Navigate the crisis with a clear understanding of the tools available to help sustain cash flow.
The word “unprecedented” is often used in tandem with the COVID-19 crisis, and in many ways that is true. Never in our era has economic activity come to such an abrupt halt. It goes without saying that the most urgent need for many businesses is managing near-term liquidity. While you cannot control the pace of reopening or macro-level declines in demand, there are steps you can take to diversify financing, support liquidity and ride out the crisis. Below, we detail strategies for generating liquidity amid COVID-19.
The earlier your lenders become aware of emerging issues that your business is facing, the sooner they can help you to address them. Waiting to communicate proactively until the situation is dire greatly reduces the lender’s flexibility given various regulations that restrict their ability to restructure loans once they are deeply distressed. Early intervention is critical. Lenders are often more receptive to these conversations when you provide them with a well-developed cash flow projection that includes upside, base case and downside scenarios over the next several months.
Talk to alternative capital providers such as senior and junior debt lenders and equity investors (for example, private equity and venture capital). At this point, no one knows the full scope of the crisis, how long it will last, or what recovery might look like. Understand which lenders and investors are “open for business,” and line up relationships early so you have potential alternative sources of capital available if and when you need them down the road.
Consider processing invoices more frequently, providing customers with discounts for paying on time, and exploring alternative uses for excess inventory. Review accounts payable to ensure you are not overpaying and are taking full advantage of available discounts, and discuss opportunities to extend payment terms with vendors. While postposing cap-ex and right-sizing payroll costs may be critical to navigating the crisis, be mindful of your ability to remain competitive as the economy reopens.
Work with your tax advisor to accelerate deductions, defer revenue and take advantage of new tax provisions in the CARES Act. Among others, CARES Act tax provisions favorable to business owners include:
Net operating loss (NOL) carrybacks up to five years for taxable years 2018-2020, losses permitted to offset 100% of income in taxable years beginning before 2021
A refundable payroll tax credit for 50% of wages paid to employees, up to $10,000 per employee, for businesses suspended due to government shutdown orders that do not receive Paycheck Protection Program loans
A 2020 employer payroll tax deferment, with deferred installments due one-half at the end of 2021 and the other at the end of 2022
It may make sense to consider selling non-core assets, equipment or divisions of your business to generate additional liquidity, particularly in light of any shifts in your business’ strategic priorities as a result of changes in the industry landscape in the months and years ahead. Also, think about pursuing strategic acquisitions of other businesses in adjacent industries or direct competitors in order to increase market share, support cash flows and better position your business to be competitive over the long term.