COVID-19: Preparing to Meet with Your Lender – How to Get Better Outcomes
Many business owners find themselves seeking financing options, whether to help the business adjust to current economic conditions or to capitalize on new opportunities that have arisen. There are a multitude of financing options available. How do you go about accessing them? What should you do to prepare for a meeting with your lender?
Some of the more common types of financing:
• Operating lines of credit
• Equipment financing
• Mortgage financing
• Term loans
How has COVID-19 impacted your business?
The lending process for different types of financing is very similar. Lenders typically start by calculating ratios to assess your company’s liquidity, performance, and ability to repay debt. This was the case pre-COVID and still applies today.
Businesses must also articulate to their lender how COVID-19 has impacted their business, the industry in which they operate, and how they are managing through these turbulent times.
Depth of disruption
• How significant are product or service reductions?
• What will recovery look like?
• What is the impact on sales and AR collection?
• What are the company’s operational plans?
• Are there low-risk opportunities to improve the company’s cash flow?
• Are suppliers open to extended payment terms?
• Are payment holidays available?
|Immediate workforce challenges|
• How are you managing staffing levels?
• What actions have you taken to ensure employees’ safety and mitigate risks?
• Are contracts with key customers/suppliers impacted by the disruption? What is the liability?
• What are the risk factors that could escalate costs?
• Is there a plan to prioritize and protect the company’s most valuable/important customers?
• Are you proactively negotiating with customers if contractual obligations cannot be met?
Sharing cash flow forecasts helps your lender understand your business
Conducting regular cash flow forecasts is a part of good business planning. During a crisis, it is especially
important to conduct various scenario assessments, including both short and long-term forecasts.
Anticipating various scenarios will not only help you make better business decisions, but it will also help you be better prepared – do you need to reconsider payment terms? Will you need financing to cover cash shortfalls, and if so, when?
Prepare scenario-based cash flow forecasts and be open to sharing them with your lender. It provides greater insight into your business plans as well as the sources and uses of your cash.
As part of your scenario-based cash flow forecasts, these are some of the questions you should be asking yourself:
What if sales do not rebound as expected? Consumer buying behaviours and patterns have changed so you may not be back to your baseline sales levels this year or next.
What if there is a deterioration in gross margin? Margins might be impacted by higher input costs, tariffs, or foreign exchange, to name a few. How are you going to manage? Are there certain product lines that are profitable? Are there any product lines that should be discontinued?
What if capital investments required are more than budgeted for? Additional sanitization measures (e.g. installation of plexi-glass, personal protective equipment (PPE) for your staff) can be quite costly which can start to add up. You’ll need to make sure you plan for these ongoing costs as you prepare your cash flow forecasts.
What if the company pivots to a new business line/offering? How will this impact your cash flow?
What if collection of accounts receivable is slower than anticipated? Or worse yet, what if one of your significant customers files for bankruptcy and you are unable to collect a significant outstanding receivable balance?
What if relief measures are not extended? Or what happens when they end?
Preparing for your meeting
- Have something written down (either a business plan or a brief overview) or give a well-organized verbal explanation of your plans
- Be clear with your expectations (i.e. products, timeline, terms, partnership with the bank)
Bring important documents
• 3 years of financial statements
• Aged AR, AP, and inventory listing
• Interim financial statements
• Interim aged AR, AP, and inventory listing
• Business plan and projections
• Ownership and organizational charts
Nice to have:
• 3 months of bank statements
• Any management reports or qualitative information that is readily available
• Any qualitative information you have on customer and product breakdown
In advance of meeting with your lender, it’s important to be prepared. Remember, as a business owner or CFO, you know your business and industry best. Don’t assume your lender is aware of the intricacies of your industry. Be prepared to give an overview of your business and where it’s positioned in the marketplace. Be prepared to share your business strategy, including both short-term and long-term plans, as well as how you propose to carry out your plans. Your banker wants to understand your business plan and how you plan on executing it. Your business strategy should be all-encompassing and include financial and operational plans, sales and marketing plans, and human resources or people plans. Having a well-thought-out and documented business plan you can share with your lender assists with the conversation and adds a layer of sophistication and credibility to the process.
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