This was originally posted in St. Louis Small Business Monthly’s October Issue.
By Orvin Kimbrough, Chairman and CEO, Midwest BankCentre
Congress is still debating the next relief package as I write this, but there’s no debate between the parties about one underpinning of the legislation: America hasn’t paid enough attention to the nation’s smallest businesses – and it is hurting our communities.
Small businesses comprise 99.9% of all U.S. businesses, employing 58.9 million people. That’s 47.5% of the country’s total workforce. The vast majority of these business are microbusinesses with just 1-5 employees, which are more likely to be minority-owned.
To this large group of small business owners that are struggling: You may feel overlooked, but you are not alone. You have resources and partners who want to see you win. So, let’s do this. Below is a 10-point playbook with strategies you can act on now, because waiting for help isn’t working.
- Know what’s in your control and what is not.
Do not hold out hope that the government and regulators will come to the rescue. This is unproductive thinking and a waste of time.
2. Choose your mindset.
Defeat starts with our frame of mind, as does winning. If you think that the only thing you can do is depend on others – like the government taking action or a bank giving respite – it will be tough from the beginning.
3. Have a thorough understanding of your balance sheet and cash flow.
How much short and intermediate liquidity do you have, or how much can you generate should you need to? Lenders use a Debt Service Coverage Ratio (DSCR) to determine if you can afford a loan. To calculate yours, divide your net operating income by your current year’s debt obligations. Ideally, your DSCR should be at 1.20x or more, meaning you have 20% more income than you need to cover your current debts. Look at your Accounts Payable as well. If you’re paying in 15 days, could you stretch it to 30 to gain cash on hand?
4. Understand your revenue concentrations and risk.
For your riskier clients – those in industries most likely to struggle in the intermediate and long term – ask for advance payment. You may need to pivot and build revenue in other areas while decreasing reliance.
5. Know thy customer.
Where are your customers now, and what do they need? Change your mode of delivery if you can, particularly if you are B2C. Be innovative. We have seen the creativity of restaurants who have moved to carryout and delivery services, even offering drinks to-go because alcohol is their highest margin product. We’ve also seen small businesses change their swim lane to provide pandemic-related goods and services that are within their area of expertise, like clothing retailers selling face masks or distilleries making hand sanitizer.
6. Borrow from thyself.
If you absolutely believe that your business will rebound in the next 18-24 months, take equity from your retirement and, as a last option, your home. Do you think you can pay yourself back within 3-5 years with interest? Talk to your insurance representative, too. You may be able to draw the amount of cash value from your whole life insurance policy to help you weather the storm or scale.
Crowdfunding is another option. GoFundMe, founded in 2010, is a platform used to raise money for emergencies and charitable causes. I have seen an increase in Covid related campaigns on this platform.
7. Secure debt before distress.
The best time to secure debt from a financial institution is when you are not in distress. If you happen to be a small-to-medium-sized enterprise and anticipate trouble but you haven’t hit that patch yet, take out a line of credit to provide you with some insurance or buffer against a future cash flow issue.
8. Apply for government help.
Sign up for every government program that you believe will help your business, and work with a local, community-based bank or one that’s friendly to small businesses. Understand the advantages, disadvantages, and fine print of each option. SBA loan programs are great for anyone purchasing a building, and PPP loans worked for the vast majority of businesses that wanted to keep their employees on the payroll. But, banks have been more reluctant to use the Main Street Lending Program, which is restrictive to the borrower on dividends and distributions and ability to pay down other debt.
State and City governments are good sources to look for support. As an example, The Missouri Department of Economic Development and Illinois both offer emergency grants and loans. Starting on 7/14/2020, Missouri small businesses can apply for emergency grants of up to $50,000 through a new $30 million program via the Missouri Department of Economic Development. The City of St. Louis established a fund to assist small businesses that have been severely impacted by COVID-19 and Stay at Home Orders. All grants are subject to the approval of the CARES Act budget by the Board of Aldermen.
9. Know your fixed cost, and try to negotiate.
If it’s a bank loan, see if you can go interest-only for a period, or refinance to a lower rate. This may be difficult because banks are tightening up credit in general. Also, try to negotiate your rent contract, perhaps making rent a percentage of sales or profits instead of a fixed contract.
10. Treat your banker like a trusted advisor.
Talk to your banker about your current situation. The more transparent you are, the more your bank can help you through this difficult time.
For those who aren’t struggling: support small businesses. If you have a platform, use your influence to fight for them. When they suffer, so do our local economies, neighborhoods and families. When they succeed, we all succeed.
Orvin T. Kimbrough is Chairman and CEO of Midwest BankCentre, the second-largest locally owned community bank serving the St. Louis region.