A lot of numbers are emerging to characterize the depth of the COVID-19 crisis. A recent Facebook survey indicated that 31% of small and medium businesses have shut down completely within the last 3 months, mostly to comply with government shut down orders. Goldman Sachs reported that 19% of small and medium businesses are completely shut down and 42% partially shut down. My own gut and experience helping companies over the last few months tells me the real numbers are probably worse.  Whether it is 19%, 31% or some other number, the impacts are staggering. Not something that anyone alive today has seen in their lifetimes. I know from my own experience that the suddenness of what has happened has caught everyone off guard. Nobody has a contingency plan in place to deal with something like this. Not big companies. Not small companies. Simply too much change. Too much uncertainty. All happening way too fast.

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The government is trying to help and rushed to market trillion-dollar stimulus packages including Economic Injury Disaster Loans (EIDL’s) and the Paycheck Protection Program (PPP). As is usually the case with new government programs, particularly those that are rushed to market in weeks, there was more chaos than cure. More horror than help. The Small Business Administration lacked any ability to cope with this and federally insured banks were recruited to deploy the program. This kicked off with little guidance and the threat of dire consequences if the bank made any error during origination. What did the banks do? They only lent money to their top customers. Everyone else was left scrambling. Then the money ran out. Then there was a push to increase funding. Then there were political delays. All the while, companies had no choice but to layoff workers or reduce wages.  To date, Facebook reports that only 26% of companies that applied for funding received it. And you have probably read the headlines – many of those companies were large well-funded businesses, not the small or medium businesses that really needed the funds. The situation EIDL’s was even worse. While EIDL’s are supposed to provide loans of up to $2 million, most companies that applied received token $10 thousand checks. And now the money is running out yet again.

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All of this has put most small businesses into a survival situation. But what does that mean? More importantly, what do you need to do to survive? To answer those questions, let’s look at a more “traditional” survival situation. It is winter and you are suddenly lost in the woods. Night is approaching and you have no shelter, no water, no food, and perhaps less than adequate clothing. Do you yell and scream and run aimlessly about trying to find help? Your chances of survival would be very low. Or do you deal as best you can with reality? This means stepping back and assessing your environment and your resources. It means creating a plan that has sequence and order. Take control of your environment. Locate some water. Gather some materials to create a fire and build a shelter. This will buy you some time. Time to think. Time to rest. Only once you have created a small safety shelter can you begin to plan your next steps toward Thriving again. 

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 A business survival situation is no different. Assess your situation – what are your fixed costs? How much cash do you have ready access to? As scary as it might be, you need to figure out how much time you have before you run out of money – call this “Survival Time”. It may only be one or two months. The first thing that you need to do to extend your Survival Time to six or seven months. You need to create a shelter so that you can work things out. To do this, you will need to make very tough decisions. And you will need to do that very quickly. The longer that you wait, the less daylight you will have to operate in. You must move quickly and decisively. Assuming you have already done the obvious – applied for the PPP, EIDL and any other state and local subsidies that may be available, the steps to extending your Survival Time are as follows:

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Step 1 - Take control of your surroundings. 

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In the case of COVID, this means creating an ability to work remotely for an extended period. This will likely require some investment. However, it is vital that you have an adequate level of remote working capability. The one environmental blessing is that we already live in a world that is rich with digital collaboration, video conferencing, social networking and many other interactive capabilities. Even touchless and voice-controlled technologies are commonplace. The key is to do just enough and make remote working possible. In a survival situation simple and stable trumps cool and complex every time.

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Step 2 - Take out your survival knife and attack your fixed costs. 

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The two most significant costs will likely be your people and your facilities. Your people should include everyone that supports you. Whether they are employees, temporary workers, freelancers or others. You need to address your entire extended workforce. Layoffs, part-time working arrangements, reduced salaries, work-for hire concessions all need to be considered. How much do you need to cut? If you need to extend your “Survival Time” by six months, then three to four months of that should come from the extended workforce. That might mean 20-30% reduction in extended workforce costs. As painful as this will be for both the workforce and for the business, it is essential. 

On facilities, you need to find ways to lower or temporarily eliminate rent and / or mortgage costs. Many states are permitting facility cost deferrals during the crisis or have implemented moratoriums on evictions. Alternatively, states like California have civil codes (§ 1511) that operate much like contractual force majeure clauses – but only if done properly. Banks are also permitting payment deferrals. This is particularly important for retail stores that are completely shuttered during the shutdown.

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Step 3 - Think of your balance sheet as your water source.

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There will be shallow puddles that you can drink from right away, and deeper pools that can extend your Survival Time significantly. The key is to maintain product flow while extending Survival Time.

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Receivables – It is likely that your customers either aren’t paying or are demanding extended terms. While disruptive, there are other ways to monetize this asset. Outright factoring may be tricky. According to Robyn Barrett, managing member of FSW Funding, “Aging invoices are what stand to create the largest roadblock to factors and their relationships with their funding banks”. However, “Reverse Factoring” may be an option where the customer has exceptional credit. Ed Edwards, a procurement expert and manager of Audience Outreach explains how it works:

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• Supplier submits the invoice to the buyer.

