By Rebecca Gubbels
March 20, 2020 (updated content and links-April 3 at 8:40am)
Drowning in a sea of email, websites, and information about COVID-19 for small business, entrepreneurs and contractors? Not sure where to begin? Don’t panic, the Missouri SBDC at UMKC is here to help you navigate these choppy waters and get back to smooth sailing as quickly as possible.
First things first, start your business’s coronavirus response by ensuring that you, your staff, and your customers are staying safe and healthy. Once you’ve cared for your all-important human capital, you should quickly begin conserving and planning for your company’s financial capital. Keeping in mind the goal of having 90 days of cash on-hand for operating expenses, start thinking through the following cash flow management practices.
Cash Flow Management Practices
Hold off on major purchases – While things are so uncertain, big capital expenditures should be postponed if at all possible.
Pay your bills slowly – While things are in flux, do not pay your bills any faster than you have to. Take advantage of the full agreed payment terms to hold onto your cash longer. The goal should be to pay your creditors as slowly as possible without incurring a negative consequence. You should also reach out to all suppliers, creditors, landlords and banks for possible modified payment terms. Many banks are already offering to modify their existing loans down to interest only or no payments for the coming 3-6 months.
Reach out to your business insurance agent – Some business insurance policies may cover situations like COVID-19, especially if you carry a business continuity policy. You may have Force Majeure coverage providing assistance for financial losses arising out of the inability to bring a project to completion. Reach out to your agent to see what, if any, coverage is applicable to you.
Manage inventory – Inventory is essentially your business’s cash sitting on a shelf. Now is a great time to consider cancelling or delaying planned inventory purchases. Get creative with current inventory on-hand. Can it be returned or exchanged with your vendor? Are there ways to incent customers to buy current inventory using discounting or other incentives? More ideas for managing inventory can be found here.
Consider reducing your payroll expenses – We entrepreneurs are only as strong as our teams. That is what makes managing payroll so hard in light of the likely impact on your co-workers who are often also friends. However, unprecedented times possibly call for unprecedented measures. At this point you should at least begin postponing new hires and considering reducing hours and laying off nonessential employees.
Bill sooner and collect faster – If you offer credit to customers, be sure to bill them promptly. Right now we recommend ensuring that you’re billing just as soon as work is completed. Then consider your collection practices. The time might be right to consider offering your customers a small incentive if they then pay what they owe you super quickly. At a minimum, you need to be following up on receivables a few days before they’re due to ensure your customers remember the invoice and plan to pay on time. The key here is to treat your customers, the lifeblood of your company, with empathy and respect while balancing your own cash flow needs.
Evaluate new distribution methods – Look for ways to boost your newly limited in-person traffic. Could you still be solving problems for customers but in different ways? Does creating a subscription service, setting up e-commerce, adding delivery, or implementing curbside service benefit your customers? We at the Missouri SBDC have a pet store client now offering same day local delivery to help customers and their pets get what they need while safely in their homes. Read more about how one local yarn shop has adapted here. Now is definitely the time to creatively adapt, if you’re able.
Now that you’ve assessed what cash conservation actions you’re planning to take, you’ll need to figure out how long your current cash reserves can last or your “cash runway”. Start with this quick calculation:
Current cash balances/Monthly cost still happening in virus response months = Your cash runway measured in months
You might also want to do this calculation a second time including sources of cash that you technically have access to but may be presently hesitant to tap.
CASH RUNWAY (USING ALL CURRENT CASH ACCESS OPTIONS)
Current cash balances + amount of cash that could be tapped (existing credit cards and/or lines of credit)/Monthly costs still happening in virus response months = Your longest currently available cash runway measured in months
Accessing these lines may or may not be prudent as circumstances continue to develop, but you should have awareness of both timelines. Additional cash runway calculation information can be found here.
Prepare to Extend the Runway
Many companies are finding that their cash reserves cannot cover operations for long. So, how can you fill the gap? First, reach out to your current bank to see what options they may have available. There are some other regularly accessible sources of funds like your bank’s conventional financing or factoring accounts receivable that may now warrant reconsideration, but there are also some forthcoming emergency loan options.
