Preserving Value in Your Business and Accessing Short-Term Capital Needs
In the face of empty store shelves, vacant city streets, and stay-at-home orders, businesses are assessing their greatest short-term and long-term risks. An approach to Enterprise Risk Management (ERM) ensures you know your greatest vulnerabilities as you look to weather the Coronavirus pandemic.
To put the current situation in context, consider the many areas of business risk.
- Compliance – Created by failing to follow federal, state or local law, regulation or policy
- Financial – May result in loss of physical assets or financial resources
- Operations – Affect ongoing day-to-day management processes
- Information Security – Failure in the confidentiality, integrity or availability of an information system
- Strategic – Affect an organization’s ability to achieve its goals and/or objectives
According to survey findings produced by WOMPLY, 73% of businesses say they wouldn’t survive with sales ceased for six months.
Right now, businesses are likely looking at increased risk in every one of these areas with a particular focus on the financial risks stemming from business interruptions that are likely uncovered by any insurance coverages.
Engaging an ERM process will take you through the stages of planning; identifying your greatest risks; analyzing your options; planning all possible responses; and monitoring progress as you control and track your success.
For many businesses, this will require immediate needs for capital.
Loan Programs for Small Businesses
Two distinct disaster relief funds could benefit small businesses and offer access to capital.
Economic Injury Disaster Loan (EIDL) Program and Paycheck Protection Program (PPP)
The EIDL is aimed as those entities that suffered substantial economic injury in a declared disaster area within the United States. They can be for-profit or not-for-profit organizations. Substantial economic injury means the business is unable to meet its obligations and to pay its ordinary and necessary operating expenses.
EIDLs provide the necessary working capital to help small businesses survive until normal operations resume after a disaster.
On the first page of the applications, applicants must ensure they check the “Economic Injury” option. Failure to do so will result in applying for the wrong loan.
| Economic Injury Disaster Loan Program (EIDL) | Paycheck Protection Program (PPP) |
|---|---|
| Maximum Loan Amount | |
| The maximum loan size is $2 million with an optional advance of up to $10,000 from the SBA, to be distributed within 3 days. Applicants are not required to repay this advance if they are subsequently denied a loan. | The maximum loan size is $10 million calculated based on 2.5 times average monthly payroll costs for the 12 months preceding the loan origination date. Payroll includes salaries, commissions, tips, certain employee benefits (including health insurance and retirement benefits), state and local taxes and certain types of compensation to sole proprietors or independent contractors. Payroll costs do not include compensation of an individual over $100k annually (the first $100k is eligible). |
| Interest Rate | |
| 3.75% for businesses, 2.75% for exempt organizations | 0.5% |
| Loan Term | |
| Up to 30 years | 2 years |
| Payment Due Date | |
| First payment plus accrued interest is due one year after the loan origination date. | First payment plus accrued interest is due at least six months after the loan origination date. Can be deferred up to one year. |
| Qualified Loan Use | |
| Financial obligations and operating expenses that could have been met had the business not been impacted by the coronavirus disaster. | Payroll costs, group healthcare benefits, insurance premiums, and interest on mortgages or other debt incurred prior to February 15, 2020, rent on any lease in force prior to February 15, 2020 and utility payments. |
| Lender | |
| U.S. Small Business Administration (SBA) | A Bank that does SBA 7(a) Loans, underwritten by the SBA |
| Collateral Required | |
| The SBA will place a UCC lien against the assets of the business for loans over $25,000 but will not preclude eligibility for the loan if sufficient collateral is not available. | No collateral is required from either the business or its owners |
| Personal Guarantees Required | |
| For loans over $200,000, owners of greater than 20% of the business, managing members of LLCs, and managing partners of LPs will have to provide personal guarantees, although no liens will be taken against real estate owned by the guarantor. | None |
| Loan Forgiveness Program | |
| None | Loan proceeds will be eligible for forgiveness based on the amount spent by the business during an 8‐week period after the origination date of the loan on payroll costs (including health insurance and other employee benefits), interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020. |
| Limitation on Loan Forgiveness: The amount to be forgiven is reduced based on failure to maintain the average number of full‐time equivalent employees as compared to the period from either February 15, 2019, through June 30, 2019, or January 1, 2020, through February 29, 2020, as selected by the business. The amount forgiven is also reduced to the extent that compensation for any individual making less than $100,000 per year is reduced by more than 25% measured against the most recent full quarter. Reductions in the number of employees or compensation occurring between February 15, 2020, and 30 days after enactment of the CARES Act will generally be ignored to the extent that reductions are reversed by June 30, 2020. Debt forgiven under the program will not constitute cancellation of indebtedness income for federal tax purposes. | |
Coronavirus Aid, Relief, and Economic Stimulus (CARES) Act
Tax Provisions
The CARES Act proposes several tax provisions, including cash rebates $1,200 if single with an annual income of less than $75,000 or $2,400 if married and an additional $500 per child if joint income is less than $150,000.
