Using debt to get your business through coronavirus

The decision to take on debt is a significant one for any business in normal times.  For businesses severely affected by COVID-19 shutdowns, debt-use consideration takes on heightened importance.  If your business is able to borrow or had credit lines available to draw down, the question becomes how to best use those funds to shore up your business.  With the uncertainty surrounding the length and severity of business disruption, prudent debt management is essential.

Prioritizing where loan proceeds should be used for the overall health of your business can be difficult. You need to balance using funds while being careful not to become so deep in debt it becomes a burden to management. Many owners are retooling their business plan in light of this business environment and could use debt for short-term cash flow disruptions and to fuel future growth.

Short-term action and long-term viability

If your business has been severely affected by the pandemic you may need to take significant short-term action just to stay viable before thinking about the long-term. While you’re focused on the near term, you can still keep an eye on the big picture.  Here’s how:

• Start with immediate needs. If you use proceeds to rehire staff and purchase inventory once you re-open or scale back up, be sure you are realistic about the revenue that this will generate and how much time it may take to rebuild.
• Plan for retrofitting. Budget for needs to retrofit your business for ongoing economic disruption; getting set up for mail order sales, or social-distancing within your workplace, as well as change of marketing outreach or to build a new audience, for example.
• Stress test. Do more than the usual amount of financial analysis and stress testing of your cash flows to assess your ability to repay the loan on time.
• Assess alternatives carefully. Financing using receivables or invoices that have become difficult to collect (called factor financing) can open up the option to acquire cash for inventory or other needs even if you do not qualify for typical bank loans. Because this type of financing is more expensive, offered at deep discounts to value, it should be a last resort.

Recent loans received as part of the stimulus package (Paycheck Protection Plan Loans) and other SBA emergency programs also have some forgiveness provisions which must be navigated carefully. The US Treasury has recently released new guidance about loan forgiveness eligibility which is less strict about how forgivable PPP funds can be used than the initial rules.

Business problems and contingency planning

With interest rates extraordinarily low, borrowing can be appealing right now. However, proceed carefully because most business loans have adjustable rates and payments may go up in the future.  Borrowing may be a vital way for you to sustain your business through this uncharted territory, but it will not fix fundamental business problems that may have been affecting you even without the virus.

Be honest about your needs and capacity and ability to manage your debt. And, of course, continue to do contingency planning.  All of the other threats to your business: natural disasters, death or disability of a key employee, competitive threats, do not go away because there is a bigger all-encompassing threat.

Your ability to maintain, and even grow your business during this evolving landscape is certainly a challenge. But, what a remarkable achievement it will be once we are on the other side of this crisis.