Creativity in Crisis-Freedom Banks 10 Cs for Surviving COVID-19
Dear Freedom Bank Client:
We have all seen our world upended by the COVID-19 pandemic which poses very serious global threats to public health and our economy. It could conceivably cost billions of dollars in productivity losses resulting from absenteeism, payouts of sick leave or workers' compensation, and lost sales; disrupt transportation and communication services on which we all depend; and impede delivery of necessary goods and services.
Due to their crucial financial and economic role, small businessesshould have plans in place that describe how they will manage through a pandemic event. Sound planning should minimize the disruptions to the local and national economy, and should help a business maintain the trust and confidence of its customers. Similarly, in this crisis which has not been created by the banking industry is one where community banks can really be part of the solution of helping the country and its small businesses manage through the crisis.
Freedom Bank is ready to assist you and embrace our values of IDEAS and deliver great customer service when our clients need it the most. The privilege of serving our clients and communities is an honor for which we are extremely grateful. We have the technology, the digital products, and, most importantly, the skills and dedication of a talented team of bankers here at Freedom. We have ample liquidity and capital and have stress-tested our portfolio to extremes to ensure we are here to support you under any adverse scenario. We are confident that, together, we will not only get the important work done, but we will also emerge from the challenges presented by this uncharted situation stronger than ever.
For those clients who are experiencing hardship in the face of this national crisis, we are taking two immediate steps to be helpful to clients. For those attendance-based businesses with revenue interruption or other consumer clients who find themselves temporarily without income, we are prepared to enable you to access any Certificates of Deposits without any early withdrawal penalty and we will accommodate an interest-only period on your loan facilities for up to 90 days to help manage cash flow constraints.
One potential form of assistance to small businesses is Small Business Administration (SBA) economic injury disaster loans (EIDLs).EIDLs provide eligible small businesses and nonprofit organizations up to $2 million to help meet financial obligations and operating expenses that could have been met had the disaster not occurred. Loan proceeds can only be used for working capital necessary to enable the business or organization to alleviate the specific economic injury and resume normal operations. Interest rates for EIDLs are statutorily set at 4% per annum or less and can have maturities up to 30 years. Collateral is generally required for loans over $25,000 if it is available, though SBA will not solely decline loans for a lack of collateral.
Beyond these immediate programs, we are working on a series of individualized solutions for clients based upon their individual circumstances and the new Federal programs being released daily. Please contact your banker today if you feel either of these measures are necessary and to determine if you qualify for relief.
The Ten C’s
Freedom Bank wants to be a resource to help our clients and prospects in this crisis and we have created an Action Plan to survive the COVID-19 pandemic.You may know that the traditional five Cs of credit is a system used by lenders to gauge the creditworthiness of potential borrowers. The system weighs five characteristics of the borrower and conditions of the loan, attempting to estimate the chance of default and, consequently, the risk of a financial loss for the lender.
I believe there are ten things that a small business and its owner/manager should be doing to manage the financial affairs of their business and hence the survival of their enterprise during this crisis. This is what I recommend you be thinking about and prioritizing in the coming days.
1. Character – Stay true to your values and don’t cut corners in the face of adversity. Prioritize the health and wellbeing of your employees at all costs. This will strengthen the culture of your company in the long term. Make the hard,personal sacrifices where necessary to make it through this period. The most important attribute your bank is looking for is honesty and integrity in all your dealings and financial reporting. Bad news to the bank early will more likely make it a shared problem, bad news withheld mushrooms into an isolating challenge that will be harder to solve. Take a long-term perspective, maximize your impact every day, and know that the storm will soon pass.
2. Communication – Provide regular communication to employees, clients and suppliers, including daily emails and weekly conference calls to ensure employees understand priorities and expectations. Fear grows in the face of uncertainty and your role is to provide as many of the facts as possible and answers where you can. This is also the time to ensure you are asking your team to share details and insights with you. We are in uncharted water and you should be utilizing the experience and ideas from all teammates, vendors, shareholders, etc. Make sure you are proactive in sharing your situation with your bank and,as mentioned earlier,do not hold back on any details or concerns.
Clients – Remain committed to the success of your clients and reach out to them to see how you can help or be of service. The key to preserving or restarting your business will be the relationship with your clients. You want them to know your plan and how your changing operating environment will impact them. Find out what their needs are during this time and be thinking about ways you can innovate your business model to address opportunities. Use any and all of the digital channels you have to engage and maintain the client relationships. Social media can also be a powerful channel during this period to communicate with your network and preserve your brand and business awareness.
4. Cash Flow – Your Company’s cash flow forecast is the fuel that keeps things going and your business growing. The money coming in gets allocated to your employees, suppliers and other expenses. If you don't know what the future holds, then you'll have a hard time planning your investments and taking advantage of promising opportunities. Complete a 13-week cash forecast to understand your circumstances and plan for all immediate issues – this will help manage the liquidity risks in the business. Update it each week with what you know. Start with cash-on-hand at the start of the week, add collections of cash, and subtract disbursements of cash, resulting in cash-on-hand at the end of the week.
You must have that document on hand to show any banker– they will ask for it to see if you’re planning ahead. Identify potential shortfalls in cash balances in advance—think of the cash flow forecast as an "early warning system". This is, by far, the most important reason for a cash flow forecast. Make sure that the business can afford to pay suppliers and employees. Suppliers who don't get paid will soon stop supplying the business; it is even worse if employees are not paid on time.
