July 16, 2020
Canada Emergency Wage Subsidy (CEWS) Extension
At the beginning of the week the federal government announced that there will be an extension of the CEWS until December, in order to support businesses as a result of COVID-19. More details are to come as they are made available.
Managing Credit
Some analysts are anticipating a contraction in credit availability (a “credit crunch”). There are a number of contributing factors to this, most notably the impact of COVID-19. While managing credit is important for businesses to do on an ongoing basis, this may be a particularly important time to look closely at your credit. Below are some starting points to consider.
· Negotiate New Credit
While you may not require a credit facility at this time, it is often times when it is not needed that it is easier to obtain. Lenders will be looking at your ability to service debt (ability to pay scheduled payments and interest), and to repay the principal balance, and so when your ability to meet these objectives can be presented the strongest is also when you will be best positioned to negotiate credit terms. This may have a direct impact on the amount of security required by the lender, as well as the lending costs and terms. If you think you may need additional credit down the road, this may be the time to consider applying for it. If you are considering new credit, recall that there is the CEBA, which is an interest free loan up to $40,000, of which 25% will be forgiven if the balance is paid by December 31, 2022, which is a program from the federal government as a response to COVID-19.
Another area to negotiate new credit may be found with some of your vendors. It is not uncommon for businesses to pay invoices once received. If your vendors have 30 day terms, then take advantage of those terms. If they do not offer terms, consider requesting payment terms. While it is most common to see 30 day payment terms, some industries see payment terms stretching to 45 and even 60 days in some instances. Remember the value of relationship with your vendors, and be sure to balance this value with any benefit you may see from negotiating credit terms. Further discussion about early payment discounts that may also be offered by vendors is below.
· Review Current Credit Facilities
Part of negotiating new credit will likely involve a review of current credit facilities, and ensuring that you remain compliant with current lending terms, and so this would be an important time to review your current credit facilities for the following:
o Current compliance with existing lending covenants, and whether drawing on new credit facilities will impact compliance with existing lending covenants.
o Servicing of current debt according to terms, such as meeting minimum payment requirements.
o If taking on additional credit requires the approval of existing lenders.
In situations where businesses are not compliant with lending covenants at the time they are tested (most often at year end), lenders generally work with businesses to get back to compliance, rather than calling the debt. In a climate of constrained credit availability, it is possible that there will be more security requirements, higher costs, and more restrictive terms that are introduced as part of lenders working with businesses to get back to compliance. If your business finds itself in this situation at year end from time to time, be aware of how this may impact you.
· Manage Current Credit Balances
If you have current credit balances at this time, consider if it is possible to pay them down, as this will free up credit for future use if needed. Your ability to do this will largely be impacted by cash flow. Ways that you can improve cash flow in order to pay down existing debt may include optimizing inventory management in order to decrease the amount of time inventory is held, negotiating terms with vendors as discussed above, ensuring you are invoicing your customers quickly and allowing for expedient payment (such as electronic payment), considering leases rather than large purchases, and offering discounts to customers to pay early (see discussion on early payment discounts below). These were discussed in a previous email.
· Early Payment Discounts
If your business has a tendency to pay invoices as soon as they are received, rather than according to payment terms that may exist (such as 30 days), then consider negotiating an early payment discount with your vendors. Common discounts, among others, include:
1/10 Net 30: 30 day terms, with a 1% discount if paid in 10 days
2/10 Net 30: 30 day terms, with a 2% discount if paid in 10 days
One way to consider the impact of early payment discounts is this. If you pay an invoice amount in 10 days, rather than 30, you are committing those funds to the payment of that invoice 20 days earlier than you need to. This is considered an opportunity cost, as those funds could be used for other business investment. What is the return for your business? A 2% return over the course of 20 days turns out to be up to approximately 37% over the course of the year. In most cases, this is much greater than your weighted average cost of capital (to be discussed in a later post), making a strong case for paying early to take the discount.
On the flip side, if you are offering discount terms such as 2/10 Net 30 to your vendors, consider the cost of lending that this is for your business. While this source of lending may not come with the restrictive lending terms that you may encounter with traditional sources of credit through financial institutions, it is likely coming at a much greater cost, and so this is something you may want to look at, to see if this approach is serving you best at this time.
As always, if you have any questions about this, or if you need any assistance in reviewing your current credit, or in considering additional credit options, please reach out to us.
The information contained in this communication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
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