The current environment will test most businesses’ ability to operate and manage in a crisis. An effective response by a company requires transparency, accountability, and above all, strong leadership. Businesses need to be clear about who is making the decisions, keeping the board, ownership, and shareholders regularly informed, and maintaining the board’s independence.
While long-term thinking is key to survival, there’s plenty of short-term fear and worry that’ll keep any business owner up at night. Cash is becoming scarce for many, but it’s still needed to keep the lights on and goods moving. You’ve got to have something there to be able to keep rolling through the sale.
We’re hearing from our supply chain and partners, as well as others in the space. So, we wanted to provide some thoughts on leading your business, finding support, and understanding where you might be able to leverage relationships to thrive, even now. Red Stag Fulfillment remains operational and is working to keep customer orders moving.
The coronavirus is putting us all to the test, so we hope this helps.
Where Should Companies Start?
The most advantageous starting place to look is the slew of new loans and other provisions contained in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, in which about $350 billion (at the time of this writing) has been set aside to help workers and small businesses. Many are interested in the Paycheck Protection Program (PPP), the initiative provides 100% federally guaranteed loans to small businesses.
The U.S. Chamber of Commerce, a lobbying group focused on financial and business issues, has put out a comprehensive guide to Emergency Loans (get the PDF here), including a checklist for small businesses. You should also head to the Treasury Department’s specific page for Assistance for Small Businesses to learn about the PPP.
The 5 big questions:
1) Who can apply for help and for how much?
There are a lot of specifics here, so get some help or walk through Treasury’s documentation carefully to understand if you are eligible. That said, some general requirements are that you’re a business or non-profit with 500 or fewer employees (or you meet any special SBA size standards for your industry) and been in operation since before February 15. There are options for sole proprietors, independent contractors, and self-employed people as well.
Your size and loan application may have specific requirements around employee salaries, payroll taxes, contractors in use, and other elements of your business.
2) Will loans be forgiven?
As it currently stands, borrowers are eligible to have the loans forgiven up to a point. The forgiveness amount will be equal to what you spend in 8 weeks on things like payroll costs, mortgage interest or rental costs on a lease, utility payments, and if your tipped employees are paid additional wages. Loan forgiveness cannot exceed the principal, and the government is saying at least 75% of your loan forgiveness should be payroll costs.
If you’ve reduced employee wages, it’s a smart idea to consult both the Treasury guidance and that Chamber PDF to understand how it may impact loan forgiveness amounts
3) How long before we see any money?
This might be the $350 billion question. The loan process isn’t clear and we’re reading that it could be in as little as happening the same day to something that requires up to a week. The government has stated that it wants to get the process down to 24-hours as soon as possible, with this including loans moving from application to signatures to funds dispersal.
4) Are there any special restrictions?
We’re still early in the process, so we only know some items here. First, the PPP is designed to primarily address wages and salaries, so we expect loans to have strict demands for use and forgiveness around maintaining your workforce at size and pay levels. You’ll need to show that uncertainty or existing losses are generating the need for the loan, and you can’t have applied elsewhere for loans covering these costs.
You can’t take out loans to cover all payroll costs. This includes many payroll and income taxes, compensation for people living or working primarily outside the U.S., some wages designed to cover sick leave, and compensation for people who make more than $100,000 annually.
Independent contractors and the self-employed may need to provide personal financial documentation as well as more standard business information.
5) Who is handling the money?
The loans are going to be guaranteed by the Small Business Association (SBA) but may come from a variety of sources including banks, credit unions, and other established lenders. Make sure the provider you fill out a loan application with is an SBA partner.
While the program is open until June 30, 2020, it’s smart to start your application process as soon as possible. The money is capped, so when it runs out there’s no current plan to extend it and make more available. Be sure to look through all program options. The SBA is also planning to start offering $10,000 grants to some businesses as part of its overall Disaster Assistance Program. The good thing we’re hearing about most of these programs is that the government may not require collateral or personal guarantees, and many processes won’t require that you try to get credit elsewhere first.
Reducing Cash Burn
The best advice a variety of experts has given us is to start reducing your cash burn and look for ways to change how you operate. For some, it is people and locations, while others may face diversified cash issues around suppliers and partners. It is time to stop everything that you don’t need and prioritize your must-haves to operate.
Take a deep breath and think about every process you have and every physical space you operate. There might be a lot to cut or cancel that you’re not necessarily reviewing:
- One common thing that businesses forget is to cancel some recurring deliveries and services, such as water for the breakroom or cleaning in office spaces.
- Cancel recurring resupplies for your office and other spaces.
- Entertainment services can be paused; as can any money you automatically move some money to petty cash.
