Keep Your Business Healthy: Capital Sources in This Time of Crisis
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 just 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 $15 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 would encourage every small retail and commercial tire dealer, small tire wholesaler and small retreader to apply for an SBA-administered Paycheck Protection Program (PPP) 7(a) loan under the new Cares Act by June 30, 2020.
Congress just allocated $350 billion to this program and if you can “fog a mirror” and simply say that you really need it, you qualify. The two requirements are:
1) being in business in February 2020 before the crisis hit, and;
2) having 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 capped at 4% and can be amortized up to 10 years.
The loan proceeds can be used for certain operational expenses like payroll, benefits, rent, utilities and other debt payments that you had before.
The PPP 7(a) loan is a government-guaranteed loan so approved lenders will be happy to get the money out there as no prior SBA approval is required. There are no up-front fees as the SBA will pay lenders/originators directly and not from loan proceeds.
The SBA is scrambling to expand the number of financial institutions that can process these loans, as well as simplify the approval time to 24 hours.
More will be known on how to apply later this week, but call your existing bank today to see if they can help. PPP 7(a) 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 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. So keep good records and read the requirements on how to use the money, but go get one of these loans.
Since all US 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 a maximum loan amount of $2 million at 3.75% interest with maximum term of 30 years.
If you apply for an EIDL loan, it can’t be for the same expenses or costs that are to be covered under the PPP above. Other requirements of this loan have been loosened – such as no personal guarantees on loans up to $200,000 and no requirement that you had to be turned down by your bank -- to the effect where I’m pretty sure all small business owners reading this, particularly those with good credit scores, should apply.
Unlike the PPP, some degree of creditworthiness and ability to pay back is considered by the SBA. As soon as you apply for this loan, you can get an advance of $10,000 within three days that is not repayable, if for some reason you are turned down. Yes, that is free money.
If for some reason you don’t want to access these once-in-a-lifetime options, the next logical place to look for capital is your 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 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, and the amount that one can borrow against a 401K 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 above 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 (no stock buybacks, no dividends, limits to executive compensation) will apply, in most cases.
Michael McGregor is a partner at Focus Investment Banking LLC (focusbankers.com/tire-and-service) and advises and assists multi-location tire dealers on mergers and acquisitions in the automotive aftermarket. For more information, contact him at firstname.lastname@example.org.