I recommend a 13-week cash flow model because of its broad uses. Bankers often prefer the 13-week horizon as it gives them a reasonable view of the health of the company to which they are lending. In this instance a 13-week cash forecast should be able to identify when and how any potential liquidity shortfalls should hit a company. This, therefore, offers you the ability to prepare for, if not rectify, any issues before they occur.
5. Costs – Inevitably, the economic pause caused by COVID-19 will have broad and specific implications for the top line revenue of your business. Now is the time to launch a war on expenses to preserve what you can and “bunker in” for the challenges ahead. Conduct talent assessment and pursue reduction in force as necessary to ensure the organization is structured to be as effective and efficient aspossiblein serving customers and preserving earnings during this period. Evaluate all vendor and professional service relationships to identify essential services and either in-source opportunities or ask for billing deferrals from key vendors to reduce expenses. Review all of the leased space and locations to ensure space is maximized and configured properly and reach out to landlord for rent concessions for the period required. Use this crisis as a way to rethink and commence intensive expense management review to improve efficiency and implement new expense and capital investment approval process for the long term.
6. Capital – Your company’s capital sustains the solvency of your business and provides the cushion for unforeseen events like COVID-19. It is likely most businesses may need more capital, but now is obviously not the optimal time to seek new capital. You should evaluate all sources of capital you have to bolster your company and lower the risk of insolvency in the business. Also, complete full assessment of financial controls and risk management infrastructure and roll-out new financial and risk management reporting structures for management use during this period so you can track the risk and capital levels on a real time basis.
7. Collateral – While the bank will be looking at the capital in the business to support the level of debt, most credit facilities have collateral as a secondary source of repayment behind the cash flow generated in the business. Now is the time to pay particular attention to the assets you have pledged, to ensure they continue to have the market value required by your lenders. If you have a borrowing based on trading assets, accounts receivable and inventory, your 13-weeks cash flow can ensure you can remain compliant with the advance rates in your borrowing base and plan for required pay downs. If there are shortfalls in the collateral or borrowing base emerging, be proactive in thinking about what other sources of collateral in the business or that can be provided personally by the guarantors to support the ongoing level of debt in the business.
Businesses should evaluate how their operations and financial well-being will be affected, and then closely analyze whether any existing insurance policies could potentially provide coverage for such losses. Commercial property insurance policies often contain two types of coverage that may be applicable to disruptions like those caused by COVID 19 and the responses thereto: business interruption coverage and contingent or supply-chain business interruption coverage. Typically, business interruption coverage is triggered when the covered property suffers “direct physical loss of or damage to” covered property. The key takeaway is that whether business interruption insurance is applicable to shutdowns of businesses likely will depend upon the specific language of the policy(s), as well as the individualized facts.
8. Creativity – It is human nature to focus on the crisis at hand and become overwhelmed by the issues being cast upon your business by no fault of your own. This is an exogenous shock to the economy being brought on by a pandemic that none of us could have predicted. Having said that, do take a step back and realize that now is the time to use your creativity to innovate in the crisis to build a bridge of new revenue and perhaps reinvent your business. Clients have real needs during this time you may be able to serve in new ways and customer behaviors could change permanently as a result of the trauma of this experience for which we need to begin planning for now. This is also a good time to ensure you are fulling utilizing all the new digital tools that you have implemented recently or are now available, from CRM systems, digital payments, and social media. How creative you are during the crisis could define the future of your business.
9. Capacities – There are many capacities in your business that are probably not fully utilized or have deferred maintenance since we all never seem to have enough time when we are growing our business. Utilize the down time to attend to the deferred maintenance in your business. Areas of opportunity are maintenance on your facilities, updating customer lists, and any other task that goes by the wayside. This is also a great way to keep employees engaged and to seek their ideas on how to improve if you have the resources to keep them going.
10. Community – Look to those in your network for advice, support and help and look outwardly to those in your community that you and your employees can help. It definitely takes a village in a crisis to keep our country moving forward and to strengthen the social fabric that holds us all together. Don’t be bashful about asking for help and be bold in finding ways to offer support. Start with the charities you have supported in the past, but also think of additional ones that you are in a position to help in the context of our “social distancing” norms at the moment. Efforts in this regard might be the most rewarding when we look back on this experience in years to come after the wounds have healed.
Freedom Bank’s Support
Freedom Bank’s efforts to invest in our people and technology, preserve strong liquidity, strengthen our balance sheet, improve the bank’s credit profile, and reduce non-interest expenses should serve us well and enable us to be a very strong bank in this environment. Freedom Bank has taken all measures to safeguard employees' health and well-being during a flu pandemic while ensuring Freedom Bank’s ability to maintain operations and continue providing essential services to our customers.
We strongly encourage you to take advantage of our full suite of convenient digital services to manage your personal and business banking requirements. You can access your accounts online or by using the Freedom Bank app on your mobile device where you can make payments, view transactions, check balances, find an ATM and more. It’s easier and faster (in many cases) to manage your account digitally, especially given the current environment. Please contact us if you need to enroll in these services.
Please contact me if you wish to discuss any of these ideas or if Freedom Bank can be helpful to you during this crisis.
Joseph J. Thomas, CFA
President and CEO
10555 Main St; Suite 600
Fairfax, VA 22030
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