- If there’s software your team can’t use remotely, consider reaching out to those vendors and asking to pause.
- Go to your locations and turn off everything that can be — there’s no need for the network printers to still be on in an empty office.
If you don’t have visibility and control over your cash flow, now is the time to start. You want to know what you have now, where it’s headed, and start forecasting out to see how long you can run on current cash.
Here’s a fantastic webcast hosted by MollenhourGross (jump to the 6-min mark to avoid sound issues) about how businesses can manage through the coronavirus, but the principles could be applied to a wide array of business circumstances. It’s a great resource to start understanding how you can run your business, who to turn to, and where you might be able to find support.
They’re discussing how to gain visibility and perform more financial planning, including revisions of scenarios, scenario planning, and your lending discussions. Much of it centers on the conversation everyone is having with their partners and providers: hardship deferrals.
What Is a Hardship Deferral?
Generally, hardship deferrals are an acknowledgment of business cash flow issues and a request to defer expenses, interests, loan payments, fees, taxes, and other costs until you have a better handle on cash flow. They go by different names and have various requirements depending on who you’re asking.
In the case of COVID-19, the cause for the hardship is external, and that may get you some additional leeway for established partners like banks and landlords, while other services may be facing the same crunch and be less able to give monetary support or relief.
So, if you’ve been impacted, your partners, vendors, suppliers, and financiers may be willing to work with you on payments and debt relief. You’ll need to follow any rules they have, make your asks very specific, and know when to push. So, let’s look into that more.
It’s 100% About the Relationship
From the webinar and our own experiences to the best books on business that came out long before today’s current scare, one thing remains clear: success and ability to negotiate with partners depends entirely on your relationship. Remembering that everyone is being impacted can help you start thinking about which partners to approach, as well as the right way to approach these partners, in a way that leads to mutual respect and assistance.
There are a few big questions to consider for understanding each perspective in this:
- How well have you worked together with partners in the past?
- Do you pay on-time? Do you deliver on-time?
- How well do you personally get along with your direct contacts?
- What issues have come up in the past, and how were they resolved?
- Would you get rid of this partner if you could? Would they get rid of you?
It’s about now that most of us all realize how meaningful the relationships are that we fostered during good times. It pays dividends to be able to walk into a bank or reach out to a landlord and greet someone by name and have them know you. That relationship makes it easier to ask for help when we need it and drop our ego at the door when it’s beneficial.
Take actions that demonstrate how you care about your business partners — even something as simple as paying on time or sending a periodic “thank you” message. All of these small things work in your favor and will give you a strong footing. Here are some direct thoughts on how to understand and leverage your relationships, and when it might be fruitful or when a partner might not be able to help.
Big or Small?
You can likely gauge how “big” of a client you are to other vendors. You may be a small business that desperately needs the attention of your outsourced legal counsel. But, if you’ve been the annoying, late-paying client and currently represent a marginal fraction of their overall business, what incentive do they have to answer your emails first?
It all comes back to that relationship.
Now, there’s no specific thing you want to be to every vendor. In some cases, being a small client can help you. For instance, if you’re not a big lease and you rent from a nationwide firm, they may be more willing to help you with a deferral. On the other hand, if you’re the chief buyer from a specific supplier, then they rely on you to keep things moving and may be more willing to shift payments to a sharing model where you’re paying them at the moment you make a sell.
Think about the role you play and how you leverage that, while also being respectful of their operations.
Begin with Banks and Landlords
Think about the space you lease or own. The reason many banks and landlords are providing assistance is that they have those fixed costs, where you’re often paying for someone’s mortgage plus a little more.
Your landlord can predict their cost each month and understand exactly how much they can afford to defer. There are many protections in existing and proposed legislation that will help them recoup lost income — especially in areas where evictions and utility shut-offs have been suspended during the epidemic.
At the same time, commercial landlords know that they won’t have many options but to try and help you during this crisis. Not only is it bad for their business (and reputation) to lose tenants and shut places down, but there’s almost no chance that they’ll be able to move a new business into those locations. They’ll have to wait for the social distancing restrictions to pass and then move in teams to clean and replace on-site branding and other elements, making something ready for a new tenant — plus how many months it would take them to locate one.
It would be a net loss for them and could do longer-term damage. So, they’re one of your best practical options to start having discussions around hardship deferrals and supports.
Landlords are expecting to get calls about this. They’re evaluating you and your relationships to help and are open to more suggestions for how you can stay in business longer. Here’s a great piece from that MollenhourGross webcast discussing a restaurant adding a movie screen to its exterior to become an ad hoc drive-in, and how their landlord appreciated the effort and rewarded them for it.
