Updated: Capital Resources During COVID-19 Crisis
This MTD exclusive was written by Michael McGregor, a partner at Focus Investment Banking LLC who advises and assists multi-location tire dealers on mergers and acquisitions in the automotive aftermarket.
Your tire business is likely the most valuable asset that you and your family own. And for most tire dealers, “family” includes your employees, who have helped make your business what it is today.
Let’s see what capital sources you can tap now to protect your business and your family during this challenging time.
If your business has fewer than 500 employees, Congress made it a whole lot easier for you to get a Small Business Administration (SBA) loan.
The SBA used to define small tire dealers as those with under $16.5 million in annual revenue. Small tire wholesalers were defined as having fewer than 200 employees. But that’s all been waived, and the threshold has been dramatically raised.
I’ve been encouraging every small and medium sized retail and commercial tire dealer, small tire wholesaler and small retreader to apply for an SBA-administered Paycheck Protection Program (PPP) loan under the CARES Act by June 30, 2020.
Congress allocated $350 billion initially to this program, with an additional $310 billion now set aside. If you can “fog a mirror” and simply say that you really need it, you qualify. The two requirements are:
1) You were in business in February 2020, before the crisis hit, and;
2) You have employees that you paid salary and payroll taxes on.
The amount that you can borrow is 2.5 times your average monthly total payroll cost in 2019, up to an amount of $10 million. The loan interest rate is 1% and is amortized over two years.
Seventy-five-percent of loan proceeds can be used for payroll and benefits , and the remaining 25% can be used for certain operational expenses like rent, utilities and other debt payments that you had before.
The PPP loan is a government-guaranteed loan and numerous lenders, including large banks and SBA lenders, are working to get the money out there. There are no up-front fees as the SBA will pay lenders/originators directly and not from loan proceeds.
The launch of PPP was rough and it oversubscribed quickly. That’s why Congress has added more funds to the program.
The logical place to start looking for a PPP loan is with your existing bank. If they can’t help, try a community bank in your area. Be persistent. I’ve heard from several tire dealers that have already received their loans.
Keep in mind that PPP loans are non-recourse loans and no personal or other guarantees are required. There will be no collateral requirements, no prepayment penalties and you need not have been turned down elsewhere for a different loan.
Furthermore, your payments on this loan are deferred for the first six to 12 months. To top it all off, the money you spend on payroll, rent and utilities the first eight weeks after you get the loan will qualify for loan forgiveness later and reduce the principle balance.
Since all U.S. states and territories have been declared disaster areas, a separate kind of small business loan is now available to tire dealers through the SBA.
The Economic Injury Disaster Loan Program (EIDL) covers loss of revenue events and features grants of $10,000 and a maximum loan amount of $2 million at 3.75% interest with maximum term of 30 years.
At first, Congress allocated only $17 billion for this program and demand for EIDL far outstripped that amount. An additional $60 billion has been earmarked for this program.
If for some reason you don’t want to or can’t access these once-in-a-lifetime options, the next logical place to look for capital is your existing bank.
If you have a good relationship with your bank, have multiple store mortgages or an existing line of credit, they should be happy to help you out during this difficult time. If they don’t, remember that and make sure to find a new bank when this is all over.
We’re also hearing that private equity investors are stepping up and supporting their investments with additional capital. Just know that the more capital they invest, the greater the share of your business they will own.
Friends, family and your own resources have funded many companies over time, so consider these sources. People will soon be able to withdraw up to $100,000 from their personal retirement account without penalty or taxes, if it is paid it back within three years. The amount that one can borrow against a 401(k) has been raised to $100,000.
So potentially, lots of people you know can be sources of capital. If you have a home equity line of credit, you might consider accessing that, as well.
For companies with more than 500 employees, Congress has allocated an additional $500 billion in Treasury Department and Federal Reserve loans. Check with your state governors to get assistance accessing these loans.
Restrictions, including what you use the money for – for example, no stock buybacks, no dividends and limitations to executive compensation – will apply, in most cases.
To contact McGregor, email firstname.lastname@example.org.