The Act also proposes an employee retention credit of 50% up to $10,000 wages for a furloughed employee. It would delay payroll tax payments for 2020 until 2021 and 2022. Further, all 2020 estimated tax payments would not be due until October 15, 2020 for individuals and businesses.
Unemployment Rules
With jobless claims increasing rapidly, including 3.3M individuals filing in a single week recently and 6.6M in the week after, the Act would expand benefits to self-employed and independent contractors with a $600 per week increase to 7/31. An additional 13 weeks of benefits would mandated beyond what states allow for those needing it.
Small Business Provisions
The Act offers paycheck protection for small business, which would mean forgiveness of loans if maintain payroll. A portion of forgiven debt would be applied to payroll costs, interest on mortgage, rent, and utilities. The federal government would offer eight weeks of assistance retroactive to February 15, 2020. There would also be debt relief for six months, and the Small Business Administration (SBA) would be required to pay principal, interest, fees on existing SBA loans.
Federal Tax Relief
Other recently developments have included the automatic extensions to file and pay federal income taxes until July 15, 2020. This applies to individuals as well as partnerships and corporations. There are no interest or penalties.
It is important to note that this does not apply to gift, estate, payroll or excise taxes. It applies to first quarterly estimated payments due originally on April 15, 2020.
Most states are following suit on state tax extensions.
Families First Coronavirus Response Act (FFCRA)
FFCRA requires certain employers to provide paid sick leave or expanded family and medical leave for specified reasons related to the virus.
Under the Act, there is some tax relief through refundable payroll tax credits related to paid sick leave and paid family medical leave for private companies with fewer than 500 employees. These tax credits are 100% refundable.
Companies are to pay employees full wages up to $511 for 10 days ($5,110 in total) if they unable to work due to:
- Employee being subject to quarantine
- Employee being advised by health care provider to self-quarantine
- Employee experiencing symptoms
Companies are to pay employee two-thirds of full wages up to $200 per day ($2, 000 in total) if they unable to work due to:
- Employee caring for another individual subject to quarantine or advised to self-quarantine
- Employee caring for child when school is childcare facility is closed
Companies are to extend Family Leave if an employee is unable to work due to care for child under 19 when school or childcare facility is closed. The paid leave is not to exceed 10 weeks and is at two-thirds of regular pay or $200 per day with a $10,000 maximum.
Companies will receive a credit for health insurance coverage during leave period as follows:
| Paid Sick Leave | $5,000 | $10,000 |
| Payroll Tax Liability | $8,000 | $8,000 |
| Pat (refund) | $3,000 | ($2,000) |
Other Considerations
As businesses analyze their situation, they should consider a number of other factors.
For example, they should review their Business Interruption Insurance policy. Most of these policies exclude interruptions for viruses. Be sure to check the policy for specific exclusions.
Now is the time to speak with your lender about other lending options, such as payment deferment options (principal and interest for three months), interest only payments, and fee suspension programs as well as any other options they might be able to offer.
Market Thoughts
The equity markets have experience significant volatility in recent days and weeks. While it is too late to de-risk portfolios, huge opportunities exist currently in the municipal bond market.
Additionally, corporate credit markets are in the cheapest 5% of history.
Moving forward, scaling into equity positions is the prudent approach.
The biggest risk factors are policy errors on the healthcare and fiscal stimulus fronts.
Ultimately, there are numerous reasons to be more bullish when looking at the data.
Steps to Take to Manage Your Risk Today
When identifying immediate actions to take, consider these seven recommendations.
- Be Prepared and Have a Plan – Develop or refine your current plan; conduct scenario planning; identify risks and manage them to the best of your ability; identify new markets, clients and products that are recession resistant
- Manage Cash Flow – Develop 13-week rolling cash low forecast; accelerate A/R; decelerate A/P; expand lines of credit; and eliminate expense
- Manage Capital – Reduce inventory; limit capital purchases; reduce debt; expand lines of credit; and engage in the sale/leaseback of capital assets
- Attend to Clients – Prioritize critical clients; address clients’ needs; seek new clients; and diversify clients
- Attend to Staff – Address low performers; retain valuable staff; utilize temps for demand fluctuations; outsource non-strategic centers; and train, train, train
- Focus on Sales and Marketing – Continue marketing; understand your value in times of crisis; train/retrain sales staff; accelerate time to close; and increase marketing to key customers
- Utilize a Dashboard and Track Early Warning Indicators – Monitor, monitor, monitor; track what drives your business; and include early warning indicators
Coronavirus Resource Center
Have more questions about the impact of the coronavirus on your business? Visit Marcum’s Coronavirus Resource Center for up-to-date information.
