Heart-to-Heart Every Lawyer Should
Have With Business Clients
By: Luis Salazar
Client, I’m glad we’re having this conference call because we need to have a frank talk. To survive COVID-19, your business must take realistic stock of its situation. If there is an issue meeting periodic loan repayments or financial ratio requirements, reach out to lenders for relief. Be proactive and transparent with vendors. Do it, today, not tomorrow, when it might be too late.
Economic conditions have deteriorated so fast that our financial system has a systemic problem. Rather than deal with borrowers on a one-off basis, banks will to try to work with you.
As a CEO/president/owner or CFO, examine what’s in the bank account, what can easily be liquidated for cash, and what’s realistically coming in terms of collections.
On the other side of the ledger, calculate how much must be paid over the next 60, 90 and 180 days. Look for ways to minimize that without cutting staffing to the point where your operations —and thus sales—fall so much you can’t pay your obligations.
With the numbers in hand, look at your credit status. Most businesses are required to maintain specific ratios of debt to assets, of cash flow to debt, and so on. Project how many weeks, or months, those levels can be maintained.
If you’re going to have financial problems, now is the time to have a hard talk with creditors to describe what’s happening and what’s needed. You should already have a good relationship with your lender. This important first step will help you negotiate a forbearance to secure additional credit.
Here’s what not to do: Say to the lender, “I’m sorry I didn’t come to you sooner, but we’re closing in a week if you don’t help me.” Give the lender time to act. Raising a credit limit takes time; the lender will ask for a lot of financial information. It will take time for you to deliver the numbers and loan officers to digest them.
Understand that the lender will likely make demands. It may be to shut down some of your operations or shed specific assets to improve your liquidity. And it’s not just to improve cash flow. The lender may want you to sell large portions of your company now in order to recover as much as possible in a future liquidation.
If you don’t like the terms, try to find a more risk-embracing lender. Expect it to charge you a higher interest rate and be more aggressive in taking an equity position. While that will pose a greater risk to the company’s future, it may also be the best way for the business to survive.
Don’t be surprised if a loan officer says, “Yes, you can have more credit, but we want to protect ourselves. We want personal guarantees, or additional personal guarantees.” The lender might also require that shareholders put equity in the company.
Before investing your personal funds, consider the lender’s requirement in terms of balance sheet and debt structure rather than dollars. You might be able to loan the company rather than provide equity. Just know that, as an owner or shareholder, if you’re facing a deep financial crisis, chances are that you’re investing capital regardless of how your investment is structured.
You might be tempted to keep your cash and file for corporate bankruptcy. I fear we will see that happen often in coming months. Know that, in many circumstances, an out-of-court liquidation or assignment for the benefit of creditors is less expensive, more effective and faster.
What we haven’t talked about here, because the president and Congress are still negotiating the terms, is what type of relief your business might see from the federal government. Clearly, it’s going to take more than lower interest rates.
Is Uncle Sam going to save your business? I don’t know. What I can say is that there is a light at the end of the tunnel. That light is not a train, it is hope. You may be very scared right now, but you will get past this. And I look forward to that day.
So, take a breath and say to yourself, “Oh, yeah, OK, I’m not the only one. I’m not alone. If somebody else can make it through this crisis, I can, too.”
The original article was posted on the Daily Business Review here.