This past year has been filled with unexpected challenges that had life changing consequences for me. A few months ago, I was enjoying life in retirement by splitting firewood, swimming and working hard on things I enjoyed. After years of worrying about my businesses, employees and clients, I was now focusing on myself and my wife and living the good life. Things couldn’t have been better. I was golden – or so I thought.
One day, I was a bit nauseous for a couple of days, but nothing major and decided to go to my doctor anyway to check it out. Upon my arrival I was feeling fine but they did an EKG and pronounced that I was going to the Emergency Room immediately. This was serious because my resting heart heart rate was over 180 (yikes!) and I was in “aFib”(atrial fibrillation). Holy crap and the most remarkable thing was that I didn’t feel a thing! Not one other symptom to alert me that something was seriously wrong. After a week in the hospital and tons of tests they found that I had blown my mitral valve and was in some serious trouble. Nope, I didn’t have a heart attack with all the classic symptoms and frankly was in the best shape I’ve been in for years. Now here I was – everything changed in an instant and I was having my chest cracked open to repair my heart valve. One day things were great and the next day not – who could have seen this coming?
The same thing just happened to the entire planet.
One day we hear a little story about a new strain of virus emerging halfway around the world and within a few weeks it has everyone sheltering in fear and left with a crippled economy. This has changed almost everyone’s lives in ways most people have never experienced before. It is worse than 9/11, Pearl Harbor or even devastating natural disasters because it is invisible, and it is hitting everywhere. The COVID pandemic attacks people’s health, their livelihood and their futures as the uncertainty hangs in the air. In just a couple of weeks, everything changed.
Having opened my first restaurant in 1973, I can safely say that I have seen quite a few ups and downs from Jimmy Carter to the Great Recession of 2009. I have lived through lines at the gas pumps, double digit inflation, blackouts, hurricanes and recessions. I know that major downturns are a fact of life and are inevitable and if we read the signs right, we could be prepared for it. People are often very short sighted, especially when they think they have a strong and stable economy. Psychologists call it “Cognitive Dissonance” which is a condition in one’s mind which hard evidence conflicts with that person’s opinion to such a degree that they generate a hallucination to rationalize their world view. Sorry but that’s just stupid and over the years I have lost patience with delusional idiots. Science and numbers don’t care what you “believe”!!
Back in 2017 and 2018, I had written a few articles in this publication warning people in our industry about deep weaknesses in our economy and how claims to the contrary were total BS. Because of the inherent frailty described the foodservice industry was very vulnerable. My good friend Fred Klashman, the Publisher of Total Food Service, called me “Dr. Doomsey” because I felt a house of cards was being built on false representations that the economy was strong and stable. There were too many signs were telling me that one hiccup would bring the whole house down – and it happened, just like when my health suddenly turned bad.
Hindsight is always 20/20 and unfortunately, we can’t turn the clock back to prepare for these things.
If you were fortunate enough to have built up cash reserves, you can tap into them and try not to blow through everything before you can recover. If the business has no access to reserves, most owners rely on personal funds or the generosity of family and friends to get the cash needed to survive. For others the hope is that they can go to their bank or get some help from the government. Borrowing working capital in good times is hard enough, but add catastrophe to the mix and it can approach impossible.
Now that the nuclear bomb hit – how does your business survive? Without cash flow you are screwed. Without cash reserves, you are really screwed. Now you go to your bank or apply to a government program and guess what?… they may be taking applications but the process can be very long especially when everyone else on the planet is applying as well. While this is happening the clock is ticking, your debt is growing and your options diminish. What a goddamned mess.
Late last month, the Senate finally stopped their childish partisan bickering (from both sides!!) and passed the most massive financial appropriations Bill of all time. It should help put out many fires but it will still take years to fully recover as it did from the 2008-2009 collapse. The Bill is over 1,000 pages and this is what I pulled out before press time:
- $350B to establish lending programs for small businesses (assumed through the SBA), but only for those who keep their payrolls steady through the crisis. Small businesses that pledge to keep their workers would also receive cash-flow assistance structured as federally guaranteed loans. If the employer continued to pay its workers for the duration of the crisis, those loans would be forgiven. THIS IS THE ONE WE NEED TO WATCH.
- Unemployment insurance extended by 13-weeks and include a four-month enhancement of benefits. While this helps many workers in foodservice, it could negate much of the SBA lending/grant parameters I speak about above. You have to keep people on your payroll in order to participate.
- $1,200 in direct payments will be rushed to individuals ($2,400 per couple) that would apply equally to workers with incomes up to $75,000 per year before phasing out and ending altogether for those earning more than $99,000. Families would receive $500 per child. This will most likely be spearheaded by the IRS because they have individual tax records and vital information like bank accounts etc.
- $150B for local and state governments. This is important not only because these governments support public health on the ground plus vital services – they are suffering loss of millions of dollars in taxes and other revenues which keep society moving.
- $130B for hospitals and health care workers. No need to explain this one! It would be nice if they somehow included student debt forgiveness for all the brave nurses, doctors and healthcare workers that are doing the massive and painful job of trying to take care of us under extremely stressful circumstances.
