Dealing with Reduced Cash Flow Issues during the COVID-19 Pandemic

It is important that you develop a business recapitalization plan to help your business prepare for reduced cash flow by doing the following:

• Build a 13-week cash flow statement
• Negotiate with your lenders or new lenders
• Evaluate whether or not you should recapitalize your business
• Seek alternative and junior capital sources

Business Liquidity Assessment

Begin by assessing the following variables related to your cash flow so you can understand your business’s working capital situation:

• Determine the amount of cash, including accounts receivable you know you will collect, that is immediately available to you.
• Forecast your cash burn rate, which is the amount of money your business spends, for a month.
• Determine how much debt you have and your ability to meet all your financial obligations.

Debt Covenants

The US Department of the Treasury and the Federal Reserve are currently assessing alternatives to enable lenders to relax enforcement of loan covenants to buy time to carry lenders and borrowers until the economy stabilizes.

• Most credit agreements state limits or thresholds for certain financial ratios that the company may not breach. 
• A material decreases in EBITDA (earnings before interest, taxes, depreciation, and amortization) will likely trigger a breached covenant.
• If a breach occurs, the lender commonly provides a 90-day cure period to renegotiate the agreement, repay the principal or resolve the breach through other actions agreed upon.

Intermediate Capital Solutions

If your lenders aren’t flexible in renegotiating the terms of the loan, you have options. 

• Your business can try to refinance its debt with a senior lender such as a bank or asset-based lender.
• Your business can pursue recapitalization of the balance sheet by seeking junior capital sources, which can include subordinated debt and preferred and common equity.

Recapitalization Protects Your Business

Recapitalization restructures your business’s debt and equity mixture, typically replacing short-term obligations with longer term capital.

• While most senior lenders require a shorter period of time and rigid repayment schedules, junior lenders may offer terms of up to seven years with flexible repayment schedules.
• Preferred equity can be negotiated to allow PIK (Payment-in-Kind), adding the dividend to the face amount of the security.
• Common equity rarely requires a dividend or scheduled payments.

As we are learning to navigate through these times of uncertainty and adjusting to our new normal, we here are at The Foresight Companies want to be your go-to source for all topics related to your business operations.

Please visit our COVID-19 Business Operations Resource Center frequently for updates.

If you have any questions or concerns, please do not hesitate to pick up the phone and give one of us a call at 1-800-426-0165.  

*Please note that as information is updated and modified, terms and conditions are subject to change.