Practical Steps for Businesses Seeking Relief from Existing Lending Arrangements

Authors: Leigh Peters, Ryan Zahara

There are a number of practical steps that businesses can take to prepare for and obtain financial assistance or support in order to resume normal operations.

A number of lenders, financial institutions and secured creditors (collectively, “Lenders”) are taking proactive steps with their debtors in an attempt to normalize businesses operations impacted by COVID-19.

In this briefing, we will outline several considerations that are common among Lenders and factors which all businesses seeking relief or additional credit should be aware of.

Potential Approaches to be Taken by Lenders

COVID-19 has significantly impacted almost every industry and size of business. Lenders are likely to take steps to try and mitigate the impact on debtors in the short-term in order to allow them to stabilize their business and return to profitability.

Some of these steps may include, among others, the following:

  • deferral of principal and interest for a set period of time;
  • deferral of principal for a longer period of time if interest can be paid in the short term;
  • additional credit availability to help mitigate loss of income (may be backed by another financial institution to allow for funds to be paid out urgently); and
  • case-by-case assessment of amendments to loan documents to customize a period of relief, which could include granting additional liquidity on current borrowing capacity, new lines of credit or term loans to provide additional short-term liquidity, implementation of milestones to reduce relief granted over time and/or to set payment terms designed to bring the business back to normal operations.

Each Lender will take a different approach to dealing with debtors and the repercussions from COVID-19, but we expect these approaches to include some or all of those outlined above.

For debtors already experiencing financial distress prior to COVID-19 (i.e. ones with a higher credit risk or who are already being managed by a special loans account group) it is likely that most of the above will not automatically apply and Lenders will be analyzing the position of these debtors on a case-by-case basis.

What Can Businesses Do to Prepare for Discussions with Lenders?

There are a number of proactive steps businesses can take as soon as possible in order to increase the likelihood of obtaining assistance or relief from their Lender.

Lenders will be reviewing a significant portion of their portfolios to determine which loans must be addressed in the short term and to get a sense of what their current clients’ needs will be over the next several quarters.

If you are applying to a Lender for new credit, this application process may be more involved and take additional time (even if it is through a pre-approved government support program). Lenders will need to verify sufficient financial information in order to get credit approval to advance funds to the business. Having information organized and ready to present to the Lenders will help expedite this process and provide businesses with greater chances of obtaining the funding sought on the timelines required.

There are also a number of professional financial advisers who are willing to assist and provide advice on preparing financial plans or cash-flow modelling. If businesses have the means to engage professionals in the short-term to provide support in this area, it could result in an expedited process with the relevant Lenders and, therefore, immediate returns. These financial professionals can also assist businesses in presenting the most useful and relevant information for Lenders to make determinations on how much they would be willing to lend or on what the terms such lending might be made.

There may be some willingness on behalf of professional firms to defer billing or payment until a later date. Some may even be willing to act on a contingency basis for the opportunity to do work now, build upon a client relationship, or to create a new relationship with a new customer. For Lenders who are facing an overwhelming number of applications for new or additional credit, using a professional firm may be one way to get your application reviewed and approved as quickly and efficiently as possible.

Lenders will be looking to see that businesses have reviewed their current financial and operation positions thoroughly and that they have created business plans that address at least the following questions:

  • Was the business profitable prior to the onset of COVID-19? If yes, then this should be clearly outlined and supported by financial information.
  • How has COVID-19 impacted the financial results of the business? Businesses should be prepared to provide the following:
    • updated financial data, including updated budgets and cash flow models each showing COVID-19 impacts and a strategic plan, however volatile, for recovery which includes timelines and key milestones;
    • any cash flow models should include best estimates of cash flow requirements for the next few months as well as post-COVID 19; and
    • sources and use of funds spreadsheets showing impacts additional or increased financing will have on the business.
  • Have you considered operational challenges arising from COVID-19 and the length of time these challenges may present for? Including, for example:
    • supply chain management;
    • current inventory and projected turns;
    • current outstanding accounts receivable and likelihood that some, if not all outstanding A/R could be deferred;
    • impact on customer service, sales and deliveries of goods and services;
    • impact on fixed costs over time; and
    • impacts on workforce?
  • Have you engaged with vendors/suppliers, customers, and landlords to discuss alternate payment plans, rent deferrals, and accounts receivable extensions?
  • Have you discussed with customers potential for reductions in ordering, delivery times, and customer service interruptions?
  • Have you developed any strategies or implemented any measures to mitigate the impacts of COVID-19 on your business? Examples could include:
    • Developing new methods for delivering or marketing to your customers;
    • Reducing costs or overhead; and
    • Repurposing unused equipment or facilities to take advantage of government funding being invested to fight COVID-19.

Lenders are triaging, in some cases, greater than 200% of their normal requests for relief and additional credit.  Putting your best “financial information” foot forward can enable you to move faster and more efficiently through the process and turning your mind to the above, with the help of internal and external professionals, will be invaluable for navigating these unchartered waters.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.