Area microlenders and community development financial institutions are hustling to offer interim financing. Their available loan amounts are comparatively small… often capping out at $20,000 or $50,000, but they’re comparatively FAST. These amazing community resources can be quick because they are typically much smaller operations than banks, and they aren’t responsible for taking and protecting depositors’ funds. AltCap has already modified an existing loan product to meet local borrowers’ immediate funding needs. Many states, regions, and cities are also putting together assistance mechanisms. Learn more about AltCap, Justine Petersen, and all the pre-existing Kansas City area loan funds at KCSourceLink here.
SBA Related Disaster Financing
The Small Business Administration has begun offering direct Economic Injury Disaster Loans (EIDL) for small businesses with substantial economic injury. Here “substantial” means that a business is unable to meet its obligations and unable to pay its regular and necessary operating expenses like rent, staff, etc. due to COVID-19. The SBA has also empowered all of their SBA Preferred Lenders to begin offering Paycheck Protection Program (PPP) loans to cover 2.5 months of payroll related expenses for businesses harmed by COVID-19. Here is a complete and regularly updated comparison of the various SBA related disaster funding options.
The next step is to apply. However, application is the beginning of the underwriting process, not the end. The minimum application requirements for the direct from SBA EIDL loan path and the application can be found here. A sample of the PPP program’s bank application can be found here. You can apply for that by reaching out to your local SBA lender. We want our clients to do more than just apply, though. We want our clients to gather all of the paperwork below to prepare for approval. Application has been made as simple and streamlined as possible to help get as many businesses as possible into the consideration funnel. However, many items need to be verified, considered, and calculated during the underwriting process prior to approval and the end of the loan funnel… funding.
The following list is suggested for a well-qualified application, fully prepared to answer any underwriting questions that may arise. Please begin gathering and/or creating all of these items right away.
- Payroll Information – Please gather the following pieces of information about your company payroll:
- Total number of full time employees as of February 15, 2020
- 2019 average monthly payroll expenses including wages, commissions, health care and retirement benefits, and any owner’s draws or other owner payments while excluding any FICA taxes
- For PPP loan purposes, please cap any employees that earn more than $100,000/year at $11,111 in monthly wages.
- Payroll Tax reports (forms 941 for the past six quarters and 1099s) for the previous 18 months
- Past 3 Years of Business Tax Returns – If you’ve been in business less than three years, provide as many returns as you have filed. Tax returns hold more sway and legitimacy than internally prepared financials. There are reasons to consider filing your 2019 return as soon as possible. Do also be aware that the IRS has extended the deadline to both file and pay your taxes until July 15th. Missouri has followed suit.
- 4506-T – While you’ll be asked to fill in recent tax information, the SBA will have you authorize them to check with the IRS to ensure accuracy using a 4506-T form. Be sure to get your entity legal name listed accurately. All info should match tax return EXACTLY. That form can be downloaded here: https://www.irs.gov/pub/irs-pdf/f4506t.pdf
- 2019 Income Statement – Show your company’s performance for each month of 2019 as well as the year’s total.
- Required if your 2019 taxes have not yet been filed
- 2019 Balance Sheet – Provides perspective on what your company owned at the end of a “normal year” and whether those assets were purchased by owners (equity) or other people’s money (debt).
- Required if your 2019 taxes have not yet been filed.
- 2020 Monthly Income Statements – Further evidence of how your company was doing prior to the beginning of the pandemic response.
- Current Balance Sheet – Gives the most recent statement of assets, equity, and debt.
- Business Debt Schedule – Gives required details about all current debts. This form should be prepared in advance of your application and is downloadable here: https://www.sba.gov/sites/default/files/tools_sbf_sba202.pdf
- Operating Documents – Gather your “I’m a real business” documentation. Corporations will have Articles of Incorporation. LLCs should have Articles of Organization (some single member/only one owner LLCs will not have these, though). Partnerships should have partnership agreements. There is no equivalent paperwork for sole proprietors. You may be working under a name other than your legal company name and have a separate fictitious name filing, as well. You should gather your Certificate of Good Standing, as well. All of this information can be found on the Secretary of State’s website: https://www.sos.mo.gov/business
- Business Narrative – The SBA or any new lender will need to have some background information about your business. Create a professional business summary of:
- Who are you and your company?
