Proactively manage cash flow
If cash flows are expected to be tight, quick action is needed to preserve or generate cash. Borrowers should:
- Take advantage of “one time” cash benefits such as evaluating payments which can be deferred or negotiating payment relief where possible
- Consider alternative suppliers which may provide better terms or at least provide negotiating leverage with current vendors
- Prioritize collections of accounts receivable – and consider inducements to expedite payment
- Avoid making lump sum payments in advance for expenses
If active cash management is still expected to be insufficient, the borrower should seek other funding sources…lenders should expect a funding request or borrowers should pursue asset sales or equity sources/rescue lenders to fill the anticipated gap.
Re-forecast P&L performance in light of new realities
For many borrowers, the current year budget is likely no longer relevant and realistic. Whether working with the existing or a revised budget, a reforecast will be essential to more accurately predict the realistic outcome for the fiscal year.
ACTIONS FOR LENDERS:
Engage with borrowers
Understand the impact of COVID-19 on the business by requesting the information mentioned above. As the situation unfolds over the coming weeks and months, closely monitor the borrower’s cash and business activity to develop an almost real-time understanding of the business’s financial needs and condition. Ensure your borrowers have a plan that appropriately manages liquidity but balanced against preserving collateral value.
Assess the adequacy and possible deterioration of collateral
Perhaps most important is a dispassionate evaluation of how possible courses of action may improve or place greater risk to collateral value and/or enterprise value.
Expect funding requests and evaluate cost-benefit
Evaluate your borrower’s scenario analysis assumptions…it may be necessary to create your own sensitivity analysis to more critically assess risks.
Particularly if the disruption caused by COVID-19 extends from weeks to months, or even several months, lenders need to evaluate lending thresholds and capacity to extend new money or negotiate relief for borrowers through this period.
An independent firm can be used to review a borrower
Many skilled and talented management teams have limited experience managing through the degree of disruption and uncertainty caused by COVID-19. Lenders may benefit from an external review by an independent consultant to examine that a borrower’s cost structures are prudent, identify and manage risks, and ensure that the financial information provided (particularly projections) are realistic and comprehensively developed… a financial advisor or Chief Restructuring Officer can support organizations through times of distress and help drive stabilizing actions.
Review exit options
Given the current market uncertainty from COVID-19, M&A activity has almost slowed to a halt so the option to engage remedies and sell may not necessarily be practical or feasible. However, a lender should assess its options under a variety of scenarios that are critically developed and challenged.
How we can assist
We provide leadership and advice to guide our clients through times of challenge and uncertainty. We specialize in precisely the kinds of business challenges that are faced through the disruption caused by COVID-19.
We support organizations in liquidity management, creditor/lender discussions, cost reduction and business model review. We work either as advisors to companies/lenders or provide supplemental leadership (such as Chief Restructuring Officer). Everyone is affected by the COVID-19 pandemic. Having robust financial information and proactive borrowers and lenders will work towards the efficient resolution of cash flow problems through this period.