As COVID-19 continues to escalate rapidly, it increases the tempo of business owners as they scramble to keep control over a business situation that feels anything but in control. Presently the working capital loans offered by BDC seem to be the best chance of survival for many. While there will be opportunities to pivot businesses many business owners are forced to be distracted from market opportunities while they try to determine how to navigate the BDC loan process and whether to apply or not in the first place. Our intention here is to give you a rundown so you can decide next steps.
First of all, the COVID-19 program loan is a working capital loan of up to $2 million with flexible terms and payment postponements at a very good interest rate. To break this down a little more:
Up to $2 Million will be determined on many factors, especially the companies eventual ability to repay the loan. The loan range starts at $100k.
Flexible terms is referencing the fact that this is a 36 month loan, but 60% of the loan is not due until month 36. And at that time you can likely refinance it for another 5 years. So you have a lot of time to recover.
Payment postponements is referencing that you will not have to pay the first principal payment until 6-12 months into the loan period. Interest payments will begin right away.
* Special reminder: Right now any loans you have are likely eligible for 6 month deferral of principal payment so reach out to your lender to makes sure you hit pause on your payments
What is the interest rate like?
It’s actually really good compared to a normal working capital loan. It is the Current Floating Base rate (as of Mar 19th is 5.05%) with a 1.75% discount for an effective rate of 3.3%
What companies are eligible?
Well in general your business had to have been financial viable prior to the impact of the coronavirus in order to qualify. And by financially viable that would generally mean profitable to BDC (positive Net Income, not a Net Loss). If you are a SaaS business and had a reasonable runway before the coronavirus you may qualify as well.
What companies are not eligible?
If you have not yet been in business for more than 2 years you will not be eligible because you must have 2 years externally prepared financial statements. Certain types of businesses like Cannabis, Bars, Residential complexes/houses, money exchanges, etc) are not eligible. And if you are pre-revenue you will not qualify either.
Can you use this loan to pay down higher interest loans?
Nope. This loan cannot be used to payout or refinance any other banks or creditors or existing BDC loans.
What if you do not need more than $100k?
For commitments under $100k you can apply to BDC’s online portal as they do have a quick adjudication (although not at these special terms and rates).
What are the risks?
You are required to sign a non-collateralized BDC Personal Guarantee AND GSA position. It means if you default on the loan the creditor may reclaim the asset. These are standard requirements for working capital loans so don’t be surprised. These terms should always be well considered but especially so with so much uncertainty. Talk to your Lawyer and Accountant for guidance.
What do you need to pull together?
Confirm the amount you are requesting
Complete the application form and likely a personal net worth form
Most recent Accountant Prepared Financial Statements for last 2 years
Current interim financial statements with comparable from the previous year (in-house)
Two versions of financial and cash flow projections (one pre-COVID, and the update given COVID disruption to your business)
Answers to these 4 questions:
At what activity level do you anticipate to operate at, over the next six months (i.e. full shut down or reduced capacity)?
What are the key carrying costs for the next 6 months?
Examples : rent, insurance, electricity, salaries, financial fees, etc.
With a working capital loan and/or postponement (and support from other lenders) does this cover your cash needs for the next six months?
What are your agreements with key suppliers (and customers) on payment terms / support for the next six months?