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Getting Back to Business: The Role Cash Flow Budgets Play in Obtaining Bank Financing

It is clear that most businesses felt the financial impact of the pandemic during the last few months and are now experiencing the stress of getting their businesses up and running again. While PPP loans and SBA disaster loans helped businesses through the roughest months of the pandemic, now the PPP funds have likely been used up and the SBA loans will have to be repaid.

Businesses have to re-hire employees, re-stock inventory, and generally start to incur significant expenses as they return to what they believe will be a more “normal” and profitable level of business. However, the funds needed for these expenses may not be available from current operating cash flows, especially coming off the cash flow drain experienced during the height of the pandemic. The challenge is finding a way to replace the “lost capital” through various sources of financing.

To help business owners decide how much and what type of additional financing is needed, a cash flow budget should be prepared that covers at least a 24-36 month period. This budget will be relied on and become an integral part of a bank’s underwriting process. As you create the budget, consider areas that need to be addressed in order to better manage cash flow as your business gets up and running again. Here are some tips:

• Be conservative with revenue projections
• For your largest vendors, seek extended payment terms on current balances owed and future purchases
• For customers, negotiate payment plans and then continue doing business only with those customers who abide by their plans
• Consider adding or changing the products or services you are offering based on the needs of a post-pandemic society, i.e., maybe the time has come to invest greater resources in digital sales?
• Consider price reductions for existing inventory, especially if seasonal or obsolete, to generate funds to purchase new inventory that may be more in-line with changing consumer buying habits
• Plan for costs associated with re-hiring and/or training new employees
• Plan on allocating resources to IT, especially if working remotely impacted your business’ ability to function during the pandemic
• If you were considering acquiring a particular business pre-pandemic, as part of an overall growth strategy, consider that option now, understanding that businesses may be more apt to sell in the current environment

Once you have a budget that reflects cash flow from future operations, determine the type and amount of financing needed. This may include restructuring existing debt with your current lender. Consider financing obtained through bank lines of credit, terms loans, SBA lending programs, or other government-backed loan programs, such as the Main Street Lending Program. Depending on the type of financing needed, incorporate the future monthly debt service into the cash flow budget.

It is important to remember that the cash flow budget, along with other financial information provided to a lender, will be relied on by banks during their underwriting process, probably to a greater extent than before the pandemic. For this reason, the budget needs to be conservative, realistic, and objectively illustrate a business’ ability to repay its debt.

Gettry Marcus is actively looking for ways to assist our clients during these difficult times. If you would like additional information please contact your Gettry Marcus Advisor or Lee Ferber, co-chair of Gettry Marcus’ Business Advisory Services Group.