a simple three-step process to apply for a disaster loan. You need to have business and personal financial data handy when applying. The personal financial statement or SBA Form 413 is required. SBA Form 413 helps to determine which of your assets could be collateralized. Your accountant or financial advisor can help you fill out the form if you are not familiar with the financial terminologies. Other than SBA Form 413, you will fill out and sign an IRS Form 4506-T, which allows SBA to access your tax filing records.
The question is, how much should you borrow? Unless the loan is forgiven, you or your business still needs to pay back the principal as well as interest. Your accounting or finance team can help you determine how much to consider borrowing. I don’t like to borrow money, and many of my clients have the same attitude. But in a desperate time, you want to take advantage of what’s available to keep your business open and prospering later.
I sincerely hope that you or your business do not need a loan. But if you do, and you have not initiated the discussion with your accounting or finance team, you should do so as soon as possible. Please remember the quality of your business earnings and cash flow is essential.
Don’t waste the Coronavirus crisis! Use this downtime to plan strategically, especially about your business model. Your business model needs to stay flexible in any economic climate. Together we can all come out stronger!
Everett, Craig. (2019). 2019 Private Capital Markets Report. Retrieved from: https://bschool.pepperdine.edu/institutes-centers/centers/applied-research/research/pcmsurvey/
Slee, R. (2011). Private capital markets: Valuation, capitalization, and transfer of private business interests (2nd ed.) Hoboken, N.J.: Wiley. (2011).