- How was the company performing prior to COVID? You’ll need to document the case that the reason you’re struggling now is because of COVID rather than a continuation of previous issues.
- How you’ve retooled in these unexpected circumstances:
- This should include measurement of your decreased customer traffic, reduced sales, and other recent (and anticipated!) business harm.
- It should also include what actions you’ve taken to solve your cash flow needs outside of this loan request.
- How much money you need and what you will use it for:
- While the SBA will calculate 6 months of operating expenses for EIDL (maximum loan amount $2 million) and the bank will calculate 2.5 months of payroll expenses for PPP (maximum loan amount $10 million), you should be ready with calculations of your own to ensure you’re being correctly awarded the maximum amount.
- The SBA and any SBA Preferred Lender that you’re working with can only calculate correctly if the information you provide them is accurate. Make double, extra sure your financial information entered is properly before submitting!
- How you plan to be able to pay any new loan back:
- No payments will be required until 6 months to 1 year later depending on which program (EIDL or PPP) you select/are awarded
- Prepare a written description of how you’ll be able to repay the loan amount (automatically amortized over 30 years for EIDL or 2 years for PPP) and the other assumptions you’ve included. The SBA knows this is unprecedented and that we’re all trying to figure things out. However, you must demonstrate ability to synthesize all that you know so far about your company, your industry, and your customers and make some best educated guesses.
- Should ideally include 3 years of projected income statements (spread monthly for year 1) and accompanying balance sheets. Your existing accounting software can typically generate projections from historical data that you may then edit. Your bookkeeper or accountant can help create projections. Your SBDC counselor can also assist you with getting started, but more importantly, with reviewing your assumptions and strategic decisions included in the projection process.
- Who are you and your company?
- NOTE on Multiple Businesses – You will need to disclose any business “affiliates” defined by the SBA as business parent companies, subsidiaries, holding companies (for assets like real estate), and/or businesses with common ownership or management. Our recommendation is that you put together a chart that shows all of the businesses you own, how many employees each business has, what each company’s revenue is, and the percentage of ownership that you control as an individual. This chart will help document your adherence to the necessary SBA size standards.
- Past 3 Years of Personal Tax Returns – Anyone who owns 20% or more of your company will need to provide the last three years of their personal tax returns.
- 4506-T – You’ll be asked to fill in recent personal tax information, and again the SBA will have you authorize them to check with the IRS to ensure accuracy using a 4506-T form. All info should match tax return EXACTLY. That form can be downloaded here: https://www.irs.gov/pub/irs-pdf/f4506t.pdf
- Personal Financial Statement – All company owners and investors with greater than a 20% ownership stake should be prepared to provide a current listing of their personal assets, debts and net worth. The required PFS form can be downloaded here: https://www.sba.gov/document/sba-form-413-personal-financial-statement-7a504-loans-surety-bonds
- Personal Credit Score – All lenders will review 20+% owners’ credit history and credit scores. Even in disaster, historical evidence of repaying creditors is still the best indicator of likelihood to pay new creditors. While not something you need to actually submit like the rest of these items as lenders will independently pull this information themselves, you should proactively check all three of your credit reports and scores either directly with Experian, Equifax, and TransUnion or with a reputable aggregator like Fair Isaac Corporation (FICO).
- Entrepreneurial service agency Justine Petersen has resources to assist with personal credit building and repair, if necessary.
Knowledge is power. You now have the knowledge and the power to take action. The Missouri SBDC is here to help you take action. We are ready to help you with this entire process so you can find calmer sailing waters. We have multiple advisors who can help Missouri businesses in a wide variety of ways including assistance with financial projections to determine your cash flow needs and repayment ability. Our goal is to make our clients into the best qualified applicants for any assistance.
Contact us today. You don’t have to sail alone.
Stay Strong and Small Business On!
Business and Program Development Consultant
Missouri Small Business Development Center at UMKC
4747 Troost Avenue, Suite 108
Kansas City, MO 64110