The biggest question on the minds of business owners right now is how to find funds and support in order to keep operations afloat and weather the storm of COVID-19.
The Small Business Association (SBA) works with lenders to set guidelines for loans made by its partnering lenders, community development organizations, and micro-lending institutions. Loans guaranteed by the SBA range in value and can be used for most business purposes including long-term fixed assets and operating capital. The most recent SBA loan program is called the Paycheck Protection Program (PPP). A loan through the PPP is eligible for forgiveness, and requires no collateral or personal guarantee, but must be used to fund payroll related costs and a few other specific expenses. In general, eligibility for an SBA guaranteed loan is based on what a business does to receive its income, the character of its ownership, and where the business operates. Normally, businesses must be within established size standards, be able to repay the loan, and have a sound business purpose. Those with bad credit may qualify for startup funding. The SBA also assists with export loans for financing day-to-day operations and advance orders with suppliers.
What happens if the government assistance programs determine you are not eligible or the programs have run out of funding?
Although multiples will vary by lender and circumstance, senior cash flow lenders typically cap out at a multiple ranging from 2-4
Don’t lose heart. There are many other opportunities in the financial markets that may be the white knight in a business’s future.
Asset Based Lending (ABL)ABL encompasses a broad range of lending activities and funders ranging from commercial banks and financial institutions to specialized lenders focusing on specific types of transactions. It covers a range of industries including hedge funds and subprime lenders. ABL is among the most common type of non-equity funding available to small to medium-size companies.
The most common ABL lenders are those that provide revolving credit to companies based on the pool of their inventory and accounts receivable. Under the typical ABL arrangement, the lender advances a percentage amount against the company’s pool of assets and bases the percentage amount on the type and eligibility of the collateral. For example: the advance rate for current accounts receivable may be 85%, 60% for finished goods inventory, and 50% for raw material. (Note – collateral rates will vary by bank and by circumstance). The company typically submits a borrowing base certificate on an agreed upon frequency in support of continued funding under the arrangement. While the ABL lender only advances against the most liquid assets, the collateral agreement between the company and the lender typically encompasses all otherwise available tangible and intangible property.
While ABL arrangements can be the most cost-effective source of commercial borrowing, the cost ranges significantly depending on: the nature of the underlying assets against which the company is borrowing, the financial health of the borrower, and the lender and its business model. An ABL loan is a more followed loan from the lender, which regularly carries a higher interest rate but does allow the borrower to leverage their balance sheet more than a traditional commercial loan – in other words – more cash now but more expensive later and increased oversight from the lender.
As of the date of this article, the Paycheck Protection and Economic Injury Disaster Loan programs have experienced a lapse in appropriations, and are paydayloansohio.net/cities/hamilton/ unable to accept new applications
Leveraged Cash Flow LendersLeveraged Cash Flow Lenders differ from ABL lenders as described above in that these type of loans advance against underlying enterprise value (EV) of the business, customarily a multiple of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) or cash flow of the business. 5x EBITDA depending on the industry and time in the credit cycle. These are often augmented by additional leverage from either Junior-Secured Lenders or more likely Sub-Debt Lenders going to a higher EBITDA multiple such as 5-6x +/(-). One advantage of a cash flow loan is the potential for the borrowing business to obtain financing much faster than with an ABL as there no appraisal of collateral here.