What Should Lenders Be Asking Now? Updated August 18, 2020
Two months ago we discussed the questions that lenders should be asking their borrowers as borrowers were beginning to finalize their June 30, 2020 results and report the initial impact of the Covid shutdown and the CARES Act program funds. With the end of August around the corner, the second quarter results and even July 2020 results are available.
It is time to consider updating and expanding discussions with borrowers looking toward the remainder of 2020.
The outline of questions is a guideline to facilitate a discussion focused on the thought processes the business is going through and the financial impact over the past few months and into the future. Open ended questions that encourage a discussion are the most important tools lenders can use to understand their borrowers and the impact of the Covid-19 situation.
Here are Focus Management Group’s suggestions.
What is the new normal for the business?
With the changes that are taking place on a daily basis, a quarterly reforecast is a key business planning tool that is needed for any business. Businesses that are accepting there is a new normal and are developing plans to move forward, understanding the new normal, are being successful.
From an income statement perspective, questions should center on these discussion areas:
How are revenues and expenses expected to be impacted moving forward?
Are there changes in customers?
Are there changes in products or product mix?
What happens to margins with these changes?
Are vendors still providing products and services?
Have new vendors been identified?
How have employee counts changes?
What is happening with employee benefits?
Have rent or lease abatements occurred?
Have estimated tax impacts been addressed?
From a balance sheet perspective, questions should center on these areas:
-Where are government program deferrals and loans accounted for on the balance sheet?
-Working Capital Management
How has the accounts receivable aging been performing?
Are inventory levels being adjusted as needed?
How has the accounts payable aging been performing? Are vendors providing working capital as expected?
Have loan payments been made as agreed?
If the borrower has a line of credit, is it sufficient to fund operations?
The questions we initially raised about the CARES Act should be revisited:
Did the Company receive a PPP loan?
-If so, how much was received, what lender provided the PPP loan, and what was the funding date?
How have the loan proceeds been used?
What is the amount of forgiveness expected?
-Has the Company begun the process of applying for loan forgiveness?
When do they expect to apply for forgiveness?
Have the required documents been organized and prepared for submission?
Did the Company receive an Economic Injury Disaster Loan (“EIDL”)?
-If so, how much was received and when?
Has the Company participated in the payroll tax deferral program?
-If so, how much has been deferred to date?
Has the Company participated in any other programs specific to its industry?
-Agriculture: B&I loans, USDA purchase programs.
-Health Care: Accelerated payments, Advance payments, Provider Relief Fund
Is the Company planning to participate in the Main Street Lending Program?
It will also be important to consider details regarding business operations:
Is the business currently operating, and if so, at what level?
-Are employees on site? Are employees working remotely?
-Is the business operating differently in various states or regions?
-What has been the impact of any CDC or government requirements?
Change in workflow?
-What are staffing levels and how has employee availability been impacted?
-Is the head count back to pre-Covid levels?
-Are qualified people available?
-Have wages been increased?
-Have bonuses been necessary?
-For employees who have taken wage cuts, when will wages be restored?
Work from Home (“WFH”)
-Have work from home policies been implemented?
-Will those policies change?
-Has the work location been permanently impacted?
-Will the office footprint change?
-Have costs increased for cleaning?
-Are reconfigurations of production, office or retail and services spaces necessary?
-Have rent payments been deferred? If so, to when?
-Have loan payments been deferred? If so, to when?
-Have lease payments been deferred? If so, to when?
The challenges of 2020 underscore the value of using a weekly cash planning tool. This is an excellent time to suggest that a borrower implement and use a weekly cash flow plan, and if appropriate, a weekly borrowing base forecast.
-Weekly cash flow anticipating cash inflows and outflows.
Is a weekly cash flow currently being prepared?
Would assistance in preparing a cash flow help the company?
-Weekly borrowing base forecasting.
Rolling forward accounts receivable.
Rolling forward inventory.
Rolling forward accounts payable.
Is availability under the line of credit sufficient to support working capital needs?
The key to these questions is to help anticipate what NEW NORMAL looks like and the impact on the operations, the cash flow and the financial reporting of the business.
Focus Management Group has additional resources explaining:
The different CARES Act programs
Part 3: Accounting for the CARES Act Payroll Tax Deferral Program
Accounting and reporting considerations.
Working capital management.
Please use the links to our website’s Insights pages for articles on these topics. Call us if there is anything you would like to discuss with us. Watch our archived webinars on these topics.