How Businesses with Credit Lines can Manage their Repayment Obligations with Creditors amidst the COVID-19 Pandemic
By George Mpeli Kilindu ~ Managing Partner at Kilindu Giattas & Partners on 30 Apr 2020Finance
Considering the current COVID 19 pandemic (hereinafter referred to as “the Pandemic”) which is affecting the global economy, businesses with existing credit lines are at a risk of experiencing difficulties in meeting their repayment obligations to their creditors brought about by cashflow and human resource challenges. This is certainly a stressful time for many businesses, especially for small and medium sized ones with less financial resources to keep them afloat during this difficult period.
Below are some tips that may be useful to business leaders in alleviating the looming stress and strain that come with their respective businesses failing to meet repayment obligations to creditors: -
Revisit the terms and conditions of Credit Facility Agreements:
In many instances, once credit facility agreements are executed, parties thereto rarely revisit these documents, unless there is a specific need to do so. This is certainly one of those occasions where revisiting terms and conditions of one’s credit facility agreement may prove to be extremely useful.
For instance, many credit facility agreements have a “Force Majeure” clause which provide for certain unforeseeable circumstance(s) that prevent(s) a party to an agreement (in this instance, the borrower) from fulfilling its obligations therein. A Force Majeure clause may allow a party additional time to fulfil its obligations under a contract or even excusing a party from a portion of its obligations under a contract. It has been argued by many legal practitioners that the Pandemic falls under this category, especially when it involves specific measures taken by a state, such as imposition of mandatory lockdowns or prohibition of retrenching staff as a direct result of the Pandemic.
Approach your creditor to discuss how your business has been affected by the Pandemic:
As a gesture of goodwill and sound business etiquette, businesses should approach their respective creditors informing them of how the Pandemic has affected their “Top Line”, which in turn may have impacted on its repayment obligations. Do not wait until your creditor makes the first move, which is a cardinal mistake committed by many businesses, especially small and medium sized ones.
It is advisable to have “Face to Face” meetings (under the present circumstances, using video conferencing facilities) with your creditors, so as to express clearly the plight that your business is facing. This should always be followed by a written correspondence to formalize and record this interaction.
Request to restructure aspects of the Credit Facility Agreement:
Credit facility agreements are not cast in stone and, as such, can be amended. Most creditors are aware that their borrowers are currently facing hardship in the wake of the Pandemic, and this trend is likely to continue for an unknown period of time. Many creditors are now more willing to listen to their borrowers, as it is clearly not business as usual. So, business leaders should not be fearful of approaching their creditors to restructure their credit facilities. Some aspects to look at, in terms of restructuring, include, but are not limited to: -
- Request for a moratorium: A moratorium is a legal authorization granted to borrowers allowing them to postpone their payment obligations to creditors, for a defined period. As such, a moratorium provides the borrower with a grace period during which no payment in respect of the loan is made to the creditor. This will provide a business with relief and also provide time within which businesses can look for other means of repaying the loan and managing their finances.
- Reducing the interest rate and penalties associated with late repayments: Businesses can request their creditors to reduce the prevailing interest rates as well as penalties associated with late repayments in order to deal with the financial setbacks they are experiencing. This may assist businesses in managing cash outflow and cutting costs, especially as regards to the penalties associated with late repayments.
- Requesting for additional line of credit: This may be an odd suggestion to many, but there is logic to this approach. It is expected that businesses will adjust, adapt and overcome the setbacks of the Pandemic at some point. The difficult period is the time in between. Therefore, depending on how the business is managed, this could be the perfect time to seek additional lines of credit, on more favourable terms, as opposed to when things were “Normal”. This line of credit may be the lifeline which your business needs to get through this difficult period.
Ensure that the creditor is regularly updated on the status of your business:
Businesses should keep their creditors updated on any progress or setbacks that they are facing, even after their credit facilities have either been extended, or varied. This is just sound business practice. This approach may go a long way to give comfort to creditors that their borrowers are willing and committed to repay their credit facilities.
By George Mpeli Kilindu ~ Managing Partner at Kilindu Giattas & Partners