- $500B fund set up with $425 for the federal reserve to leverage loans in order to help broad groups of distressed companies and $75B for industry specific loans. Oversight of these funds in the form of an inspector general and a five-person panel appointed by Congress and not at the sole discretion of Steve Mnuchin and Trump which was the main objection Democrats had to the original Bill. In its present form the Bill requires that companies that accept money must also agree to halt any stock buybacks or golden parachutes for their executives for the length of the government assistance, plus an additional year. This type of corporate abuse happened after the bail outs of the Great Recession leaving executives and corporations in great shape and the American taxpayer footing the bill. Not good, but they prevented it in this bailout.
- In another disappointment for Trump and his pals, there is a provision that blocks senior government officials and family members from receiving the money to pour into their businesses.
Clearly the details need to be ironed out and I do not expect the money to be in the hands of businesses for several weeks.
Here’s a summary of the Small Business Interruption Loans portion of the CARES Act:
Any business or non-profit that employees less than 500 people are eligible to receive an SBA 7(a) loan to cover the period of February 15, 2020 to June 30, 2020. It is presumed if you are applying for a 7(a) economic disaster loan you are a business that was impacted by Covid-19.
- Eligible loan amount is the lesser of:
- Average total monthly payments of payroll costs over the last year; multiplied by 2.5
- OR, $10,000,000
- Use of loans:
- Payroll, paid sick, medical or family leave, costs of group health care benefits during periods of leave, salaries, mortgage payments, rent/lease payments, utilities and other debt obligations.
- Loan eligibility:
- Borrower was in operation on February 15, 2020
- Had paid employees and paid payroll taxes.
- Good Faith certification of loan going to ongoing operations, used to retain workers, etc.
- SBA banks have the delegated authority to make and approve loans (you do not need to go through the SBA directly for approval).
- No fees are collected by the SBA.
- No collateral or personal guarantee required.
- Deferral: Complete payment deferral for covered loans are considered for a period not less than 6 months and not more than 1 year.
- The loan is guaranteed up to 100%.
- Loan forgiveness – you can apply for loan forgiveness if a set of criteria is met. Seek advice.
While you are waiting for the details to be ironed out (since no one ever planned for this type of situation before – even though they were warned many times) you may need cash to sustain yourself. Banks have always been a poor source for access to capital for most small businesses. As I have pointed out in many of my articles in TFS, they are naturally risk averse and will only finance their best clients. The biggest help that many banks are offering is allowing their credit card customers to skip or defer payments, lowering rates and waiving fees and penalties. It is a way of taking some of the pressure off individuals and businesses by leaving more cash in their hands. It’s not a loan – but it helps. I’ve checked with a number of banks including Citibank, Bank of America, Chase, Capital One and Barclay’s and all of them are offering programs to help their customers. I recommend that you contact them immediately if you have one of their credit cards or a loan.
Bridging the gap may come from the world of alternative finance and merchant cash advance, where most lenders have slammed on the breaks because they cannot assess the current underwriting risk of applicants. Many of their existing customers are now considered slow-paying or delinquent through no fault of their own, and this often triggers some fairly negative covenants slowing your lenders access to capital. Most of the major alternative finance companies have bank or institutional lines of credit that provide them with the capital that they lend to small businesses. These credit lines have very strong performance covenants which limit defaults and slow paying customers. If too many loans fall below the required performance metrics, the bank can stop providing credit and basically “call the note”. MAJOR SCREWED! This could put many of the lenders that serve our industry in grave danger. I would suggest you start looking for cash immediately before many of these lenders hit a speed bump with their line of credit even if you get government assistance. The world will not come back to normal for quite a while and businesses with cash reserves will be the ones to survive.
Get creative to stretch your capital.
Indirect access to working capital can come in many forms. I would recommend you contact your landlord and let them know upfront that the rent payment may be reduced or skipped until this is over. Either they will understand, or be totally pissed off, but too bad – we’re all in this together and you can point out that NY, NJ and CT have ordered that there can be no commercial or residential evictions for 90 days. I also suggest you contact your utility companies, food purveyors and even any auto finance companies you have and tell them you will do the best you can, but don’t expect full and timely payments.
Looking ahead – what will everything be like in 3 – 6 months? The stock market lost over 33% of their value in a few days. We went from a euphoric 4% unemployment rate to today’s prediction of over 20% by the Secretary of the Treasury. Those are Great Depression numbers! You need to also remember that before COVID our debt was at an all-time high for individuals, student loans, corporations and our governments and now is growing exponentially because of the pandemic. The government bailout looks like it will cost taxpayers over $2.5 Trillion on top of the $1.3 Trillion deficit we already had with reduced taxes flowing into the Treasury. This is serious crap. We have over-extended people in over extended states with a horribly over extended federal government.
The harsh reality is that people need to start asking themselves some really serious questions about their businesses and if they can survive before they overextend themselves further. If they believe they can, then they need to start making plans for how they will manage the business in the brave new world, because it will take a very long time for us to recover from this disaster.
