Seeking Non-Traditional Funding Channels
Times of declining economic activity often hit hardest those individuals who lead and own nonprofits and small enterprises. In addition to dealing with reduced revenue and slowing contributions, they are faced with difficult choices that are sure to impact the people depending on their organization for employment and services.
Organizations struggling right now to obtain credit are especially disadvantaged by traditional funding channels. The inevitable question, “How do you build-up liquidity for your company?”
Cash Flow for Operations
Cash is king, more now than ever. Many organizations are seeking ways to ensure that they have access to enough cash/liquidity to survive the COVID-19 crisis and to continue operation at reduced levels.
Despite favorable tax law changes to encourage corporate giving, revenues are under pressure and fundraising and contributions are taking a hit. Furthermore, funding of service programs by government agencies is also under pressure. As a result, many organizations are taking steps to reduce operating costs and to make do with less.
But, what do you do when reducing operations and “making do with less” isn’t enough?
Beyond the Cares Act and PPP
By May 2020, it’s probably safe to say that the majority of NY business owners are familiar with the Paycheck Protection Program (PPP) SBA 7(a) Loan Program. The PPP provides you with cash for a short period of time to cover payroll-related expenses for 2 to 3 months. A portion of this loan may be forgiven by becoming a grant. An important consideration to keep in mind is that the balance will need to be paid back in two years. Organizations need to consider how much of the funds will be needed for immediate liquidity requirements, future operating costs, and payments.
Beyond the PPP, you can obtain relief from additional programs under the Cares Act and through the Federal Reserve. Also, consider alternatives involving leveraging existing real estate assets.
- Refinancing and restructuring outstanding debt
- Obtaining new lines of credit backed by unencumbered assets
- Securing additional funding through various federal, state, and local programs
- Seeking funding from local community development financial organizations
[More details follow, but please don’t hesitate to reach out directly to ThinkForward for a more expansive explanation of alternative funding sources.]
Main Street New Loan Facility (Main Street)
Main Street loans are offered through the Federal Reserve and Treasury. The program offers organizations additional liquidity to address insufficient cash reserves and for scenarios where banks have frozen a portion of a line of credit. Finally, Main Street loans are meant to provide support to those enterprises that have no access to additional lines of credit, despite the fact that collateral is available to secure additional credit.
Unfortunately, banks are limiting the release of existing lines of credit due to their own liquidity crunch. Main Street is for companies that are lightly leveraged. If you have good historical cash flow but need additional liquidity due to a downturn in revenue, this loan can address capital needs for recovering from the impact of COVID-19.
If you choose to take advantage of Main Street, consider how you will repay the loan in 4 years. Options include using cash generated from operations or refinancing the loan with a bank line of credit or term loan. Although the New Main Street loan is unsecured, banks will still require collateral to offer you credit.
SBA 504 Refinancing Program
This SBA 504 program is for refinancing existing real estate mortgages. Only small businesses are permitted to borrow up to 90% of the value of assets to be financed. You can obtain additional equity to pay for up to 18 months of operating expenses.
During difficult economic times, it’s possible to boost your liquidity by accessing equity tied up in long-term real estate and capital projects.
SBA refinancing terms and rates are very favorable. As of May 25, 2020, the 25-year fixed rate is just 2.8%. This is a long-term financing option for obtaining funds for working capital purposes. In addition to providing additional liquidity, the refinancing rates may be lower than what you are paying on your existing bank mortgage.
If applicable, you also have the option of refunding or refinancing existing tax-exempt bonds. This option should be undertaken to reduce debt service on the bonds or to provide additional funds for working capital purposes. The funding mechanism can be arranged in the capital markets or through banks. Capital market rates may be higher, but for good credits the interest rates are extremely attractive. However, please be aware that refinancing tax-exempt bonds can be a slow process—potentially requiring up to 4-5 months to close.
Final Word of Caution
In the future, new programs may be coming from the US Treasury, including (potentially) additional bond financing options or new SBA programs distributed through your local development agencies or community development lenders. Consequently, it’s important to stay informed.