Banks are similarly positioned to help you out with loans, fees, and other concerns. Not only does some legislation help protect them and specifically note what they must do for you, but many banks are taking proactive steps to support their partners.
CNBC put together this brief list of programs and efforts banks are taking, many of which cover business loans and programs. The trick is that, for most, you must ask. It’s time for you to be proactive and use those relationships to protect your business. In some instances, banks are both pausing loan payments and reducing interest rates, so you might be able to not only stave off some costs now but refinance existing loans at lower rates in hopes of keeping total costs down. The better your relationship here, the more likely you are to find some help.
The big tip here is to be prepared when you make the ask. Come to the table with your ego set aside, your detailed financials ready to be reviewed, and be able to clearly demonstrate hardship. You want books that are easy to follow and show your losses and other expectations. The bigger your “ask,” the more important these financials are.
Deepen Your Relationships: Trade Credit
Don’t overlook existing options in these cases either. One common tool is business trade credit, and it could be the right thing to ask for to keep your relationships healthy.
When vendors or suppliers extend you this line of credit, they generally want to see a game plan where you can use the money to keep things running. Existing sales forecasts, backed up with the most recent numbers, are great as are plans to adapt your business.
It’s likely that vendors with good relationships are going to be more willing to extend something beyond the normal 30-day window. Past payment behavior is one of the biggest factors in getting this line of credit from most, so it can be a compelling way to build trust and strengthen a relationship while also staying afloat.
Consider Partners Who Are Big, Even If They Feel Small
Your other smart place to start with for seeking deferments and other support is from partners whose business relies on yours and who are big enough to absorb the impact of such losses. This generally means they’ve got substantial revenue, size, and their own costs, so it’s easier for them to account for and mitigate losses when it comes to tax time.
Large companies that follow standard best practices will have sizable cash reserves and options, allowing them to continue to operate.
When you’re thinking of these companies, treat it like your supply chain: Always look a few tiers up. Even if you only have a local relationship with a brand, it may have a much larger reach then expected. One of the best examples is the online food ordering service Seamless.
Seamless is doing an amazing thing to help independent restaurants, and won’t take commission fees from their online orders as more and more cities ban dining out. When most of us think of Seamless or other online order deliveries, we view them as a local group filled with local restaurants and delivery people.
That’s only partially true. Yes, they’ve got a local face with your favorite haunts in town, but Seamless is owned by Grubhub, which had $1.01 billion in revenue in 2018. They’ve got size and capacity to absorb their relief for smaller, independent businesses — and they’re limiting relief to those shops, so they’ve still got ongoing revenue from the majority of orders on their platform.
Knowing the business structure of your partners may help you find someone who has the capability and cash to provide help.
Ask About Their Operations
While we may understand at a high level how our partners operate and what they do for us, it’s time like this that show we don’t always understand how their businesses run. What their day-to-day looks like and how we impact it.
Let’s talk about Red Stag Fulfillment here for a second.
You might know us as the people who get your products to customers on-time and without a problem. Many customers like us because they can touch base to be sure that everything is doing fine, but don’t have to be involved at a granular stage to keep things moving.
At the same time, that means many don’t realize the nature of our cash flows. Red Stag can feel big, and we are growing, but we’re still a relatively small player in the fulfillment space. We have our niche and work hard to keep it running.
To give you a quality service that’s reliable and not impacted by carrier backlogs, we pay the carriers upfront as our client’s orders are shipped. We pay our staff and keep a large workforce moving so that there’s always someone to keep goods moving. That’s on top of the work we do to get products into our warehouse and get them ready for shipping. And after all of that, we bill out to clients and wait for them to pay us. This means by the time your monthly bill arrives, we’ve already completed the work and paid our team for it.
This business model makes it hard to provide a deferral because we’re recouping on variable costs after the service is delivered. Our operational costs are immediate, and service-based as well, so our downstream partners and we aren’t able to mitigate those expenses.
Our business, and your partners who operate similarly, are best positioned to help you keep generating income. We’re the front-line defense designed to keep your business open and running, so you can make payroll and other elements. So, our efforts at this time are going to be designed to provide the best quality service and be an alternative to other avenues that are closing — such as Amazon’s major FBA disruption.
Future Mitigation: Fixed -> Variable
Finally, we wanted to touch on some of the available options for businesses to adjust the way they’re using cash in their operations. In our space, we’ve seen a large number of companies gain better risk mitigation by making a move that can sometimes feel scary or unintuitive.
Moving from fixed costs and constraints to variable elements. For your business, the shift may represent potential savings, especially if you’re struggling with scaling up or down due to current demand.
