As the United States begins its transition back to “normalcy” post the COVID-19 pandemic, millions of small-to medium-size enterprises (SMEs) are beginning to witness COVID-19 business repercussions as they reopen.
When owners return to their respective companies, they will be looking at the building or offices that they have called “home” for a good part of their lives. It is these buildings, these offices, and these operations that have provided for them, their families and hopefully for generations to come. They return and flip on the switches that turn on the machines, that make the products they sell and that build revenues and ultimately fuel our economy. As many of us in the financing arena agree, COVID-19 turned everything upside down for millions of people and has placed unprecedented stress on the capital markets, banks, and other capital providers.
Many banking professionals have been and are still working endless hours in a day, seven days a week to fund their small business clients. Their dedication and conviction to their customer’s success has not gone unnoticed. It’s these core business customers that these banking professionals work so hard for – the sub $50MM a year revenue company. These companies, that span all industries, are expected to recharge our economic stability. When the pandemic hit and took hold, SMEs and their financial partners never realized how their company and financing relationships were going to change.
As the days turned into weeks and the weeks to months, many SMEs began experiencing the “cash crunch” and saw their precious liquidity evaporate. Many, if not all, of the banking professionals I know were busy deploying the necessary government PPP funds, financing the vital life line of cash that is supporting payroll obligations of the loan portfolios.
As the dust settles and smoke dissipates, business doors will begin to open again. It’s when these doors open that independent lenders like myself will need to be ready, be willing and be able to assist the SMEs in what I call the “collateral dilemma”.
Balance Sheet Analysis
Pre COVID-19, the balance sheets of many SMEs were right-sized and fit the financial metrics of the company and their commercial lenders. As the pandemic event took control and the shutters were put on businesses, balance sheets began to morph. Collections stopped, receivables and payables began pushing out, sales screeched to a halt and the inflow of cash was gone. One thing remained, the debt the company had, but now it is even bigger.
As these companies remained closed, the once pristine balance sheet that supported all of the collateral that the commercial lender was comfortable lending into and against now looks very different. Questions are being asked in monthly portfolio review meetings. Borrowing base certificates are out of formula. The precious availability that supported the business has now all but dried up.
It is at this moment that many of us in the asset-based arena start to sharpen our pencils, put our reading glasses on, and commence the true balance sheet analysis of carving up the company’s assets in A/R, inventory, and fixed assets. It is our job as the asset-based players to assist our commercial lending comrades, helping them make sense of what looked good in the past and fit the credit box.
As the pandemic drags on and COVID-19 business repercussions are presented, many SMEs are facing capital and liquidity issues with their lender. There’s probably been an analysis that’s determined that the once abundant level of collateral that secured the loan is now either running with no working capital availability or has gone negative, potentially driving an over-advance situation.
There is not one business owner that I know that has enjoyed receiving a call from their lender to discuss potential collateral shortfalls and the requirements needed to cure compliance issues. It’s at this point that the management team understands that the business relationship with their commercial lender has changed and moving forward, the company will be scrutinized to ensure that balance sheet assets and cash controls are running concurrently and in unison. If the loan-to-collateral levels begin to fluctuate to a point of nervousness, the lender may formally request that the owner infuse cash into the business.
The End Game
As the country and economy gradually reopen, all of us lenders have one goal in mind: help and assist the SMEs. Our individual credit criteria and collateral requirements make each one of us different and attractive. There will be SMEs that need to reorganize, restructure, and accomplish turnarounds before they are back on their feet. And there will be SMEs that will not make it and be forced to close their doors forever, bringing an end to a family legacy or generational succession plan.
In either event, the one fact that remains constant is that there will always be lenders that understand, embrace and finance the collateral dilemmas.