There is a chance your 2020 profits look bleak relative to previous years. If that’s the case for your business, you may have to qualify your 2020 operating performance to your banker more than in previous years. Don’t assume they know how and how much COVID-19 and the derecho affected your specific operation and where you currently stand going into 2021.
Prudent loan underwriting has bankers measure last year’s profits against current and future loan payments to understand the capacity to repay debts. With any new loan requests and candid discussions with your banker about 2020 earnings, consider these five themes to highlight your capacity to repay:
1) Did business tank in March and Q2, but come roaring back in the summer and fall? Show them Q3 and Q4 results and explain that those, not the entire year, are a more normal and current picture of your financials. Prove it by isolating Q3/Q4 from prior years and comparing those results to Q3/Q4 2020.
2) Did revenue crash in March and Q2, but slowly built back to acceptable levels? Print a 12-month summary of revenue, net income and EBITDA to show the March/April drop and the subsequent month-over-month improvement. Perhaps monthly performance isn’t good enough to warrant big, new loans yet, but it does show your ability to rebuild the business and gives your banker confidence that your trajectory will get you to the profits you need. This type of analysis might also buy a little patience and perhaps covenant waivers if needed.
3) Did COVID-19 hurt revenue, but with PPP consideration, your P&L looks fine? PPP loans were vital to help the economy through the pandemic. However, you should forget PPP in assessing your company’s future viability. PPP was a one-time event, the most recent stimulus notwithstanding, and shouldn’t be considered in your honest assessment. A safe and sound bank won’t lend on a one-time event like PPP.
4) Was business good until the derecho and now, in total, your annual 2020 P&L looks dismal? Itemize the costs associated with the derecho and show your banker. These costs, even if continuing, are one-time costs, and as such, there is a case to be made to leave them out of bank underwriting formulas. Let your banker know when you expect storm costs to be over so your bank can expect a higher expense load for a few more months.
5) Did the cost of the derecho wipe out your working capital or eat up your line of credit? Get with your banker, show them your pre- and post-storm results and suggest you amortize those costs over as short a time as possible. This will free up working capital and put you on a path to get the storm behind you. While short repayment schedules might make cash flow tight, it’s a better alternative than dragging out storm costs for multiple years.
The above won’t guaranty loan approvals. Your banker is facing this type of recession, and maybe any recession, for the first time. Safe and sound underwriting while simultaneously meeting client need can be a challenge in this environment. However, your banker ought to have these considerations in mind when talking with you about your business as well as providing you with direct feedback and showing transparent underwriting. Building a trusted financial partnership is critical to helping weather both the good times and the not-so-good times.
John Hall is the Chief Lending Officer at Cedar Rapids Bank & Trust. His direct line is (319) 743-7068.