When PPP Isn’t Enough

by Jeff Wright

The Paycheck Protection Program (PPP), along with other federal and state initiatives, helped many business stay afloat during the COVID-19 pandemic. Many would have closed permanently because they lacked the working capital to PPP loan forgivenessmeet their cash needs.

For those that survive COVID-19, PPP funds may still not be enough. Lack of liquidity will remain a significant problem, impacting normal business operations. Lower staffing levels, disruption in the supply chain, stretched receivables and payables, and decreasing inventory levels all contribute to out-of-formula positions and covenant defaults with lenders.

PPP money was only a band-aid meant to cover payroll and some overhead expenses for a short period and unlikely enough to meet all of a company’s future cash needs. Many will need additional support or investment from their lender or a third party to restart operations.

Lenders that have processed PPP loans will soon be dealing with the PPP loan forgiveness applications, and have not addressed the myriad of expected issues with their borrowers.  Sometime during the third and fourth quarter, however, lenders will review their loan portfolios and decide which clients they will work with to restructure their loans due to covenant defaults, out of formula loans and/or requests for additional financing. Others will be asked to seek an alternative source of financing. In order to buy additional time to refinance their loan relationship, they may be asked to enter into a short-term forbearance agreement which may include additional terms, reporting, and higher pricing. Some businesses may even be forced to sell or close their operations. Multiples, however, will be lower resulting in a discounted selling price from pre-COVID-19 valuations.

Merging with another company is a consideration, but it can take time to find the right partner, conduct due diligence, and negotiate a mutually acceptable agreement. Others will have no other option but to file for bankruptcy and reorganize. This option can be expensive and few survive over the long term. Additionally, the stigma of working with a company who is reorganizing while in bankruptcy may not have support from their lenders, vendors and customers to stay in business. Some companies will just close their doors forever. Management should rely on trusted advisors (attorney, CPA and/or turnaround consultant) to explain the best options available. Accurate and timely financial and collateral information must be available to prepare a plan and help negotiate a deal either with the bank or an alternative source of financing.

If a bank says no, and is unwilling to continue working with a business, there are alternative sources of financing for businesses requiring working capital. If the business has purchase orders (POs) in hand, a PO lender can provide financing for inventory purchases. This option is usually in partnership with a factor or asset- based lender who finances the invoices to pay off the PO lender and provides additional working capital going forward.

An asset-based lender leverages the receivables, inventory, machinery, equipment and real estate of a business on a formula basis to pay off its existing lender and provide additional working capital. These lenders provide financing to companies with high leverage, weak balance sheets or those that have experienced losses but are still viable. These businesses should be able to show their operating performance and plan to return to profitability. While the pricing is oftentimes more, asset-based lenders provide critical and essential access to working capital.

It’s best to begin thinking about financing options early before the cash need arises. Lenders need time to conduct diligence, get approval, and document the agreement. Waiting too long to obtain financing can result in further disruption and missed opportunities to operate and grow the business.

It’s smart to have a plan B to finance working capital needs when PPP isn’t enough.


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About the Author

Jeff Wright has been with the Hitachi team since 2006 and contributes more than 30 years of experience in the banking and commercial finance industry. He is currently responsible for business development in the Midwest region, and works with businesses and their trusted advisor network to provide factoring and asset-based lending services. Contact Jeff at (248) 259-3749 or jwright@hitachibusinessfinance.com.
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