• Buyer approves the invoice and submits it to a 3rd party financial institution or factor, who bases interest terms on creditworthiness of the buyer.

• Financial institution pays the supplier at their desired early term of net 30 days, discounting the invoice payment by the agreed-to discount rate.

• Buyer pays the financial institution the face value of the invoice at their agreed-upon date, say net 90 or net 120 days.

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Another option is to factor or assign your receivables directly to your suppliers. This directly settles your debt with your aging receivables. The rationale for this is understandable. Your supplier wants to keep selling product and may acquiesce to keep sales moving. The point is that there are many ways to “skin the cat”. You need to figure out what works for your situation. 

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Inventory – You have piles of inventory sitting around but your stores are closed. The obvious answer is to find an alternative way to reach your customer. It is simple to establish a presence on an online marketplace like Amazon, either by selling to the marketplace directly and using them for distribution or by managing distribution yourself and simply using the marketplace as a sales platform. However, the marketing complexity and cost of customer acquisition needs to be considered. Home delivery is another option. Rob Tedesco’s article: “Hastening the Inevitable: How the Crisis Moves Retail Toward Digital” explores the digital technologies and strategies that are accelerating rapidly.

“Fire Sales” may also be necessary to raise cash quickly. Remember, extending your Survival Time is more important than profitability. This may come with an added benefit in the form of reduced carrying costs.

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Payables - You may think that COVID is a simple and good excuse not to pay. However, remember that you are trying to extend your Survival Time, not go out of business. The fastest way to damage your business is to ignore your suppliers or just stop paying them. You need to be proactive in your engagement and communications. Waiting until you are severely delinquent makes the conversation much more challenging. You lose leverage and close the door to certain options. If they begin to think you are insolvent, or do not have a future, you will lose your ability to negotiate.

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You need to develop well thought out approach plans that are “fit for purpose”. Some suppliers are essential to your survival. Some are not. You need to carefully think through and develop your strategy. While you may be forced to damage a relationship out of necessity (i.e. simply stop paying for an extended period without their agreement), make sure this is both survivable and done right. While your suppliers may be supportive because they are also impacted by COVID, do not expect them to be benevolent and simply give you a hall pass. You need to exit this crisis with your reputation and ability to carry on doing business intact. 

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Your suppliers will work with you if you negotiate properly and have a story that they buy into. That story generally has three parts:

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1. An explanation of how you have been impacted. They will respect the tough actions you are taking as long as you have a well thought through plan to survive and recover. However, if they sense that you are “lost in the woods” and simply shuttering your business, you will be prey to the wolf.

2. A recovery forecast that gives them hope. You need to instill confidence that there is a future and supporting you through the crisis is in their best interest. Your recovery plan needs believable, and pertinent to them specifically, not just wishful thinking. You need to make them want to continue to do business with them.

3. A very clear ask of what you want from them. The ask needs to be tough but reasonable. You will generally be looking for three things:

• An ask to keep product flowing – you may have completed or partially completed orders that you need shipped

• An ask to pay existing debts over time – you need to present them with a well-conceived payment plan that starts with an immediate payment of some amount.

• An ask for extended payment terms for a temporary period.

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Government Subsidy Loans - Believe it or not there is still hope. EIDLs and PPPs were quick to market first-aid kits designed to stem the bleeding and open the airways. The Main Street Lending Programs (MSLPs) are field hospitals that have greater range and are available to a much wider swath of small and medium businesses. To be clear, these are loans. They are not grants and are not forgivable. They are available to businesses that were in sound financial condition prior to COVID. For the standard program, loan size is $500 thousand to $25 million with a term of four years and principal and interest payments deferred for one year. There are also much larger and more sophisticated loans available. The MSLPs are expected to launch soon and have been in the works for several months. Expect the banks, the Fed and the Treasury to be much more prepared so there should be less chaos this time around.

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Wrapping Up

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"It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change"

- Charles Darwin 

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COVID has changed our lives forever. We have been thrust into this survival situation through no fault of our own. That said, we cannot imagine that this didn’t happen or run about aimlessly. We need to start with a positive mindset that survival is possible. Then follow that with disciplined planning and execution of tough actions. And do it fast. 

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Roger Banister was the first man to break the 4-minute mile on May 6, 1954. At the time, this was believed to be impossible. It had never been done in all of human history. Medical doctors believed this to be physically impossible and the body would suffer severe harm, maybe even death, if attempted. However, Roger Banister believed that it was possible. His performance was not an accident of fate. It was an intersection of belief, motivation, planning and execution. However, Roger’s achievement was not the most amazing part of the story. Just 46 days after Roger broke the record, another man did it. Within a year, 3 runners had done it in a single race. Running a mile in under 4 minutes is now common. What changed was not physical. It was a belief that it could be done combined with tough actions, planning and execution.

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Start with belief and mindset. Take fast, tough, but well planned and executed actions to increase your Survival Time. Use all the tools at your disposal. Just use them in different and more creative ways than you have done before. It cannot come to pass that 30% or 60% or 90% of the small and medium businesses will simply cease to exist because of COVID. The American small and medium business is the heart and soul of our economy. The engine may have been turned off. We now need to restart it and make it even more agile and inventive than it was before.