computer screen, numbers

Economic Impacts of COVID-19 on the Business and Banking Landscape

Crowe BGK
3/16/2020
computer screen, numbers

As the world continues to react to the spread of the COVID-19, businesses, lenders and other stakeholders are preparing for financial challenges that will go far beyond the recent volatility witnessed on world markets.

The resulting impacts of the virus on international supply chains and the effects of safety protocols on the workforce have already started to disrupt the normal course of business.

What does this mean?

Potential decreases in revenues stemming from changes in consumer habits and supply interruptions, as well as delayed payments from clients, could likely result in liquidity shortfalls.

Consequently, businesses may struggle to cover expenses in the near future depending on their capacity to sufficiently delay or reduce costs. Should the above phenomenon persist, the situation could evolve into significant challenges, especially for operations that are particularly vulnerable to foreign supply and labour availability.

Furthermore, decreased income will ultimately affect profitability should expenses not be adjusted accordingly.

As such, liquidity and profitability-related consequences could also impact the value of assets pledged as collateral or considered for borrowing capacity; primarily accounts receivables, inventory, and goodwill in some cases.

What should you expect?

As previously stated, businesses may notice delayed payments from their clients and experience liquidity issues, thus looking to their lenders to provide additional short-term support.

From a lender’s point of view, liquidity shortfalls, decreased profitability and potentially overstated assets will create various possible credit risks and/or debtor compliance issues, as borrowers may be in default of one or multiple requirements defined by their banking agreements, such as:

  • breaches of financial covenants;
  • borrowing base deficits;
  • payment defaults;
  • overstated pledged collateral; and
  • the inability to meet upcoming obligations.

What steps should you take?

Open and honest communication between businesses, lenders and other stakeholders will be paramount, as trust will help facilitate the support of key partners.

Entrepreneurs will first need to formulate a concrete action plan which should include:

  • minimizing the risk of supply chain interruptions by assessing the exposure of key suppliers or finding alternate sources of supply;
  • managing cash flows by maximizing receipts and reducing expenses where possible;
  • updating financial projections in order to reflect upcoming changes to the business and any liquidity shortfalls which may occur and require particular attention or support;
  • communicating the short-term action plan and updated information, such as financial projections, to lenders; and
  • preparing a contingency plan to maintain operations while ensuring a safe environment.

Given that additional short-term financing will likely be required, it will be important for lenders to obtain and review updated information in the interest of reevaluating their security, credit risks and the borrowers’ ability to service existing and additional debt.

How can Crowe BGK help?

Our Business Advisory team is able to advise businesses, lenders and other stakeholders to navigate through these challenging obstacles and provide assistance with the following:

  • Financial diagnostics and/or independent business reviews (Looksee);
  • Review of borrowing base calculations;
  • Cashflow and working capital management or monitoring;
  • 13-week cashflow forecasting;
  • Financial planning and forecasting;
  • Preparation and/or review of business plans;
  • Assistance during negotiations between management, lenders and other key stakeholders; and
  • Development and implementation of action plans.

The Business Advisory department is led by Mickaël Marchand, CPA, CA who has over 10 years of experience in assurance, transaction advisory services, business advisory and corporate restructuring.

A key member of the Business Advisory team, Bruno Ciolfi who has over 36 years of banking experience, which includes managing the Financial Restructuring department of a renowned Canadian bank, as well as leading one of the largest business bank offices in Canada.

 

Mickael Marchand

Mickaël Marchand CPA, CA

Partner

+1 438 815 3639

m.marchand@crowebgk.com

Bruno Ciolfi

Senior Advisor

+1 514 908 3629

b.ciolfi@crowebgk.com