When we think about moving from fixed to variable costs, there’s a lot of uncertainty. But, in some situations, that’s a positive. Ecommerce businesses that own their own warehouses, hire staff, have adjoining assets, the equipment to manage it, and build relationships with carriers, all face sizable costs.
Outsourcing this to a 3PL might drive down concerns in some sectors. You no longer need to worry about leases for equipment or space. Staff can focus on generating sales instead of picking and packing. Fixed payments can’t change based on your usage of assets or space, so having 10 boxes costs the same as 1,000.
A 3PL will charge you based on inventory, not large flat rates. So, you can see costs decrease when you’re not having to buy all the shelves and equipment to get goods on them. In slow months, you pay for the labor to fill just your orders. If you switch products and no longer need forklifts, you’re not stuck with long contracts or unusable assets. You’re moving to pay only for what you specifically need, and that will largely depend on what you can specifically sell at that moment.
The other variable shift comes with the constraints of your space. If you have a 10,000 sq. ft. warehouse, you’ve got to have the business to keep it full and bustling. Declines that move you down to needing just 5,000 sq. ft. mean you’re paying twice what you need to for that time. Or, if you have to scale up to 20,000 sq. ft. to meet a short-term surge, you can struggle to find that availability.
Working with an ecommerce fulfillment company like Red Stag gives you access to the space you need as demand changes. When you grow, we can scale you up. When things slow down, you pay less but still get the same high-quality service. And, you can adapt when things change that are far outside of your control.
For instance, Amazon’s recent move to restrict inventory it is accepting is hurting many wholesalers and small shops. They not only are uncertain about how they can move goods, but what to do with existing inventory. Some have already purchased the next set of inventory but now can’t ship it to Amazon warehouses. This means they’re holding on to excess without having a designated place to keep it.
Now is the time we look at our relationships and leverage partnerships. We can work together to build something stronger and more resilient. There’s no playbook to handle things like the coronavirus completely, but there’s an opportunity for us to come out stronger, together.
At Red Stag Fulfillment, we look forward to continuing to serve you and your customers during these times.
There’s a lot here and many more questions we all have as the situation develops. We hope this helps, and we want our employees, clients, vendors, and partners to know that we’re here to be a partner with you in these times, and to help you grow as things pick up in the future. And, we encourage you to share the information you learn with partners about these and other programs.
The best way to get through this is together.
Additional Resources for Businesses
Small Business Administration: The SBA, a federal agency, has a guide for small and mid-sized businesses to learn about different debt relief programs, apply for aid, how to handle employees, and resources for weathering these tough financial times. The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduces the Paycheck Protection Program to be administered by SBA, designed to help you meet payroll shortfalls and protect workers. It is expected to be implemented during the month of April.
SBA Disaster Loan Assistance: Jump right to the application process for SBA Disaster Loan Assistance. These are federal disaster loans for businesses, private non-profits, homeowners and renters.
SCORE: SCORE is a non-profit service that operates partly with an SBA agreement, and it has a variety of resources for using SBA and other loan programs. They can help you apply for economic injury and disaster loans as well as utilize other resources. They have a mentorship program designed to help with financial questions and it is all remote currently. Even after this disaster passes, you can work with a free mentor to better utilize local and state-level programs as well as SBA options.
American Bankers Association: The ABA has put together a current list of publicly announced steps banks of all sizes have taken to respond to the crisis. Look for your bank specifically to see business and consumer protections and policies. It is also putting together an ongoing news service for coronavirus responses that you may find useful, here.
Department of Treasury: Treasury Secretary Steve Mnuchin said that the newly passed small business loan program should be up and running during the first week of April. In public comments, Sec. Mnuchin noted that businesses should reach out to your local institutions: “Any FDIC bank, any credit union, any fintech lender will be authorized to make these loans.”
EXIM: The Export-Import Bank of the United States has established cost and relief measures for U.S. exporters, financial institutions, and others, covering things like shipment programs, payment difficulties, and business operations at other ports.
KPMG: “Leading successfully in turbulent times” (PDF) is one of the better resources we’ve read on how to build continuity planning at a time like this. It can walk you through elements including managing cash flow, tax considerations, legal obligations, and what your teams should be doing now.
OSHA: If you’re concerned about staff policies and what to do when things start to reopen, consider reading up on OSHA’s Guidance on Preparing Workplaces for COVID-19. It also has some additional information on worker exposure and other resources.
IRS: Get the latest information on tax relief and changes for businesses directly from the IRS.California SBDC: The California branch of the Small Business Development Center Network put out a booklet for SMBs in its state (PDF), but there’s a lot of good information for anyone in the U.S.