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Businesses Affected by COVID-19 May Receive Financial Relief from Bank Lenders by Brent Leslie, CPA

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Posted on March 27, 2020 by Brent Leslie

The Federal Deposit Insurance Corporation (FDIC) issued a letter on March 13 encouraging the country’s banks and credit unions to be especially accommodative to borrowers whose business operations have been adversely affected by the COVID-19 pandemic. Although the notice specifically recommends financial institutions be flexible when working with entities in industries hard-hit by the virus, relief may also be available to businesses in other fields whose revenue and cash flow are severely strained by the spread of the virus.

Before picking up the phone to call a lender and simply asking for an interest rate reduction or payment pause, businesses should arm themselves with relevant facts to use as leverage in their loan-modification negotiations.

It is critical that business owners carefully review all the pertinent terms of their loan agreements, including specific debt covenants, in order to understand all the rules and restrictions with which they are required to comply. For example, a loan may require a borrower to maintain a certain level of liquidity, debt-to-equity ratio or debt-to-asset ratio. In general, the stronger a company’s financial position, the less risk a lender will perceive, the less restrictive the loan covenants will be, and the more flexible the lender can be to modify those terms.

Borrowers seeking financial relief at this time should review their most recent, pre-virus financial statements and project out their estimated post-virus financial positions and cash flows over the next 12 months. It is important to remember that, although a company may be well-capitalized and able to meet its immediate cashflow requirement, the stress COVID-19 will have on its operations may not be apparent until several months down the road. If businesses can identify these future needs, they will be able to have more effective negotiations. With this information, businesses can more easily demonstrate proven track records of success and creditworthiness and show lenders that borrowers are monitoring their financial covenants and being proactive. This intelligence is a great way for borrowers to begin an honest conversation and negotiation with lenders, who are not keen on borrowers defaulting on a loan repayment in the future.

Following are some of the forms of emergency assistance that borrowers may receive from their borrowers at this time without damaging their creditworthiness or exposing bankers to penalties or regulatory or compliance risks:

There is little doubt that the spread of the coronavirus will have significant impact on businesses and the financial institutions that extend credit and loans to them. However, bankers recognize the unique circumstances businesses face and they are willing to work with borrowers and make accommodations to help them survive and potentially thrive through this crisis.

About the Author: Brent Leslie, CPA, is a director of Audit and Attest Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with domestic and international clients on a broad range of transactions and helps them navigate a complex accounting compliance environment. He can be reached at the firm’s West Palm Beach, Fla., office at (561) 361-2050 or info@bpbcpa.com.