Supporting SMEs While Managing C&I Risk During the Coronavirus Pandemic

We at LSQ would be surprised at this point if you were not feeling the economic impacts of COVID-19. As different areas slowly start to reopen, there is no doubt that the ripple effects of this crisis will be felt for some time to come. While the public equity markets seem to have recovered from the volatility earlier this year, the same cannot be said for Main Street. How is the pandemic affecting Main Street’s access to the credit markets, and what can be done to ensure small and medium-sized enterprises (SMEs) have the capital they need to keep doors open?

A Pandemic’s Effect On US Businesses

Over 70% of SMEs have reported being negatively impacted by the effects of the virus and the subsequent closing of the economy. At LSQ, we have not been immune— over 80% of companies within our own portfolio have reported a slow down in business activity. Going into the second quarter of 2020, businesses already found themselves highly leveraged. Fueled primarily by the low interest rate environment, corporate debt was at an all-time high, representing 46% of US GDP. This leverage, combined with a slowdown in business activity, has many businesses panicking about how they will continue to fund their operations over the coming quarters.

Now, only two months into what will likely be a prolonged recovery, companies are finding themselves with depleted cash reserves. Due in part to lagging financial information presented to banks by their clients as part of their performance monitoring efforts, and by the potential opportunistic behavior of borrowers participating in payment deferment plans, making accurate predictions about the amount of distressed commercial debt we’ll see is difficult.

That being said, following conversations with our bank partners throughout the country, they are predicting up to a 10x increase in distressed loan assets this year with C&I credits strained by considerable declines in top-line revenue, supply chain disruptions, difficulties in managing and training remote workforces, and the additional cost and burden of managing COVID for their staff and customers.

What Can Be Done?

When faced with the downward trend in sales revenue and so much uncertainty about when things will again begin to pick up, it’s important that SMEs have access to the capital they need not just to keep doors open, but to ensure that their businesses keep up with the rapidly changing needs and preferences of their customers.

The government’s lending programs have provided a vital backstop for many of the nation’s businesses. As of this writing, the SBA has approved over $530 billion in Payroll Protection Program (PPP) loans to over 4 million small businesses in the country. However, these loans will only go so far. While they provide a few months of coverage for expenses such as payroll and rent, they are not substantial enough to cover all of a company’s costs, nor the expense that many businesses will incur in pivoting to serve their customers in a post-pandemic world.

As financial professionals, we all have a keen interest in the well being and staying power of our clients. According to a Barlow Research report, demand for additional credit among small businesses has increased to its highest point since 2010. Unfortunately, many of the tools and resources that the traditional finance sector has learned to leverage in the preceding decade are no longer readily available.  Banks are already starting to pull back and rework their credit appetites, reviewing covenants and underwriting criteria, begging the question: when SMEs run out of their 8 weeks of PPP loan coverage, will they be approved for the capital they need to keep doors open?

Turning To Alternative Finance

At a time when bank financing may be difficult to come by, the alternative lending space is paramount. When the future is uncertain, leveraging a company’s assets is an excellent way to generate the working capital they need to maintain operations. And assisting your clients, when possible, in obtaining additional financial resources can also benefit the bank. We’re all familiar with the concept of leveraging a company’s commercial real estate to increase liquidity. The same can be done with a company’s other commercial assets such as accounts receivable, inventory, machinery, and equipment.

Taking advantage of LSQ’s invoice financing program allows a company to turn their unpaid AR into a working capital lifeline. LSQ’s product is specifically designed to help companies in times of change. It’s a compelling facility for both companies dealing with a drop in sales and companies looking to take advantage of growth opportunities. While a bank may fear borrowers breaching covenants, like a debt service coverage ratio, LSQ’s facilities are structured without those covenants so business owners can focus fully on the operation of their company.

LSQ has close to 25 years of experience working with US businesses in various stages of growth and turnaround. Our experienced underwriting team has weathered downturns, knows the sensitive nature of these situations, and can be creative in transitioning the client from the bank. And our contracts are structured to allow an easy transition back to the bank when the time is right. Our goal is to help you keep the relationship. While the credit may be challenging for you in the short-term, LSQ can nurture the credit, letting the bank retain the deposit and treasury relationships, and graduate them back to a traditional credit facility when they are ready.

As you consider the best course of action to help your clients, consider a conversation with one of our representatives across the country. While the situation may feel daunting, coming together as financial professionals to creatively tackle problems as they arise will ensure a better outcome for our clients, our communities, and our nation as a whole.