Positioning for coronavirus recovery

As financial and legal landscapes evolve with the changing environment of the Covid-19 virus, sectors are strategizing about how to best prepare for the recovery period.

Businesses can still take advantage of the Paycheck Protection Program (PPP), but they should know about its changing requirements and what some of the best strategies might be.

At the same time, if your business needs financial assistance, the process could be a bit more protracted.

NH Business Review reached out to a pair of experts to learn some of the ways to best position a business for the inevitable return to post-pandemic normalcy.

Our experts:
Patrick Closson, Director and Chair, Corporate Department, McLane Middleton. mclane.com
William E. Kidder, Jr., Sr. Vice President and Senior Lending Officer, Ledyard National Bank. ledyardbank.com

Patrick Closson, Director and Chair, Corporate Department, McLane Middleton

Q. How did the recent “necessity certification” update by the SBA affect the forgiveness process of the PPP?

Closson: “On May 13, 2020, the United States Small Business Administration updated its Frequently Asked Questions to provide guidance on the certification concerning the necessity of a loan under the Paycheck Protection Program (PPP). The certification that borrowers are required to make is that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”

The SBA established a safe harbor for any borrower with an original principal amount of less than $2 million, which provides that these borrowers will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

“For borrowers with original principal amounts in excess of $2 million, compliance with the necessity certification will be based on the borrower’s circumstances. The SBA explained that borrowers with PPP loans in excess of $2 million are subject to the requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If the SBA determines that a borrower lacked an adequate basis for necessity of the loan, the SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the loan is repaid following receipt of notice for repayment, the SBA will not pursue an enforcement action.

“Since May 13, the subsequent guidance, interim rules and form of Forgiveness Application that have been issued by the SBA have not provided any additional clarification, insight or interpretation of the ‘necessity certification.’”

Q. What advice would you give to someone who is now considering applying for the PPP because of the necessity update?

Closson: “The recent guidance does not significantly change the obligation that someone who applies for a PPP loan must do so based on a good faith belief that the ‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’ The $2 million safe harbor may provide applicants with some measure of comfort, but I would not advise someone to apply for a PPP loan if they are unable to make the required certification. The rules associated with the PPP loan are complicated and have changed several times over the past two months (and there are discussions in Congress that additional changes may be made to the program). In order to obtain forgiveness, an applicant will need to complete a forgiveness application that requires a significant amount of detailed information regarding how the proceeds of the loan where used, and requires the applicant to retain records of how the funds were used for a period of six years. This burden is largely outweighed by the ability to quickly access money that is needed to support the applicant’s business.”

Q. How does the PPP loan distribution reflect the need in New Hampshire?

Closson: “The demand for the PPP loan funds was very high during the first round of funding and the initial part of the second round of funding. This demand demonstrates the need that New Hampshire businesses and nonprofits have for this funding. Given the complexity of the program and the guidance that has come out regarding the program, I believe that some businesses decided not to apply for these funds because of concerns about their ability to qualify for forgiveness or not wanting to get involved in a program that was constantly changing. While there continues to be significant need among New Hampshire’s businesses and nonprofits, at this point these organizations seem to be focusing on reopening and getting back to business.”

William E. Kidder, Jr., Sr. Vice President and Senior Lending Officer, Ledyard National Bank

Kidder: “You may have made it through the Covid-19 stay-at-home order with varying degrees of success, or events may still be seriously impacting your business. In either event, you will want to look forward and ask, ‘How I can best position my business for growth and recovery?’ To the extent that your business relies on bank financing to support its operations, you may see a different focus in the questions being asked, and an increased scrutiny on lines of credit in particular.”

Q. What does your income statement look like going forward?

Kidder: “Banks have generally considered historical performance to be a good indicator of future performance. The events surrounding Covid-19 have altered this assumption, and you will likely see requests for income statement projections with a deeper analysis of the assumptions behind the projections. Banks understand that forecasting performance in these times is difficult and inexact. For this reason, the assumptions made and the ability to clearly explain the basis for the assumptions will be important.

“Questions around revenue may include:

• How will your products or services change post pandemic?
• Are there new business opportunities that you will pursue?
• How have your customers been impacted?
• When and if purchases will return to historical levels.
• Will you have to make concessions in either price or terms to reach the projected revenue?
• “Cost of goods sold may prompt questions about the diversity and strength of your vendors, as well as potential changes in costs or payment terms. Operating expenses have likely been reduced during the pandemic, perhaps through concessions on the part of vendors, landlord and employees. Questions are likely to arise related to when those concessions will be removed, and if they will create a future liability.
• How will you determine when to bring personnel back and what will the new work environment look like?
• What increased costs will there be associated with operations as a result of employee or customer expectations for safety precautions?

“Ultimately the projections and assumptions will define when your business will return to the historical norm, or what it will look like if transitioning to a new normal.”

Q. What does your cash flow look like in recovery?

Kidder: “I hate to say it but managing cash flow in a downturn can be easier than managing cash flow as you re-open and sales increase. During these difficult times, vendors, lenders and landlords may have made concessions or allowed payment deferrals; wages and salaries may have decreased, been eliminated or been supported by an SBA Paycheck Protection Program loan; you probably reduced inventory levels and collected accounts receivable — all of which supported the business’s cash flow.

“As you begin to return to more normal operations and increase your sales, your cash flow projection will be important in not only managing the business, but in allowing your bank to understand how and why they should support your working capital needs. The cash flow projection should address the impact of any deferred payments and vendors returning to normal terms, as resuming too early may deprive the business of cash flow necessary to support the increase in wages, inventory and accounts receivable. Inventory levels may need to be increased – for example, many restaurants that closed donated their perishable supplies and will now need to restock. Suppliers may have challenges of their own which could lead to reduced credit limits, changes in terms or increased pricing. All of which may impact your business cash flow, production capacity or sales. The final step in the cash conversion cycle is the collection of your accounts receivable, which may be at greater risk due to financial weakness in your customer base. Will you reevaluate the credit terms you extend? What impact will there be on sales or on cash flow?

“If you have an SBA Paycheck Protection Program loan, make every effort to maximize the forgiveness aspect of the loan. During these challenging times, businesses will need to be creative, flexible and seek every opportunity to maximize cash flow and profitability.”