While thousands of small U.S. businesses have been frustrated by the rollout of the Payroll Protection Program of the CARES Act, at least there is a program for them. For midsized companies, ie, those with 500-10,000 employees, the aid plan promised by Congress has yet to materialize.
But if you’re waiting for details before you start preparing your application, you’re making a big mistake says Regina Lee, a managing director in the Houston office of AlixPartners, one of the nation’s top turnaround advisory firms. For more than 25 years, Lee has been helping clients deal with the fallout from disasters—both natural and man-made (think: fraud).
She says that while there are no details yet for the government’s program for mid-sized companies—not even a name—there are clues about what they will be likely looking for. Her advice: Get started with assembling your application process today. “The ones who are taking a wait and see approach are probably not going to end up very happy,” she says.
“We’re advising to really apply best practices for business interruption claims when you’re thinking about these CARES Act loans,” she says. Here’s some of what she’s counseling her clients right now:
Check your insurance.
Lee counsels that businesses immediately review—if they haven’t already—their insurance policies. Do they have a virus or pandemic exclusion? If those exclusions stick, the government will likely be the only place companies will be able to go for help in a time frame that would be useful. That will help you prove you need CARES aid.
Show how you were harmed by Covid.
It seems simple, but there’s homework here. “You need to track extraordinary expenses, track lost sales, track costs that the increase as a result of the issues that arise with your business shut down.”
Revise all of your forward-looking financial statements to comply with the terms of the loan program—as it is broadly understood now.
If you’ve planned a reduction in employees, you need to revise those projections to ensure that you are retaining 90% of your workforce at the compensation levels that are required, including benefits, through September 30. You should also to be able to confirm that you intend to restore at least 90% of the workforce that existed as of February 1, within four months after the Covid 19 emergency being over. “Well, when is that going to be, right?” She says. “So it’s very, very challenging to do these pro-forma financial statements, but we are helping clients through it.”
Figure out how much you need.
Unlike the PPP, there haven’t been any guidelines issued for how much a company will be able to request from the mid-sized program. A range of options is probably a good idea. “We’re doing our best to help our clients figure out what they should ask for and that’s based on those revised pro-formas.”
Do multiple versions of the financials.
Since no one knows for sure what exactly will be required of the pro-forma statement, Lee suggests you do multiple versions so you can “pivot” quickly and be in a good position to get your application in early.
Most important: Take clues from the airlines.
The application requirements for loans to the airline industry under CARES are well mapped out already and offer a good guidebook for other companies seeking aid, says Lee. “There’s 13 requirements and 11 of those are pretty generic that I could apply to any company,” she says.
If you can get the following in order, you should be in good shape for the application process:
- The company’s existing debt structure, secured and unsecured and
- Schedules for debt service for the next three years
- Details about employment level, headcount, compensation as of certain dates—March 24th was the measurement date for airlines, she says
- Proposed headcounts and compensation structures
- Financial statements for three years and pro-forma financials for the remainder of 2020 (as described above)
- Schedule of covered losses “These are the losses that they think that they have incurred or will incur as a result of the Coronavirus,” she says. “With the airline guidance it requires those losses by line item with details of what caused the loss.”
- Airlines are being asked to describe the type and value of the securities they’re putting up to back to the loan.
- A schedule of what you plan to do with the loan proceeds.
- Quantitative information on their financial needs for the remainder of 2020, including revenues, operating costs, credit, and how the loan will address the needs, and what other funding sources they have to address those needs.
- An operating plan for the rest of the year: How does this loan, fit into the business plan? Also, you have to show that the loan “is prudently incurred.”
- Details of any cost restructuring plans they have, including contract staffing.
The airlines have also been asked to provide evidence that they can’t get credit elsewhere. “A lot of companies are looking at us and throwing our hands up and saying, how am I going to prove I didn’t get a loan? Do I need to go do a roadshow to a bunch banks and have them reject me? It’s just, that’s very, that’s a very high hurdle and we’re hoping that that will stop.”
“Those are the 11 points that apply to airlines that are likely going to apply to large businesses. We are helping our mid-sized clients prepare the same way,” she says, “just because this is all we have at the moment.”