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March 23, 2020

COVID-19: Liquidity During Turbulent Times

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One area of concern you may have as a small to mid-sized business owner is seeking liquidity during turbulent times. Accessing capital can be a challenge for small and medium-size businesses in times of uncertainty. These companies form the backbone of our economy by employing local labor and investing in the communities where we live. Access to capital is shrinking as the epidemic hits closer to home, and many are asking where do we turn? Before evaluating sources of capital, one must plan ahead for the capital request by evaluating the essential cost of operations and the expected duration.

  • Do you know which expenses can be “turned off” during an economic slowdown?
  • Are there discretionary expenses that can be eliminated, future capital expenditures that can be pushed off, or variable expenses that will go to zero?
  • What is the duration of the event, are there any gauges to monitor?

Right now, all eyes are on China, where the pandemic started, waiting to see the potential timeline for returning to normalcy. For example, many noted that as of March 18, Starbucks announced that about 90% of its stores in China are now open. But what do small business owners need to do if the reduction in productivity could be a shorter but deeper event than a business-to-business company operating on long-term contracts? Understanding the projected losses, after expense reductions, and duration can assist with the credit request. Once you control what you can control, you can begin to look externally for funding sources.

  • Capital sources, like bank loans or lines of credit, may be unavailable to new customers but likely represent a good source of liquidity if an existing line of credit is in place.
  • Accounts receivable financing could be an option to raise cash.
  • Non-bank lenders may have an appetite for a purchase order or inventory financing.
  • A final source of liquidity may be available via the Small Business Administration as Federal and State governments are announcing emergency funding packages. More information and the online application can be found using the following link: https://www.sba.gov/disaster-assistance/coronavirus-covid-19.

Some key points to consider:

  • Disaster areas need to be approved by the Federal government,
  • Currently, not all states qualify but we anticipate nationwide approval within the week;
  • The SBA will only provide credit if the applicant has no other capital available to them (e.g. bank financing availability, excess reserves, liquid assets, etc.);
  • If approved the SBA will provide up to $2 million in assistance at interest rates of 3.75% for up to 30 years;
  • Applicants may be able to qualify for traditional SBA financing if their emergency request is not approved.

As you look at the questions and financing options above, we want to support you as you choose which options are best and identify the best plan for sustaining and growing your business.

We can help

Thinking through the decisions that need to be made around liquidity can be overwhelming. If you are wondering where to start, or what to do next, the experts at Elliott Davis can help.

The information provided in this communication is of a general nature and should not be considered professional advice.  You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

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